The Swedish Economy August 2012

The Swedish EconomyAugust 2012NATIONAL INSTITUTE OF ECONOMIC RESEARCH (NIER)KUNGSGATAN 12-14, BOX 3116, SE-103 62 STOCKHOLMTEL: +46 8 453 59 00, FAX: +46 8 453 59 80KI@KONJ.SE, WWW.KONJ.SEISSN 0039-7296, ISBN 978-91-86315-34-4

5SummaryWorldwide GDP growth is still slack, and it does not appear likelyto increase very much in the next few quarters. So far, Swedenhas managed unexpectedly well, but now growth is falling offhere, too. Unemployment will rise to nearly 8 percent by the endof 2013. Uncertainty about the debt crisis in the euro area willdiminish toward year-end, when growth will be increasing in theworld economy. The forecast is based on the assumption that theGovernment will implement unfinanced measures totalling aboutSEK 14 billion in 2013. 1 The rapid strengthening of the krona willcurtail inflation and, with a certain time lag, exports. The Riksbankwill lower the repo rate to 1 percent before year-end.CONTINUED DETERIORATION OF THE WORLD ECONOMYGDP growth has remained weak in most regions of the world,and in the OECD countries GDP rose by only 0.1 percent in thesecond quarter compared to the first (see Diagram 1). In theUnited States, GDP increased by a meagre 0.4 percent, andgrowth fell off in the major emerging economies outside theOECD. The single most important explanation for the weakgrowth is the uncertainty about the development of the Europeandebt crisis, which is inhibiting investment and consumptionin stable countries as well. In the euro area GDP fell by0.2 percent, with the greatest drop in the problem-burdenedcountries of southern Europe, but even the core countries of theeuro area reported weak growth (see Diagram 2).Confidence indicators and other information point to continuedlacklustre growth in the world economy for the rest of2012. The NIER’s assessment is that the uncertainty about developmentsin the euro area is most likely to begin fading awaytoward the end of 2012. Confidence will then return to households,firms and financial markets, and GDP growth will graduallypick up in 2013.SWEDISH ECONOMY PROVING RESILIENT SO FARDespite a lacklustre tendency elsewhere, GDP surged in Swedenduring the first half of this year. According to the preliminaryversion of the National Accounts, GDP was up in the secondquarter by 1.4 percent compared to the preceding quarter (seeDiagram 3). This is due partly to the absence of major underlyingimbalances in the Swedish economy, but probably also tocoincidence. For example, stockbuilding was unexpectedlystrong in the preliminary National Accounts. It is uncertainDiagram 1 GDP in OECD CountriesPercentage change, seasonally adjusted quarterlyvalues210-1-2-30608Sources: OECD, national sources and NIER.Diagram 2 GDP in Selected CountriesPercentage change, seasonally adjusted quarterlyvalues210-1-2-31012210-1-2-3210-1-2-31 The calculations were completed on August 23. At Harpsund on August 24,Finance Minister Anders Borg unveiled the Government’s new forecast and a marginfor reforms that will reach SEK 23 billion in 2013, or SEK 9 billion more than in theforecast. A special analysis, ”A Brief Comment on the Government’s AnnouncedProposal for Unfunded Measures 2013,” presents an overall estimate of how thecentral variables in the forecast would be affected by this more expansionary fiscalpolicy in 2013.-406081012Italy, Spain, Portugal, Greece and IrelandRest of euro areaSources: Eurostat and NIER.-4

6 SummaryDiagram 3 Economic TendencyIndicator and GDPIndex mean=100, monthly values and percentagechange, seasonally adjusted quarterly values,respectively120110100908070969800020406Economic Tendency IndicatorGDP (right)0810Sources: Statistics Sweden and NIER.123.52.00.5-1.0-2.5-4.0Diagram 4 Government Bond InterestRates in Selected CountriesPercent, daily values, 5-days moving average8642010SpainGermanyItalySweden111286420whether this is an effect of inadequate statistical documentationor reflects actual stockbuilding. Regardless of the explanation,this means that the level of GDP will recede in the third quarter.The underlying development is thus not as solid as the GDPfigures would indicate. This may be exemplified by the fact thatthe Economic Tendency Indicator, which admittedly rose duringthe spring, has dropped back over the summer and is now at alevel compatible will lower-than-average growth (see Diagram3). Included in the forecast is a negative GDP growth of0.8 percent in the third quarter of this year. With this setback togrowth, GDP for the full year 2012 is estimated to increase by1.3 percent, a growth rate regarded as consistent with other informationon the development of the economy given normalrelationships.LONG AND PAINFUL WAY BACK FOR THE EURO AREAThe fundamental problem in the euro area is that the southernEuropean countries are not nearly competitive enough, withdeficits in the current account as a consequence. To restore externalbalance and at the same time reduce unemployment, thesecountries must increase their exports. A prerequisite for doingso is a lower cost level in relation to the rest of the world. Thedeficit countries of the euro area have received some help fromthe weakening of the euro against other currencies, including thedollar and the krona, but it is also necessary to adjust the costlevel in the euro area. This process has begun with a higher rateof pay increases in Germany and a tendency toward lower payhikes in Spain and some other countries.It will take a long time, however, to adjust relative cost levelswithin the euro area since the exchange rate between these countriesis fixed. In the meanwhile the development of debt burdensand the financing of budget deficits must be managed. Themeasures presented thus far have not succeeded in restoring theconfidence of lenders in the central government finances ofSpain, Italy and some other countries. This situation is reflectedin continued high interest rates on central government bonds inthese countries (see Diagram 4). More political will to take necessaryaction will be required in the EU.In the forecast GDP will rise slowly in the euro area beginningin 2013, but it will take a long time for resource utilizationto return to normal. It is not unlikely that the adjustment willproceed even more slowly than assumed in the forecast, withweaker growth as a consequence. The confidence of financialmarkets in the sustainability of public finances will then belower, driving up interest rates on central government bonds andfurther retarding growth. The consequences for Sweden of amore negative development like this one are described in thespecial analysis “Effects on the Swedish Economy of a DelayedRecovery in the Euro Area”.Note: 10-year maturity.Source: Macrobond.

8 SummaryDiagram 8 Net ExportsPercent of GDP, current prices8.58.07.57.06.56.05.55.04.500020406081012Sources: Statistics Sweden and NIER.14168.58.07.57.06.56.05.55.04.5Diagram 9 Net Lending and CyclicallyAdjusted Net Lending, GeneralGovernment SectorPercent of GDP and of potential GDP, respectivelyDiagram 9). Underlying net lending can thus be regarded asconsistent with the surplus target of net lending averaging1 percent of GDP over an economic cycle. It is thus not compatiblewith the surplus target to permanently reduce the netlending of the public sector.Therefore, the reduction in net lending required to achievebalance in foreign trade should be undertaken in the privatesector. The principal driving forces in this adjustment will be astrengthening of the real rate of exchange and a low real rate ofinterest. An expansionary monetary policy will facilitate the adjustment,but it is uncertain how rapidly the adjustment will takeplace. It will call for a structural transformation, with a growingexport industry in the present deficit countries and growingdomestically oriented production of services in Sweden andother surplus countries. It is important to realize, however, thatthe longer it takes for the surplus countries like Sweden, Germanyand China to reduce domestic net lending, the more timeit will take for the deficit countries to increase their net lending.Worldwide growth will probably be affected negatively duringthe entire period of adjustment.43210-1-2-300020406081012Net lendingCyclically adjusted net lendingChange in cyclically adjusted net lendingSources: Statistics Sweden and NIER.Diagram 10 Exchange RatesSEK per currency unit, monthly values121443210-1-2-31612LITTLE MARGIN FOR UNFUNDED FISCAL POLICYMEASURES IN 2013–2016The forecast is based on the assumption that the Governmentwill implement unfunded fiscal policy measures of SEK 14 billionin the Budget Bill for 2013. 2 This means that fiscal policywill be slightly expansionary in 2013 as well, since cyclically adjustednet lending will continue to decrease somewhat (seeDiagram 9).The margin for unfunded measures during the period 2014–2016 will be limited, the reason being the demographic trend,which will lead, for example to higher expenditure for pensions,while it will hold down potential GDP growth. It is assumed inthe forecast the surplus target will be achieved. Consequently, itis estimated that only SEK 7 billion (net) in unfunded measureswill be provided in 2014–2016. 3 For this reason fiscal policy willbe slightly contractionary in these years.1110987611109876REPO RATE LOWERED TO ONE PERCENT BEFORE YEAR-ENDUncertainty about developments in the euro area remains high,and the growth forecasts for the euro area and elsewhere havebeen revised downward. In Sweden growth will be weaker in theperiod ahead; thus, it appears that the labour market will weakensomewhat more than expected.50002EURUSD0406081012141652 At the same time a higher local government tax in county council districts isexpected to yield SEK 1 billion in additional tax revenue; thus the net unfundedmeasures for the entire public sector will amount to SEK 13 billion.Sources: The Riksbank and NIER.3 With SEK 23 billion in unfunded measures in accordance with what the FinanceMinister indicated on August 24 (after the calculations for the forecast had beenconcluded), the margin for unfunded measures in 2014–2016 is thus SEK –2 billion.See also Footnote 1.

The Swedish Economy August 2012 9At the same time, the exchange rate of the krona hasstrengthened rapidly over the summer, particularly against theeuro (see Diagram 10). In real trade-weighted terms, the currentlevel is not remarkably high and is in line with the valuation in2000 and 2004 (see Diagram 11). The appreciation of the kronathis year is due to several different factors. The macroeconomicstatistics have turned out to be stronger in Sweden than in othercountries, leading to an upward shift in expectations about therepo rate in relation to policy rates abroad. The greater differencein expected policy rates is giving rise to an inflow of capitalinto Sweden that tends to strengthen the krona.There are also a number of more technical factors that mayhave played a contributing role. Nowadays there are only a fewcountries in the world whose bonds are given the highest ratingwith stable prospects by all rating institutions. This translatesinto an increase in demand for Swedish government securitiesfrom certain institutional investors. There is also informationthat foreign central banks are increasing their holdings of Swedishcurrency. Regardless of the reason for the strengtheningexchange rate, it puts downward pressure on inflation, and witha certain time lag it will also have a negative effect on exports.Inflation as measured by the CPIF will remain just above 1 percentthrough 2014 (see Diagram 12).In these circumstances, the Riksbank will need to ease monetarypolicy so that inflation will not drop to a level that is muchtoo low. The NIER’s forecast is that the Riksbank will lower therepo rate by 0.25 percentage points at its monetary policy meetingsin October and December (see Diagram 13). This is roughlyconsistent with the expectations of market operators as reflectedin the pricing of so-called RIBA futures.With this forecast for the repo rate and macroeconomic developmentsin other respects, the krona, in nominal effectiveterms will remain for the next few years close to its average levelin August. As usual, however, the exchange rate is difficult toforesee. If the krona were to continue strengthening, for exampleas a consequence of increased uncertainty about the futureprospects for the euro, it might be necessary to lower the reporate further (see the special analysis “Effects on the SwedishEconomy of a Delayed Recovery in the Euro Area”).Diagram 11 Effective Exchange Rate ofth Swedish Krona – KIXIndex 1992-11-18=100, monthly values160150140130120110100Diagram 12 Consumer PricesPercentage changeDiagram 13 Repo RatePercent, daily values5443210-19000000202CPICPIF04Nominal KIXReal KIX0406Note: A higher index implies a weaker krona.06080810Sources: The Riksbank and NIER.101212Sources: Statistics Sweden and NIER.141416161601501401301201101009043210-15433221100809101112131415160NIER´s forecastRIBA futures, August 20 2012The Riksbank, July 2012Sources: NASDAQ OMX, The Riksbank and NIER.

10 SummaryTable 1 Selected IndicatorsPercentage change unless otherwise stated2009 2010 2011 2012 2013 2014 2015 2016GDP –5.0 6.2 3.9 1.3 1.8GDP, calendar-adjusted –4.9 5.9 3.9 1.7 1.8 2.8 2.8 2.5Current account 1 6.8 6.8 7.0 6.9 6.5 6.1 5.7 5.5Hours worked 2 –2.6 2.6 2.3 0.4 0.1 1.1 1.4 0.9Employment –2.1 1.1 2.1 0.4 0.0 0.8 1.3 0.8Unemployment 3 8.3 8.4 7.5 7.6 7.9 7.7 7.0 6.6Labour market gap 4 –3.4 –2.5 –1.4 –1.7 –2.1 –1.4 –0.5 –0.1Output gap 5 –7.6 –4.3 –1.9 –2.4 –2.4 –1.3 –0.3 0.2Hourly earnings, business sector 6 3.2 2.5 2.7 3.3 2.8 2.8 2.9 3.1Cost of labour, business sector 2 2.4 –0.8 2.8 3.9 2.9 2.9 3.0 3.2Productivity, business sector 2 –3.6 4.0 2.5 1.8 1.9 2.1 1.8 2.1CPI –0.5 1.2 3.0 1.1 0.8 1.3 2.2 2.5CPIF 1.7 2.0 1.4 1.1 1.3 1.1 1.5 1.9Repo rate 7,8 0.25 1.25 1.75 1.00 1.00 1.50 2.00 2.75Interest rate, 10-yeargovernment bond 7 3.2 2.9 2.6 1.7 2.4 3.2 3.7 4.1Index for the Swedish krona(KIX) 9 122.8 114.3 107.6 105.4 103.4 103.5 103.7 103.7GDP, worldwide –0.6 5.3 3.8 3.4 3.8 4.2 4.4 4.5General government net lending 1 –1.0 –0.1 0.1 –0.3 –0.4 0.2 1.0 1.4Cyclically adjusted net lending 10 1.9 2.1 1.4 1.2 0.8 0.9 1.3 1.51Percent of GDP. 2 Calendar-adjusted. 3 Percent of labour force. 4 Difference between actual and potential hours workedexpressed in percent of potential hours worked. 5 Difference between actual and potential GDP expressed in percent ofpotential GDP. 6 According to Short-term Wage Statistics. 7 Percent. 8 At year-end. 9 Index 1992-11-18=100. 10 Percent ofpotential GDP.Sources: Statistics Sweden, National Mediation Office, The Riksbank and NIER.

The Swedish Economy August 2012 11Revisions in the Forecast for 2012–2013• Growth in the euro area and the rest of the world hasbeen revised downward slightly for 2013 even thoughthe first half of 2012 has proven somewhat strongerthan expected (see Table 2). The principal reason is thatconfidence indicators are pointing to somewhat greaterweakness around the end of 2012 and early in 2013.• In Sweden, GDP growth has been revised upward for2012 due to a strong preliminary outcome for the secondquarter. The growth, however, is not expected tolast, and most of the principal confidence indicators remainat low levels. Consequently, the forecast has beenlowered for the second half of 2012 and the outset of2013.• The krona has strengthened substantially more than expected(see Diagram 14). It is assumed in the forecastthat there will be some weakening in relation to the levelin August, but the krona will still be some 3 percentstronger in 2013 than in the June forecast. This willlower the inflation rate and curtail exports in the somewhatlonger term.• The decrease in inflation will be countered in the shortrun by higher oil and food prices on the world market.CPIF inflation has therefore been revised downward byonly 0.2 percentage points for 2013. There has been agreater downward revision of CPI inflation since theRiksbank is expected to lower the repo rate.• Unemployment has been slightly higher than expected,although employment is in line with the June forecast.In the period ahead the labour market is expected toshow a somewhat weaker tendency (see Diagram 15).• Lower resource utilization, with higher unemploymentand lower inflation, means that the forecast for the reporate has been revised downward (see Diagram 16).• As in the June forecast, fiscal policy is anticipated to beslightly expansionary in 2012 and 2013. The forecast ofaggregate unfunded fiscal policy measures in the publicsector has been adjusted upward for 2013 fromSEK 7 billion to 13 billion.Diagram 14 Effective Exchange Rate ofthe Swedish Krona – KIXIndex 1992-11-18=100, monthly values1301251201151101051000709August 2012June 20121113Sources: The Riksbank and NIER.Diagram 15 UnemploymentPercent of labour force, seasonally adjustedquarterly values9.08.58.07.57.06.56.05.50709August 2012June 20121113Sources: Statistics Sweden and NIER.Diagram 16 Repo Rate in SwedenPercent, daily values54315151301251201151101051009.08.58.07.57.06.56.05.5543221100709August 2012June 20121113150Sources: The Riksbank and NIER.

12 SummaryTable 2 Current Forecast and Revisions Compared to theJune 2012 ForecastPercentage change unless otherwise statedAug20122012 2013Diff.Aug2012Diff.InternationalGDP, worldwide 3.4 0.0 3.8 –0.2GDP, OECD 1.6 0.0 1.8 –0.2GDP, euro area –0.5 0.1 0.5 –0.2GDP, United States 2.2 0.1 2.1 –0.2GDP, China 7.9 –0.2 8.5 –0.3Federal funds target rate 1,2 0.25 0.00 0.25 0.00ECB refi rate 1,2 0.50 0.00 0.50 0.00Oil price 3 111.8 3.6 108.9 2.1CPI, OECD 2.3 0.0 2.0 0.2GDP by ExpenditureGDP, calendar-adjusted 1.7 0.7 1.8 –0.5GDP 1.3 0.7 1.8 –0.5Household consumption 2.0 0.2 2.9 0.4General government consumption 0.7 0.3 0.4 –0.3Gross fixed-capital formation 3.9 –1.0 3.3 –0.1Stockbuilding 4 –1.0 0.2 0.0 –0.3Exports 1.6 1.6 3.7 –0.6Imports 0.9 0.8 5.0 0.1Labour Market, Inflaton,Interest Rates etc.Hours worked 5 0.4 –0.3 0.1 –0.1Employment 0.4 0.1 0.0 –0.3Unemployment 6 7.6 0.1 7.9 0.3Labour market gap 7 –1.7 –0.3 –2.1 –0.4Output gap 8 –2.4 0.1 –2.4 –0.4Productivity, business sector 5 1.8 1.5 1.9 –0.6Hourly earnings, business sector 9 3.3 –0.1 2.8 0.0CPI 1.1 –0.1 0.8 –0.5CPIF 1.1 0.0 1.3 –0.2Repo rate 1,2 1.00 –0.50 1.00 –0.50Interest rate, 10-yeargovernment bond 1 1.7 –0.1 2.4 –0.1Index for the Swedish krona(KIX) 10 105.4 –2.6 103.4 –3.1Current account 4 6.9 0.4 6.5 0.1General government net lending 11 –0.3 –0.1 –0.4 –0.21Percent. 2 At year-end. 3 Dollar per barrel, annual average. 4 Change in percent ofGDP preceding year. 5 Calendar-adjusted. 6 Percent of labour force. 7 Differencebetween actual and potential hours worked expressed in percent of potential hoursworked. 8 Difference between actual and potential GDP expressed in percent ofpotential GDP. 9 According to Short-term Wage Statistics. 10 Index1992-11-18=100. 11 Percent of GDP.Note: The difference is between the current forecast and the June 2012 forecast. Apositive value denotes an upward revision.Source: NIER.

The Swedish Economy August 2012 13SPECIAL ANALYSISA Brief Comment on theGovernment’s AnnouncedProposal for Unfunded Measures2013The NIER’s forecast is based on the assumption that the Governmentwill implement unfunded measures totallingSEK 14 billion in 2013. The calculations were completed onAugust 23. On August 24 at Harpsund, Minister of FinanceAnders Borg presented the Government’s new forecast. Fromthe presentation it could be seen that the Minister of Financewas assuming that the Government would implement unfundedmeasures totalling SEK 23 billion in 2013, that is, SEK 9 billionmore than in the NIER’s forecast. 4 This special analysis presentsa general calculation of how the central variables in the forecastare affected by the more expansionary fiscal policy for 2013announced by the Government.It is not yet clear what measures the Government intends topropose in the Budget Bill for 2013. Negotiations between theGovernment parties are in progress, and it will be necessarythereafter to seek the support of the Swedish Parliament. In theNIER’s assessment, however, it is considered probable that theunfunded measures will amount to SEK 23 billion in 2013.A MORE EXPANSIONARY FISCAL POLICY IN 2013 WILLREQUIRE A MORE CONTRACTIONARY FISCAL POLICY IN2014–2016According to the NIER’s assessment, there will be a margin forunfunded measures totalling SEK 21 billion in 2013–2016. 5 Asthe Government is already planning to implement unfundedmeasures totalling SEK 23 billion in 2013, there will be no marginleft, in the NIER’s assessment, for additional unfundedmeasures in 2014–2016. In the overall calculations presentedbelow, it is assumed that the level of cyclically adjusted net lendingin 2016 will be the same as in the forecast, a necessity if thesurplus target is to be met. This means that there will beSEK 9 billion less in unfunded measures for 2014–2015 comparedwith the forecast. The situation may be viewed as onewhere the margin for permanent unfinanced measures is usedearlier than in the forecast. With this policy, cyclically adjusted4 The Finance Minister also announced that the margin for unfunded measures in2014 would be SEK 27 billion, or an addional SEK 4 billion this year. This figurecould be both higher and lower in the Budget for 2014 to be presented nextautumn.5 See the chapter ”Macroeconomic Development and Economic Policy 2012–2016”.

14 SummaryDiagram 17 Cyclically Adjusted NetLendingPercent of potential GDP3210-1-2-300020406081012NIER´s forecast, August 2012More expansionary fiscal policy 201314163210-1-2-3net lending decreases to 0.5 percent of potential GDP in 2013.Thereafter it will gradually rise, in these calculations, to1.5 percent of potential GDP in 2016, the same level as in theforecast (see Diagram 17).The Government, however, is much more optimistic thanthe NIER about the future development of GDP and unemployment.In the Government’s forecast, unemployment dropsto 5.2 percent in 2016, almost 1.5 percentage points lower thanin the NIER’s forecast (see Diagram 18). Employment is higher,and GDP is growing faster. In the Government’s forecast thelevel of GDP is 2.9 percent higher in 2016 than in the NIER’sforecast (see Diagram 19). This means that their assessment offuture tax revenue and expenditure for unemployment is moreoptimistic, thus creating a margin for unfunded measures.Sources: Statistics Sweden, Government andNIER.Diagram 18 UnemploymentPercent of labour force8.58.07.57.06.56.05.55.0000204060810NIER´s forecast, August 2012Government forecastSources: Statistics Sweden, Government andNIER.Diagram 19 GDPIndex 2011=100, calendar-adjusted level120110100908070000204060810NIER´s forecast, August 2012Government forecastSources: Statistics Sweden, Government andNIER.1212141416168.58.07.57.06.56.05.55.0120110100908070EARLIER IMPLEMENTATION OF MEASURES WILL HELPSPEED UP ECONOMIC RECOVERY SOMEWHATThe NIER has prepared a general calculation of how the overallmacroeconomic development would be affected by 9 billion morein unfunded measures in 2013 and SEK 9 billion less in unfundedmeasures in 2014–2015. It is assumed in the calculationsthat the emphasis in these additional measures will be on reducingtaxes for firms and on infrastructure investment and maintenance.The overall effect of the more expansionary fiscal policy isthat GDP growth will be a few tenths of a percentage pointhigher in 2013 and slightly lower in 2014–2015. Unemploymentwill decrease somewhat sooner, but the levels of GDP and employmentin 2016 are largely identical with the forecast. 6 Asthere will not be time to influence inflation significantly, theRiksbank will not change interest rates more than marginally.In this assessment, no consideration has been given to possibleeffects that would permanently increase employment or capitalformation. This is due partly to the lack of sufficiently welldevelopedproposals to consider, and partly to the likelihoodthat the effects would probably be minor in 2013–2016.From a cyclical standpoint it would be desirable to implementunfunded measures in 2013, when the economy is slack.This would help to speed up recovery and counteract the rise inlong-term unemployment. However, since the margin for permanentunfunded measures is limited, in the NIER’s opinion, italso means that fiscal policy must be given a contractionarystance in 2014–2016 in order to achieve the surplus target forgeneral government finances.6 The Government’s higher forecast for the level of GDP in 2016 is explainableprimarily by a more optimistic assessment of structural unemployment. Thisassessment does not seemed to have been affected appreciably by the newmeasures.

15Macroeconomic Development andEconomic Policy 2012–2016The recession is deepening this year, and the Swedish economywill not begin to recover until the second quarter of 2013. Economicpolicy will need to remain expansionary in order to stimulatedomestic demand as exports stagnate because of the lacklustretendency of demand and a stronger krona. Fiscal policywill be slightly expansionary this year and next year, but contractionaryin 2014–2016 so that net lending will reach1.5 percent of GDP when resource utilization in the economy isbalanced is achieved in 2016. The repo rate will be lowered to1 percent this year and will need to be kept low for several yearsahead.This chapter first presents the NIER’s forecast for the developmentof the international and Swedish economy during 2012–2016. There is then a more detailed description of the developmentof monetary and fiscal policies. A detailed presentation ofthe forecast for the short term, 2012–2013, is found in the fivechapters immediately thereafter.International DevelopmentsAFTER-EFFECTS OF THE FINANCIAL CRISIS TO PERSISTThe after-effects of the rapid build-up of private debt during theyears preceding the financial crisis will continue to impact theworld economy for several years to come. GDP growth andresource utilization in the OECD countries will admittedly berising for the next few years, but growth will be limited comparedto previous recoveries. The level of GDP in the OECDcountries in 2016 is forecast to be more than 10 percent lowerthan if GDP growth had been in line with the trend for 1998–2007 (see Diagram 20).Before the crisis, it was often emphasized that imbalances innet lending between countries, as reflected in the current accounts,were a threat to the stability of the world economy. Surplusesor deficits in the current accounts of different countriesare not a problem in themselves, but may be an indication that ahigh level of net lending in countries, due to demographic factors,for example, is being channelled into countries where thereturn on investment is higher. If countries with deficits importcapital for investments that will raise the long-term level ofGDP, this will in time contribute to higher global growth. In theyears before the financial crisis, however, net lending was channelledprimarily into developed countries, where housing investmentand private debt, for example, rapidly increased.Diagram 20 GDP in OECD CountriesIndex 2007=10013012011010090807098000204060810GDPProjection of trend 1998-2007Sources: OECD and NIER.121416130120110100908070

16 Macroeconomic Development and Economic Policy 2012–2016Diagram 21 Current AccountPercent of GDP151050-5-10-15959799ChinaUSGermanySpainSweden01Sources: Statistics Sweden, IMF and NIER.03Diagram 22 GDP Components in SpainIndex 2007=1001201101009080706050000204Domestic demandImportsExports06Sources: Eurostat and NIER.Diagram 23 Real Government BondInterest RatesPercent, monthly values543210-1-200UKUS0204Note: 10-year maturity.0605Sources: Macrobond and NIER.08080709101011151050-5-10-151201101009080706050543210-1-2The imbalances have decreased substantially compared to theperiod before the financial crisis (see Diagram 21). But the adjustmenttoward smaller imbalances in net lending betweencountries has not taken place via the contribution of investmentto higher long-term GDP growth and exports in the countrieswith deficits. Rather, the adjustment has been made through aweak economic tendency in the countries which prior to thefinancial crisis had substantial deficits in their current accountsand a rapid accumulation of debt. In these countries, such asSpain, the UK and the United States, the deficits have decreasedas domestic demand and thus imports have shown a muchweaker tendency than exports (in Diagram 22 the tendency inSpain is shown). At the same time, unemployment has risen. Theimprovement in the so-called external balance (the current account)has thus taken place at the price of a higher internal imbalance,in the form of unemployment, for example. With aprolonged period of high unemployment in a country, there is adanger that employment will drop to a permanently lower level.The balance in the current account of the surplus countrieshas diminished, particularly in China, but this tendency is duemore to lower exports than to stronger domestic demand. At theglobal level, the tendency thus means that the propensity forsaving and net lending has risen, while at the same time investmenthas been depressed after the financial crisis. This has contributedto the pressure that has pushed real rates of interestdown to record-low levels (see Diagram 23).With a few exceptions, productivity, measured as output perhour worked in the business sector, has not recovered from itsdecline after the financial crisis in the OECD countries. Thedevelopment of productivity has thus been considerably weakerthat the annual growth of nearly 2 percent observed in 2000–2007. The lacklustre tendency of investment and world trademay be contributing causes, but they hardly explain the entiredecrease in productivity growth.The weakness of productivity, in combination with a lacklustreeconomy and structural problems on the labour market inmany countries, mean that the level of GDP has shown muchweaker growth since 2008 than could have been expected (seeDiagram 20). This raises questions about the sustainable rate oflong-term growth in the OECD countries. If this rate remainslower for an extended period, further challenges will be posed inregard, for example, to the sustainability of public finances. Inthe NIER’s medium-range forecasts, it is assumed that potentialproductivity growth will gradually return to historical rates,which means that the losses incurred in recent years will not berecouped. In many areas, the tendency of potential GDP issomewhat weaker than it has been historically since the age profileof the population means slower growth in the labour force.The unexpectedly low level of GDP is one reason why governmentdebt, in terms of both level and share of GDP, hasrisen rapidly in recent years. A lower level of GDP also means

The Swedish Economy August 2012 17that private indebtedness becomes harder to manage. In thiscontext, there is currently a discussion among economists concerningthe appropriateness of a considerably tighter fiscal policyat the same time as the private sector is saving and the possibilitiesof stimulating the economy with monetary policy are limitedby the level of policy rates, which is already close to zero.GLOBAL ECONOMY TO RECOVER IN 2013–2016Resource utilization in the world economy is falling somewhatthis year as global GDP increases by 3.5 percent. The weakereconomy is primarily an effect of the debt crisis in the euro area.Uncertainty about the euro crisis is expected to subside towardthe end of the year, as actors in the economy gradually begin togain confidence in the proposed political measures to managethe debt burden of the southern European countries and thusalleviate the financing problems of these countries. In combinationwith a more expansionary economic policy in the majoremerging economies and a slightly less contractionary fiscal policyin the OECD countries, this will help to boost global growthsomewhat in 2013. The recovery of the world economy is forecastto continue in 2014–2016 (see Diagram 24 and Table 3).GDP growth in the euro area will remain low in the next fewyears. One reason for this is that the structural adjustment ofrelative wages and costs among euro countries will take time. Inthe special analysis “Effects on the Swedish Economy of a DelayedRecovery in the Euro Area” there is a discussion of what adeeper crisis in the euro area, due in part to the delayed structuraladjustment, would mean for GDP growth in the euro areaand for the Swedish economy.INTEREST RATES IN OECD COUNTRIES TO REMAIN LOWThe weakness of resource utilization in the OECD area appearsto be curbing inflation. The central banks in the US and the euroarea will therefore maintain their policy rates of 0.25 and0.50 percent, respectively (after a reduction from 0.75 percent inSeptember), for several years ahead. The Federal Reserve willbegin to raise the policy rate in the US (federal funds rate)around the end of the first half of 2014, when recovery has becomeevident. In the euro area the first rate hike will not comeuntil later. The increases in policy rates will then proceed moreslowly than has been normal with previous phases of rate increases(see Diagram 25). This is particularly true of the euroarea, where recovery will take a long time and a normal level ofresource utilization will not be reached until the end of the decade.Diagram 24 Output Gap in US and EuroAreaPercent of potential GDP420-2-4-6000204USEuro area060810Sources: OECD, IMF and NIER.Diagram 25 Policy RatesPercent, daily values76543210121416420-2-4-676543210-100 02 04Euro areaUS060810121416-1Sources: ECB, Federal Reserve and NIER.

18 Macroeconomic Development and Economic Policy 2012–2016Diagram 26 Economic TendencyIndicator and GDPIndex mean=100, monthly values and annualpercentage change, calendar-adjusted quarterlyvalues, respectively120110100963Table 3 GDP and CPI WorldwidePercentage change2011 2012 2013 2014 2015 2016GDP, OECD 1.9 1.6 1.8 2.2 2.5 2.6GDP, emerging markets 1 6.2 5.6 6.1 6.2 6.3 6.3GDP, worldwide 3.8 3.4 3.8 4.2 4.4 4.5CPI, OECD 2.9 2.3 2.0 1.9 2.0 2.1CPI, worldwide 4.8 4.0 3.7 3.6 3.6 3.590800-31Emerging markets here refer to all non-OECD member countries.Note: GDP figures are calendar-adjusted and in constant prices. Aggregates arecalculated using purchasing-power parity-adjusted weights from the IMF.Sources: IMF, OECD and NIER.70-660969800020406Economic Tendency IndicatorGDP (right)081012-9Developments in SwedenSources: Statistics Sweden and NIER.Diagram 27 Output Gap and LabourMarket GapPercent of potential GDP and of potential hoursworked, respectively, seasonally adjustedquarterly values420-2-4-6-8-100002Source: NIER.04Output gapLabour market gapDiagram 28 Productivity, BusinessSectorSEK per hour, constant prices, seasonallyadjusted quarterly values50045040006081012420-2-4-6-8-10500450400RAPID GDP INCREASE IN THE FIRST HALF OF 2012According to preliminary statistics, GDP rose by a total of about2 percent in the first two quarters of 2012. The strong tendencyin the first half-year, however, is temporary in nature, and variousindicators point to a sharp slowdown in GDP growth in thesecond half of this year. The NIER’s Economic Tendency Indicator,an aggregate measure of sentiment in the economy, hasbeen dropping in recent months and is now below normal (seeDiagram 26). Underlying the fall-off is the continuing euro crisis.The heightened uncertainty about what will happen in debtburdenedcountries with problematic banks is also dampeningthe economy in Sweden. For the full year 2012 GDP growth willbe 1.7 percent in calendar-adjusted terms. 7Despite the strong growth in the first half of 2012, resourceutilization in the Swedish economy is still low, and it will recedefurther during the autumn. For the full year 2012 the output gapis forecast at roughly –2.5 percent (see Diagram 27). Thus, witha normal level of resource utilization, output would be 2.5 percenthigher. However, the labour market gap is not fully so deep(see Diagram 27). The reason is that to some extent firms considerthe weakness in demand to be temporary and are retainingsomewhat more staff than they need in the short run. Thus,when growth at companies begins to pick up during 2013, therewill initially be spare resources for increasing output withinfirms. This means that the labour market will continue to deteriorateduring 2013.350300350300SUBDUED PRODUCTIVITY GROWTH THIS YEARLabour productivity in the business sector has shown a veryslack tendency in recent years (see Diagram 28). In the first twoquarters of this year, however, there was a clear recovery. For2509395979901030507091125013Sources: Statistics Sweden and NIER.7 All figures in this section are calendar-adjusted unless otherwise indicated.

The Swedish Economy August 2012 19the full year 2012 the increase will be only 1.8 percent owing toweakness at year-end.The NIER’s assessment is that the underlying, or potential,rate of growth in business-sector productivity has been slippingdownward since the middle of the previous decade. From 2006to 2011, potential business-sector output, according to theNIER’s analysis, rose by only 0.7 percent per year. This may becompared with an average of 2.7 percent per year in 1981–2006.The lacklustre development of potential productivity is dueto several factors. Low investment in the business sector hasmeant that productive capital has been increasing slowly in recentyears. With the recession following the financial crisis of2008, the need for capacity-enhancing investments has beenlower than normal, at the same time as heightened uncertaintyabout the tendency of the economy many have curtailed growthas well as the introduction of new technology.The labour force and employment have been surging, partlybecause of the economic policy that has been pursued. 8 Thequantity of productive capital per person employed has thusshown a slack tendency since 2008, a development that has heldback growth in productivity. Moreover, some of the new entrantsinto the labour force may possess relatively limited qualifications,and this factor may also have curbed productivity.SLOW GROWTH IN POTENTIAL GDP THE NEXT FEW YEARSThe NIER estimates that potential GDP increased by an annualaverage of 2.2 percent between 2006 and 2011. Much of theincrease, about two-thirds, is explained by a rapidly growinglabour force.This year potential GDP is expected to increase by2.1 percent (see Table 4), a faster rate than in 2011, when potentialGDP, in the NIER’s assessment, rose by 1.5 percent. Thestronger tendency this year is considered to be temporary innature, and in 2013–2016 potential GDP will rise by an averageof nearly 2 percent per year. This is somewhat less than the averagerate of GDP growth in 1980–2011, 2.2 percent per year,and substantially below the average growth rate of 2.7 percentper year in 1995–2011. Underlying this weaker tendency is thecontinued subdued development of potential productivity, at thesame time as growth in the potential labour force and in potentialemployment is slackening. One reason for the latter tendencyis that the effects of previous measures to increase employmentare beginning to achieve their full impact. But it is alsodue to demographic factors. 98 See the special analysis “Long-Term Effects of Economic Policy Reforms on theLabour Market” in The Swedish Economy, December 2011.9 See the special analysis “Ny befolkningsprognos får effekter på sysselsättningenpå lång sikt” (“New Population Forecast Will Have Long-Term Effects onEmployment”) in Konjunkturläget, June 2012.

20 Macroeconomic Development and Economic Policy 2012–2016Diagram 29 Swedish Export Market andExportsPercentage change151050-5-10-150506070809101112Market for Swedish exportsExportsSources: IMF, OECD and NIER.13141516151050-5-10-15Diagram 30 Nominal EffectiveExchange Rate of the Swedish Krona –KIXIndex 1992-11-18=10012512011511010512512011511010510010093 95 97 99 01 03 05 07 09 11 13 15Sources: The Riksbank and NIER.Diagram 31 GDP and Domestic TotalDemandIndex quarter 0=100, see explanation below125125120115110105100959085-40 4 8 122007Q4=100, GDP2000Q4=100, GDP1990Q1=100, GDP1201151101051008516 20 24 28Domestic total demandDomestic total demandDomestic total demandNote: The X axis refers to quarters. The date 0 isthe last quarter before GDP started to fall. Theforecast line applies to the current recovery.Sources: Statistics Sweden and NIER.9590Table 4 Potential VariablesPercentage change unless otherwise stated2011 2012 2013 2014 2015 2016Potential GDP 1.5 2.1 1.8 1.7 1.8 2.1Potential hours worked 1.2 0.6 0.4 0.4 0.5 0.5Of which contributionpotential employment 0.7 0.4 0.4 0.4 0.4 0.4Of which demographiccontribution 0.4 0.4 0.4 0.3 0.3Potential productivity 0.3 1.5 1.2 1.3 1.4 1.6Potential productivity,business sector 0.6 2.0 1.5 1.6 1.8 2.1Note: The calculations are adjusted for inter-year differences in the number ofworkdays.Sources: Statistics Sweden and NIER.SWEDISH ECONOMY PREPARED FOR RECOVERYThe low level of resource utilization in the economy this yearmeans that there is substantial room for GDP to rise, althoughthe increase in potential GDP will be modest for the next fewyears.Domestic conditions for recovery are favourable comparedto those in many other countries. Public finances are robust, andhousehold saving is high. At the same time, Sweden has largesurpluses in foreign trade, and in general the business sector iscompetitive internationally, despite the recent substantial appreciationof the krona. Given Sweden’s sizable foreign trade, however,the country’s economy is heavily dependent on developmentsin other countries. The weak growth abroad this year andnext year will hold back recovery in Sweden.WEAK GROWTH IN EXPORTSWith the low growth in the OECD countries this year and nextyear, the world market for Swedish exporting firms will expandrather slowly (see Diagram 29). This factor will be one reasonwhy Swedish exports will increase by a modest 2 percent thisyear and by only 4 percent in 2013. In the years 2014–2016 exportswill go up by 5–6 percent per year. As this rate is lowerthan the growth rate of the global market for Swedish exports,the country’s exporting firms are expected to lose market share.This has been the tendency in the latest 30-year period, but to arather limited extent. For demographic reasons Sweden has adecreasing need for net saving in relation to other countries, andthe comparatively large losses of market share are an element inthe reduction of global imbalances. This development is consistentwith that this year’s strengthening of the krona endures overthe period (see Diagram 30).Growth in domestic demand will thus remain a more prominentdriving force than in recent periods of recovery in theSwedish economy, particularly in comparison to the years followingthe crisis of the early 1990’s (see Diagram 31).

The Swedish Economy August 2012 21LOWER INTEREST RATES WILL STIMULATE HOUSEHOLDCONSUMPTION NEXT YEARHousehold consumption will increase this year by 2.2 percent(see Diagram 32), despite the effects of the recession on thelabour market and the uncertainty created by the euro crisis.One reason for this is that real household disposable income willstill increase at the relatively high rate of 2.8 percent. Householdsaving will rise above 10 percent of disposable income. In 2013the labour market will still be weak, with unemployment risingtoward 8 percent in the latter months of the year. At the sametime, monetary policy will shift in a more expansionary directionas the appreciation of the krona continues to hold down pricesof imports and thus inflation (see the section ”Monetary Policy,Interest Rates and Exchange Rates” below). This will stimulatehousehold consumption, which will rise by 2.9 percent. In 2014–2016 employment will be increasing at a higher rate, and unemploymentwill go down. The economy will then be in an upwardspiral where rising demand bolsters the labour market, furtherstrengthening demand. Household consumption will then increaseby about 3–3.5 percent per year (see Diagram 32). As ashare of GDP, household consumption will gradually rise andapproach 49 percent in 2016 (see Diagram 33).General government consumption will show relatively weakgrowth in 2012–2016, increasing by an annual average of0.8 percent during the period. As a share of GDP, general governmentconsumption will thus drop from about 27 percent in2012 to 26 percent in 2016 (see Diagram 33).One explanation for the rising consumption share for householdsis that for demographic reasons they can be expected toreduce their saving. From the early 1990’s to the middle of thelast decade, there was a gradual rise in the proportion of thepopulation aged 20–64, that is, the segment of the populationwith a high rate of gainful employment. On average this grouphas a tendency to save fairly large amounts, whereas the oppositeis true of age groups with a low employment rate, i. e.younger and older persons. The demographic trend has nowturned, and the age groups with a low employment rate willgrow rapidly in the years ahead (see Diagram 34). This developmentin itself indicates that total consumption – that is, householdconsumption and general government consumption takentogether – will rise as a share of GDP, as has been the case inrecent years. In the next few years, however, this upswing will betemporarily interrupted, partly as a consequence of a cyclicalupturn in the investment share.A declining share of the population aged 20–64 also suggeststhat growth in per capita consumption will be relatively slack.Total per capita consumption should therefore not be affectedappreciably by the demographic trend. In 2012–2016 householdconsumption per capita will increase by an average of2.2 percent per year (see Diagram 35). This rate is somewhatmore rapid than during the period 1995–2011, when householdDiagram 32 Household Consumptionand Saving RatioPercentage change and percent of disposableincome, respectively6543210-100020406081012Household consumption expenditureSaving ratio (right)Sources: Statistics Sweden and NIER.Diagram 33 Shares of GDPPercent of GDP, current prices5040302010000204060810121414Household consumption expenditureGeneral government consumption expenditureGross fixed-capital formationNet exports (right)Sources: Statistics Sweden and NIER.Diagram 34 Household Consumptionand Population Age 0–19 and 65+Percent of GDP and of population, respectively827976737080848892960004Total consumption expenditureAge 0-19 and 65+ (right)08Sources: Statistics Sweden and NIER.121616161412108642108642444342414016

22 Macroeconomic Development and Economic Policy 2012–2016Diagram 35 Household Consumptionper capitaPercentage change6420-2-4-680848892960004Sources: Statistics Sweden and NIER.Diagram 36 Gross Fixed-capitalFormationPercentage change, calendar-adjusted values105008126420-2-4-6161050consumption per capita was increasing by an average of2.0 percent per year. At the same time, however, general governmentconsumption per capita will be increasing marginallyduring the period 2012–2016. This may be compared to theperiod 1995–2011, when general government consumption percapita rose by an annual average of 0.5 percent per year.In connection with the financial crisis of 2008–2009, grossfixed-capital formation dropped from 20.0 to 18.0 percent ofGDP. After a cyclical recovery in 2010 and 2011, growth in investmentwill recede to 4.5 percent this year and further to3.3 percent in 2013 (see Diagram 36). A decrease in housinginvestment will contribute to the fall-off this year. Also underlyingthe downward shift, however, are the uncertain prospects forthe economy in other countries and low capacity utilization inthe Swedish business sector. At the same time, the appreciationof the krona is contributing to downward pressure on profits inmanufacturing, another factor that is holding back investment,though with a certain time lag. In 2014 the need for capacityenhancinginvestment will nevertheless be increasing, andgrowth in investment will go up. On average, gross fixed capitalformation will increase by roughly 5.5 percent per year in 2014–2016. Its share of GDP will reach 20.0 percent in 2016, a proportionthat in the NIER’s opinion should be considered normalin a long-term perspective.-5-5-10-10-15-15-20-2000 02 04 06 08 10 12 14 16Sources: Statistics Sweden and NIER.Diagram 37 GDPPercentage change, calendar-adjusted values66442200STRONGER KRONA STIMULATING IMPORTSImports will rise modestly in 2012 because of the weak tendencyof demand. In 2013 growth in demand will recover. At the sametime, a stronger krona will continue to curb the development ofprices of imports. In total, this means that imports will grow by5 percent next year. In 2014–2016 growth in imports will berising further as demand accelerates. Imports will then be increasingby an average of about 7 percent per year.Net exports will be somewhat higher this year as a share ofGDP, but next year the downward trend that began in 2007 willresume (see Diagram 33). The decline will continue in 2014–2016, and in 2016 net exports will be slightly less than 5 percentas a share of GDP. Sweden’s net lending in relation to othercountries will thus continue to drop. In light of the demographictrend, with a decreasing proportion of the population in agegroups with a higher frequency of gainful employment, there isnothing remarkable about this downward trend.-2-4-600 02 04 06 08 10 12 14Sources: Statistics Sweden and NIER.16-2-4-6RECESSION NOT OVER UNTIL 2016All aspects considered, GDP growth will remain subdued in2013 at 1.8 percent (see Diagram 37 and Table 5). Growth willpick up in 2014–2016 and reach 2.5–2.8 percent per year. Eventhough recovery will then be more evident, it cannot be consideredto be very rapid, and the output gap will not close until2016 (see Diagram 38).

The Swedish Economy August 2012 23Table 5 GDP by ExpenditurePercentage change, constant prices, calendar-adjusted values2011 2012 2013 2014 2015 2016Household consumptionexpenditure 2.0 2.2 2.9 3.7 3.5 2.9General governmentconsumption expenditure 1.8 1.1 0.4 0.5 1.0 1.0Gross fixed-capital formation 6.3 4.5 3.3 6.7 5.9 4.2Final domestic demand 2.8 2.3 2.3 3.4 3.3 2.7Stockbuilding 1 0.7 –0.9 0.0 0.1 0.0 0.0Total domestic demand 3.4 1.3 2.2 3.5 3.3 2.7Exports 7.0 2.2 3.7 5.0 6.2 5.9Total demand 4.7 1.6 2.7 4.0 4.4 3.8Imports 6.4 1.5 5.0 6.7 7.6 6.5Net exports 1 0.6 0.4 –0.3 –0.5 –0.3 0.0GDP 3.9 1.7 1.8 2.8 2.8 2.51Change in percent of GDP preceding year.Sources: Statistics Sweden and NIER.Diagram 38 Output Gap and LabourMarket GapPercent of potential GDP and of potential hoursworked, respectively420-2-4-6-8-100002Source: NIER.0406Output gapLabour market gap0810121416420-2-4-6-8-10UNEMPLOYMENT TO INCREASE THIS YEAR AND NEXT YEARAfter an increase of over 2 percent last year, the upturn in employmentwill slow to 0.4 percent this year. The labour force willincrease marginally faster, and unemployment will consequentlyrise somewhat to 7.6 percent (see Diagram 39 and Table 6). Theweak tendency of demand will mean at the same time that resourceutilization at firms is on the decline. Since growth in demandwill remain weak in 2013, firms will have little need toincrease the number of their employees, and employment willthus remain unchanged when viewed over the entire year. Thelabour force will continue increasing, primarily because of arising working age population, and unemployment will thereforeaverage 7.9 percent for the year. Toward the end of 2013, resourceutilization at firms will normalize. The higher growth ofdemand in 2014–2016 will thereby have a more direct impact onemployment, which will then increase by an average of 1 percentper year.All factors considered, employment will rise by 3 percent in2013–2016. During the same period the labour force will growby almost 2 percent. Unemployment will thereby drop to6.6 percent in 2016. This is marginally higher than the NIER’sassessment of structural unemployment, which is 6.5 percentthat year. Resource utilization on the labour market is thus to beconsidered normal, as is reflected in the fact that the labourmarket gap will have virtually closed (see Diagram 38).Diagram 39 Employment andUnemploymentPercentage change and percent of labour force,respectively3210-1-2-30002040608EmploymentUnemployment (right)1012Sources: Statistics Sweden and NIER.14168.58.07.57.06.56.05.5

24 Macroeconomic Development and Economic Policy 2012–2016Table 6 Labour MarketPercentage change2011 2012 2013 2014 2015 2016Hours worked 1 2.3 0.4 0.1 1.1 1.4 0.9Employment 2.1 0.4 0.0 0.8 1.3 0.8Labour force 1.2 0.5 0.4 0.5 0.5 0.4Unemployment 2 7.5 7.6 7.9 7.7 7.0 6.61Calendar-adjusted. 2 Percent of labour force.Sources: Statistics Sweden and NIER.LOWER RATE OF PAY INCREASES NEXT YEARDiagram 40 Hourly Earnings and UnitLabour Cost, Business SectorPercentage change, calendar-adjusted values86420-2-4-600020406Hourly earningsUnit labour costSources: Statistics Sweden, National MediationOffice and NIER.Diagram 41 Labour Cost Share,Business SectorPercent626058565452081012141686420-2-4-6626058565452Last year hourly earnings in the business sector, according to theShort-term Wage Statistics, rose by 2.7 percent. Despite theweakening labour market, hourly earnings in the business sectorare expected to increase faster this year, by 3.3 percent (seeDiagram 40 and Table 7). One reason for this is that the paynegotiations resulted in settlements on pay increases higher thanthose in effect in 2011, but it is also a temporary consequence ofearlier pay revisions in manufacturing. At the same time, business-sectorproductivity has shown a tendency slightly weakerthan trend, and unit labour costs will therefore rise by 2.0 percentthis year.During the period 2013–2015, pay negotiations will furtheradapt to the recession on the labour market. Hourly earnings inthe business sector will then rise by slightly less than 3 percentper year. When the situation on the labour market returns tonormal in 2016, hourly earnings will rise at the somewhat fasterrate of 3.1 percent. One reason for the comparatively low payincreases is the weak underlying productivity trend. At the sametime, the export sector is finding it hard to compensate for thestronger krona by raising prices in foreign currency. This suggeststhat pay increases are being held back slightly in manufacturing,which through a bargaining order where manufacturingusually serves as the benchmark for the central pay settlementsaffects developments in other industries as well.In 2013 cost pressure will lighten as the rate of pay increasesslows and firms use their labour force more efficiently. Unitlabour costs will then be rising by 1.0 percent, and this rate ofincrease will be generally maintained in 2014–2016. The labourcost share of value added in the business sector will be just below60 percent in 2013 and will then decrease slightly through2016 (see Diagram 41).Domestic cost pressure will be low for the next few years.Firms will thus be able in general to defend their profits duringthe next few years without raising prices very rapidly. The exceptionwill be those portions of the export-oriented business sectorwhere the stronger krona will put pressure on profit margins.5093959799010305070911131550Sources: Statistics Sweden and NIER.

The Swedish Economy August 2012 25CPIF INFLATION WELL BELOW 2 PERCENTInflation in terms of the CPI with a fixed home mortgage interestrate (CPIF) was 1.4 percent in 2011. A generally subduedinternational tendency in prices, together with the strengtheningkrona, means that prices of imports will decrease this year despitesubstantial increases in prices of food and crude oil. Thiswill be a factor in the decrease in CPIF inflation to 1.1 percentthis year (see Diagram 42 and Table 7). The upturn in unit labourcosts this year will affect consumer prices with a certaintime lag and will contribute to the increase in CPIF inflation to1.3 percent next year, even though a further strengthening kronawill continue to have a restraining effect on the development ofprices of imports. Not until 2015–2016 will prices of imports berising at a more normal rate. Domestic cost pressure, however,will remain low in 2014–2016, with unit labour costs increasingby about 1 percent per year. Inflation will thus remain low duringthe period, even though a gradually improved economy towardthe end of the period will make it easier for firms to passcost increases on to consumers. Inflation in terms of the CPIFwill thus rise gradually during the period 2014–2016 and reach1.9 percent in 2016. Measured by the CPI, inflation will be considerablyhigher in 2015–2016. The reason is that the Riksbankwill be raising the repo rate during this period, and the resultingincrease in home mortgage interest rates will be pushing up inflationas measured by the CPI.Diagram 42 Consumer PricesPercentage change43210-10002CPICPIF0406081012Sources: Statistics Sweden and NIER.141643210-1Table 7 Earnings and PricesPercentage change2011 2012 2013 2014 2015 2016Hourly earnings 1 2.5 3.2 2.9 2.8 2.9 3.1Hourly earnings, businesssector 1 2.7 3.3 2.8 2.8 2.9 3.1Unit labour cost, business sector 0.8 2.2 1.0 0.8 1.2 1.1CPI 3.0 1.1 0.8 1.3 2.2 2.5CPIF 1.4 1.1 1.3 1.1 1.5 1.91According to Short-term Wage Statistics.Sources: National Mediation Office, Statistics Sweden and NIER.Monetary Policy, Interest Rates andExchange RatesRIKSBANK TO LOWER THE REPO RATE TO 1 PERCENT THISYEARThe Riksbank left the repo rate unchanged at its meeting on July3. The Riksbank’s forecast for the repo rate was adjusted downwardsomewhat, however, compared with the forecast in April,and it now indicates that the repo rate will remain unchanged

26 Macroeconomic Development and Economic Policy 2012–2016Diagram 43 Repo RatePercent, daily values543210080910111213NIER´s forecastRIBA futures, August 20 2012The Riksbank, July 2012Sources: NASDAQ OMX, The Riksbank and NIER.14Diagram 44 Exchange RatesSEK per currency unit, daily values, 5-daysmoving average11109876510USDEURSource: Macrobond.Diagram 45 Lending from FinancialInstitutions in SwedenAnnual percentage change, monthly values20151050-51115121654321011109876520151050-5until the third quarter of 2013, when it will start being raised. 10Market pricing, as expressed in so-called RIBA futures, reflectsexpectations that the repo rate will be lowered once during theautumn and possibly one more time during the spring of 2013(see Diagram 43).The picture of how resource utilization develops in theSwedish economy is not totally clear. Employment increased,and GDP growth was strong in the second quarter of this year,according to the preliminary National Accounts. Several otherindicators of resource utilization, however, suggest that theeconomy has weakened. The outlook for the Swedish economyin the immediate future is relatively weak. GDP growth in thesecond half-year will be lower, and the labour market is softening.Resource utilization is thus weakening further.The krona has appreciated strongly over the summer(see Diagram 44). Compared with May, the krona in mid-Augustwas almost 7 percent stronger in effective terms. All else beingequal, the stronger krona will lead to lower resource utilizationand inflation in the Swedish economy and calls for a lower policyrate.Lending to households has continued to slow down. In Junethe rate of increase in lending to households was just over4.5 percent, half the rate of increase compared with 2010 andthe lowest rate of increase since 1997 (see Diagram 45).All factors considered, the NIER’s assessment is that basedon the latest economic information, the Riksbank, after havingleft the repo rate unchanged in September, will lower it by0.25 percentage points in October of this year and thereafter byan additional 0.25 percentage points in December in order toincrease resource utilization and to facilitate achievement of theinflation target.The NIER’s assessment is admittedly that the krona willweaken somewhat in the coming year, but also that a large proportionof the recent appreciation will be lasting (see the section”Krona Strenghtened by Weakness in Other Countries” below).The stronger krona means that prices of imports will show aweak tendency this year and next year. This will help to ensurethat the increase in prices of the goods and services in the consumerprice index will be relatively limited both this year andnext year. CPIF inflation will be only 1.1 percent this year and1.3 percent next year (see Diagram 42).If the krona develops more strongly than in the forecast, itmay be necessary to lower the repo rate below 1 percent in orderto prevent an excessively large drop in resource utilization and ininflation (see the special analysis “Effects on the Swedish Economyof a Delayed Recovery in the Euro Area”).-109799010305To householdsTo non-finacial corporations07Note. Quarterly data prior to 2003.Source: Statitics Sweden.0911-1010 Through downward adjustment of the short-term repo rate forecast, however,the Riksbank was signaling that the probability of lowering the repo rate in theautumn of 2012 is somewhat greater than the probability that it will be raised. Thejudgement was also made that the repo rate would be raised at a slightly slowerpace beginning in mid-2013.

The Swedish Economy August 2012 27LOW REPO RATE FOR THE NEXT SEVERAL YEARSThe strengthening of the krona this year and weak resourceutilization in the economy mean that inflationary pressure in theeconomy will remain low. CPIF inflation will not reach2 percent until after 2016. The repo rate will remain at 1 percentuntil mid-2014, when the Riksbank will gradually begin raising it.The low repo rate will help the Swedish economy to recover inthe years 2013–2016. As resource utilization and inflation go up,the Riksbank will gradually raise the repo rate.When resource utilization is more or less balanced in 2015,the repo rate will be just below 3 percent, a much lower reporatelevel than has historically been compatible with balancedresource utilization. The principal reason is that policy ratesabroad are low, particularly in the euro area (see Diagram 46). Ifthe repo rate were to be raised faster, and thus follow moreclosely the historical relationship between the repo rate, resourceutilization and inflation, the krona would strengthen even further.This would curtail resource utilization and inflation to agreater degree than is desirable.Diagram 46 Policy RatesPercent, daily values65432100608USEuro areaSweden10Sources: Federal Reserve, ECB, The Riksbank andNIER.1214166543210INTERNATIONAL LONG-TERM INTEREST RATES ONCENTRAL GOVERNMENT BONDS STILL AT A RECORD LOWBoth Swedish and international long-term interest rates on governmentbonds were at roughly the same level in mid-August asin June. The principal explanations for the historically low longterminterest rates are the continued weak prospects for growthin the global economy and expectations of continued low policyrates and other expansionary measures, such as the purchase ofinterest-bearing assets by central banks. Interest rates on governmentbonds in countries considered safe have also fallen as aconsequence of increased inflows in response to the uncertaintyabout developments in the euro area. The countries that appearto have received the bulk of these inflows are Australia, Canada,Germany, Sweden, Norway, Denmark, Switzerland, the UnitedStates and the United Kingdom. In some of these countries, theinflows have been so strong that interest rates on bonds withshort-term maturities have even carried a negative nominal interestrate (Switzerland and Germany, for example). The interestrate on Swedish 10-year government bonds has remained at thesame level as its German equivalent. However, Sweden’s interestrate on a two-year government bond is about 1 percentage pointabove the German rate. The difference is due primarily to expectationsthat the policy rate will be higher in Sweden than in theeuro area for the next few years.The recovery of the global economy is expected to be sluggish,and central banks in several countries are continuing tofacilitate recovery by pursuing an expansionary monetary policy.This will help to hold down interest rates on government bondsin coming years (see Diagram 47). However, both Swedish andinternational long-term interest rates will rise as uncertaintyDiagram 47 Government Bond InterestRatesPercent76543210002GermanyUSSweden0406Note. 10-year maturity.081012Sources: National sources and NIER.14167654321

28 Macroeconomic Development and Economic Policy 2012–2016Diagram 48 Effective Exchange Rate ofthe Swedish Krona – KIXIndex 1992-11-18=100, monthly values160150160150about the debt crisis in the euro area fades away and the globaleconomy successively strengthens. The upswing will be modest,though, and it is assumed that the interest rate on Swedish 10-year government bonds will rise to 2.4 percent in 2013 and furtherto 4.1 percent in 2016 (see Table 8).14014013012011010090000204Nominal KIXReal KIX06Note. A higher index implies a weaker krona.0810Sources: The Riksbank and NIER.12141613012011010090Table 8 Interest RatesPercent2011 2012 2013 2014 2015 2016At year-endRepo rate 1.75 1.00 1.00 1.50 2.00 2.75Annual averageRepo rate 1.8 1.5 1.0 1.2 1.9 2.45-year government bond 2.3 1.2 1.8 2.6 3.3 3.910-year government bond 2.6 1.7 2.4 3.2 3.7 4.1Sources: The Riksbank and NIER.Diagram 49 Exchange RatesSEK per currency unit, monthly values121110987650002EURUSD04060810Sources: The Riksbank and NIER.Diagram 50 Effective Exchange Rate ofthe EuroIndex 2000=100, monthly values105100959085801214161211109876510510095908580KRONA STRENGTHENED BY WEAKNESS IN OTHERCOUNTRIESThe krona has strengthened considerably over the summer.Measured by KIX, the nominal effective index for the krona, theSwedish currency appreciated in mid-August by nearly 7 percentcompared to May (see Diagram 48). During this period, thekrona strengthened by a full 8 percent in relation to the euro(see Diagram 49). Although the weakening of the euro againstthe krona is conspicuous, the depreciation of the euro has beengeneral, and in effective terms the euro has weakened in thesame period by 3 percent (see Diagram 50).It is always difficult to explain rapid fluctuations in exchangerates. The reason is that the rates are continually influenced byfinancial flows that depend only partially on macroeconomicfactors. There are at least three possible explanations for therecent appreciation of the krona. First, the krona is beingstrengthened by the monetary policies elsewhere, which havebeen and are expected to remain more expansionary than inSweden. While there has been no appreciable change in the expectationsof market participants regarding the repo rate, othercountries have lowered their policy rates and are expected totake further steps to stimulate the economy. Second, the krona isstrengthened by the increased inflow of capital from investorswho are required to invest in assets with the highest credit rating.Since the financial crisis in 2008, such assets have becomeincreasingly few, leaving investors with fewer currencies tochoose from. 11 Third, the krona is being strengthened by theactions of the Swiss central bank, which appears to be increasingits holdings of Swedish currency as it sells portions of the euro75757000020406Note: A higher index implies a weaker euro.Sources: Bank for International Settlements andNIER.0810127011 Currently only the government debt of the Nordic countries, together withCanada and Luxembourg, is given the highest credit rating with stable prospects byall three major credit-rating institutes. Since the financial crisis in 2008, the UnitedStates, Germany, France and the United Kingdom have had their credit ratings orprospects lowered by one or more of the major institutes.

The Swedish Economy August 2012 29assets purchased by the bank for the purpose of defending thefixed exchange rate of the Swiss franc against the euro.In the NIER’s opinion, the factors that strengthened thekrona over the summer will be dampened to some extent in thecoming year. The krona will thus weaken somewhat in relationto its current level.In the longer run, the fundamental determinants of thekrona, such as Sweden’s net foreign position in relation to othercountries, suggest that the krona will strengthen in real terms. Atthe same time, the so-called interest-rate parity condition 12 indicatesthat the krona should be strong now, as the repo rate inthe next few years will be higher than policy rates abroad. Agradual weakening will follow, so that the yield in terms of acommon currency will be the same. When policy rates in othercountries are gradually raised and approach the level of the reporate, the exchange rate will stabilize. In the NIER’s forecast,these two countervailing factors are largely offsetting, and in2016 the krona will have weakened in effective terms by2 percent compared with the annual average for 2012. Duringthe period, inflation abroad is expected to be higher than inflationin Sweden, so that the krona in nominal effective terms willstrengthen by 2 percent during the same period (see Table 9). 13Table 9 Exchange RatesIndex 1992-11-18=100 and SEK per currency unit, respectively2011 2012 2013 2014 2015 2016KIX 107.6 105.4 103.4 103.5 103.7 103.7TCW index 122.3 120.0 117.1 116.8 116.5 116.3EUR 9.03 8.61 8.38 8.40 8.40 8.41USD 6.50 6.81 6.77 6.75 6.74 6.73Sources: The Riksbank and NIER.Fiscal PolicyEXPANSIONARY FISCAL POLICY IN 2013The Budget Bill for 2012 included about SEK 15 billion in unfundedmeasures. 14 The forecast for 2013 is based on the assumptionthat the Government will implement unfunded meas-12 The interest-rate parity condition is a condition for trading in interest-bearingassets issued in different currencies. According to the condition, if assets yield adifferent return at the same risk, the exchange rate is expected to be adjusted sothat the return on the two assets, expressed in a common currency, will beequalized.13 The KIX index for the krona includes several emerging economies with higherinflation than Sweden’s14 See the Budget Bill for 2012 and The Swedish Economy, December 2011.

30 Macroeconomic Development and Economic Policy 2012–2016ures in the amount of SEK 14 billion. 15 Moreover, it is expectedthat the average local government tax will be raised by theequivalent of 1 billion. The net effect on the net lending of thegeneral government sector will thus be SEK 13 billion in 2013.The apportionment of these measures is based on the NIER’sassessment of Government announcements of future measuresand the future stance of fiscal policy.LIMITED MARGIN FOR PERMANENT UNFUNDED MEASURESIN 2014–2016Diagram 51 Output Gap and FiscalPolicyPercent of potential GDP9630-3-6-900020406081012Output gapCyclically adjusted net lending (right)Source: NIER.14163210-1-2-3The NIER’s forecast of the margin for unfunded measures isbased on the surplus target. For net lending to be compatiblewith the surplus target, the NIER’s assessment is that cyclicallyadjusted net lending should be 1.5 percent of potential GDPwhen the economy is in balance, that is, when the output gaphas been closed at the at the end of 2016 (see the fact box below,and Diagram 51).The stance of fiscal policy has been expansionary in almostevery year since 2009. In the NIER’s forecast for unfundedmeasures in 2013, cyclically adjusted net lending will be1.5 percent of potential GDP in 2013 (see Diagram 51). To meetthis surplus target, fiscal policy must be given a contractionarystance in subsequent years. As a result, the margin for permanentunfunded measures will be limited in the period ahead.In 2014–2016 growth in potential GDP will be gradual, aspotential productivity growth is expected to be slow, particularlyat the outset of the period. General government revenues, adjustedfor the cyclical phase of the economy, generally followgrowth in potential GDP, on the assumption of no changes inrules. Thus, they will increase slowly in the next few years. Togetherwith increased interest expenditure, this will further limitthe margin for unfunded measures during the period.In the NIER’s opinion there will be a margin for a total of7 billion kronor in unfunded measures for the period 2014–2016. 16 The margin will arise because general government expenditurewill be increasing more slowly than the revenue of thepublic sector in the absence of discretionary fiscal policy decisions.The distribution over time of the margin for unfundedmeasures totalling SEK 7 billion follows from the forecast forcyclically adjusted net lending (see Table 10 and Table 11).15 The calculations were completed on August 23. At Harpsund on August 24,Finance Minister Anders Borg unveiled the Government’s new forecast and a marginfor reforms that will reach SEK 23 billion in 2013, or SEK 9 billion more than in theforecast. A special analysis, ”A Brief Comment on the Government’s AnnouncedProposal for Unfunded Measures 2013,” presents an overall estimate of how thecentral variables in the forecast would be affected by this more expansionary fiscalpolicy in 2013.16 With SEK 23 billion in unfunded measures in accordance with what the FinanceMinister indicated on August 24 (after the calculations for the forecast had beenconcluded), the margin for unfunded measures in 2014–2016 is thus SEK –2 billion.

The Swedish Economy August 2012 31DEMOGRAPHY CREATING PRESSURE FOR TAX INCREASESIn light of demographic developments during 2014–2016, thecost of securing the real value of public expenditure, accordingto the principles described in the fact box at the end of this section,are estimated at SEK 35 billion for the period (see Table10). Given a total margin of SEK 7 billion for unfunded measures,tax increases of SEK 28 billion will be required to securethe real value of public expenditure for this period. The alternativeis erosion of the level of transfers and/or the level of publicservice.In the NIER’s forecast for 2014–2016, general governmentconsumption and investment develop so that their real value isunchanged (see fact box below). This principle also applies totransfers, but since the cost of securing the real value exceedsthe margin for unfunded measures in the forecast, expenditureon transfers is adjusted by the excess amount. The adjustment oftransfers is an assumption made for calculation purposes and thefinancing needs could just as well be covered by higher taxes.Table 10 Forecast for Unfunded Measures and EstimatedCost of Securing the Real Value of General GovernmentExpenditure in 2014–2016Billions of SEK, change from preceding year2014 2015 2016 2014–2016Forecast, unfunded measures 8 –6 5 7Estimated cost of securing realvalue of general governmentexpenditure 1 13 9 13 35Financing needs for securingreal value 2 –5 –15 –8 –281Securing the real value of general government expenditure means providingsufficient funding for general government consumption to increase at the same rateas demographically based needs, for general government investments to increaseat the same rate as potential GDP and for the real individual replacement level inthe system of transfers to be maintained.2A negative number implies tax increases.Source: NIER.FISCAL POLICY SLIGHTLY EXPANSIONARY IN 2012–2013AND CONTRACTIONARY IN 2014–2016Fiscal Policy ConceptsThe fiscal policy multiplier refers to theeffect of fiscal policy variables on GDP, forexample. Thus, if general government consumptionincreases or taxes are reduced bySEK 10 billion, and GDP as a result increasesby SEK 7 billion, the multiplier is 0.7.The term unfunded measures refers tofiscal policy decisions on increasing expenditureand/or reducing taxes, when suchdecisions are not funded by equally largedecreases in expenditure and/or higher taxesin some other area. Thus, these measures inthemselves constitute a deterioration in thenet lending of the general government sectorand, in addition, normally have a positiveeffect (multiplier) on GDP.Cyclically adjusted net lending is a calculationof what the net lending of the generalgovernment sector would be with balancedresource utilization (a cyclically neutralstate) and a normal composition of major taxbases. It is usually presented as a share ofpotential GDP.The fiscal policy stance in a particular yearis derived from the change in cyclicallyadjusted net lending in relation to potentialGDP. If cyclically adjusted net lending isdecreasing as a share of potential GDP, thisindicates that the fiscal policy stance isexpansionary in regard to resource utilization(potential GDP) in the economy. The reasonmay be that cyclically adjusted tax revenue(because of reduced tax rates, for example),is not keeping up with the increase in potentialGDP, or that cyclically adjusted generalgovernment expenditure is rising faster thanpotential GDP, or a combination of both.Correspondingly, if cyclically adjusted netlending is increasing relative to potentialGDP, this indicates that the fiscal policystance is contractionary. Finally, fiscal policyis neutral when cyclically adjusted net lendingis unchanged in relation to potential GDP.In the area of fiscal policy, the term unchangedrules refers to the development offiscal policy variables when no further fiscalpolicy decisions are taken by Parliament andthe Government. In practice, however, thereare significant problems in drawing boundaries.Diagram 52 Net Lending and CyclicallyAdjusted Net Lending, GeneralGovernment SectorPercent of GDP and of potential GDP, respectively44The NIER uses the change in cyclically adjusted net lending todetermine whether fiscal policy is expansionary, neutral or contractionaryin a particular year (see explanation in the margin).For this reason, cyclically adjusted net lending is a central pointof departure in the forecast for what years the Government willuse the margin for unfunded measures.Cyclically adjusted net lending will decrease somewhat between2011 and 2012, and the stance of fiscal policy will thus beslightly expansionary (see Table 11 and Diagram 52). One reasonfor this is the unfunded measures totalling about SEK 15 billionfor 2012 that have already been decided upon; another is that3210-1-2-300020406081012Net lendingCyclically adjusted net lendingChange in cyclically adjusted net lendingSources: Statistics Sweden and NIER.14163210-1-2-3

32 Macroeconomic Development and Economic Policy 2012–2016the local government sector will be temporarily increasing itsinvestments, thus limiting the net lending of that sector. Thestance of fiscal policy will be expansionary in 2013 as well. Forthe years 2014–2016 cyclically adjusted net lending will graduallyincrease to 1.5 percent of potential GDP, so that fiscal policywill be somewhat contractionary in these years.In summary, there is no conflict of objectives between thesurplus target and the unfunded measures totallingSEK 20 billion kronor in the period 2013–2016. 17 In the absenceof unfunded measures during this period, cyclically adjusted netlending would amount to 2.0 percent of potential GDP in 2016(see Table 11). Not only would the surplus target then be exceeded,but the development of the economy would be lessfavourable, with higher unemployment and a lower level of investment.18 This explains why actual net lending in 2016 will notbe higher in the absence of the unfunded expenditure.Table 11 General Government Net Lending and CyclicallyAdjusted Net Lending Given Different Fiscal Policy ForecastsPercent of GDP and of potential GDP, respectively2012 2013 2014 2015 2016Net lending –0.3 –0.4 0.2 1.0 1.4Net lending excl. further measures2013–2016 –0.3 –0.1 0.5 1.1 1.4Cyclically adjusted net lending 1.2 0.8 0.9 1.3 1.5Cyclically adjusted net lending excl.further measures 2013–2016 1.2 1.1 1.5 1.7 2.0Sources: Statistics Sweden and NIER.FACT BOXPrinciples for the NIER’s Fiscal Policy ForecastsThe NIER’s fiscal policy forecast is just that – a forecast – andtherefore need not always coincide with what the NIER considersto be an appropriate policy. This fact box sets forth the principlesfor the fiscal policy forecast.Surplus Target the CornerstoneIn the short run the fiscal policy forecast is governed by proposalsand announcements in the budget bill and the Spring FiscalPolicy Bill. For coming years, since such information is notavailable, the fiscal policy forecast is based on the NIER’s assessmentof how the fiscal policy framework will be applied. Inthis assessment, the surplus target is the cornerstone, but considerationis also given to the expenditure ceiling and the balancedbudget requirement for the local government sector.17 A total of SEK 13 billion in 2013 and SEK 7 billion in 2014–2016 in the generalgovernment sector.18 See www.konj.se for a model-based forecast excluding SEK 20 billion inunfunded measures in 2013–2016.

The Swedish Economy August 2012 33The NIER regards the surplus target as forward-looking; inother words, the forecast development of net lending is to be inline with the target. The NIER uses a measure of cyclically adjustednet lending as an indicator of whether or not the surplustarget is met.Principle of Caution in Interpreting the Surplus TargetThe difference between actual and cyclically adjusted net lendingis determined primarily by the output gap. Historically the outputgap, as measured by the NIER, has been negative on average.If this is the case in the future as well, the mean value ofcyclically adjusted net lending will be higher than the mean valueof actual net lending. The Government takes this risk into accountin determining to what extent the target has been met. Forthese reasons, the NIER assumes in its forecast that cyclicallyadjusted net lending will be 1.5 percent of potential GDP in acyclically balanced economy, that is, when the output gap isclosed. This will increase the likelihood that actual net lendingwill average 1 percent of GDP.Cyclical ConsiderationsWithin the framework of the surplus target, the NIER also assessesthe extent to which the Government intends to considerthe state of the economy in its fiscal policy decisions. For example,in a recession (boom) the Government will probably seek alevel of cyclically adjusted net lending that is temporarily less(greater) than 1.5 percent of potential GDP in order to bring theeconomy into balance more quickly.Allocation of the Content of Fiscal PolicyFor the immediately following years, the forecast is based on thecontent of fiscal policy, that is, on the apportionment of unfundedmeasures, on the Government’s announcements of futuremeasures and on the NIER’s assessment of the stance ofGovernment policy. In the longer run, where no other informationis available, it is assumed in the revenue forecasts that implicittax rates will be unchanged. In regard to expenditure,funds will be appropriated so that 1) general government consumptionkeeps pace with demographically determined needs,2) there is no deterioration of the system of transfers in realterms and 3) general government investment follows the developmentof GDP. If further changes are needed to meet the surplustarget, this will be done by adjusting transfers to households.

The Swedish Economy August 2012 35SPECIAL ANALYSISEffects on the Swedish Economyof a Delayed Recovery in the EuroAreaThe NIER’s forecast is that recovery in the euro area will commenceduring 2013 and that resource utilization will thereaftercontinue slowly to rise. In this special analysis, an alternativescenario is described, in which confidence returns to households,firms and operators on financial markets later than in the forecastand where the subsequent recovery does not begin untilsometime in 2014. In the alternative scenario, euro-area GDPgrowth per year is about 1 percentage point lower in 2013–2014than in the forecast. This has an impact on the development ofthe economy in other countries, partly through greater uncertainty,and partly because demand from the euro area decreases.For Sweden, slower recovery in the euro area leads to more severerecession, with lower GDP growth and higher unemploymentthan in the forecast, even if the Riksbank in the next fewyears reduces the repo rate 0.5–1.0 percentage point below thelevel in the forecast. How the exchange rate develops plays acentral role in regard to the effects on the Swedish economy. Ifthe krona strengthens further because of continued problems ofconfidence in the euro area, the decline in resource utilizationand in inflation will be more pronounced.Sluggish Recovery in the Euro AreaCONSIDERABLE UNCERTAINTY ABOUT THE EURO CRISISThe debt crisis in the euro area has now lasted for more thantwo years. In the countries with weak central government finances,developments have featured a weak tendency in the realeconomy, high interest rates on government securities, strongfiscal austerity measures (which in some cases have not achievedthe desired effect) and concern that banks may not be sufficientlycapitalized. A prominent element of the crisis has beenthe disappointment following hopes that the various measurespresented by euro area politicians, the IMF and the EuropeanCentral Bank (ECB) would stabilize developments. One reasonfor this is that the proposals presented so far have not includedmeasures sufficiently powerful to solve the financing problemsof banks and governments.It is assumed in the forecast that with the measures taken byEuropean authorities, worry about a financial crisis will subsidetoward the end of 2012. The labour market reforms imple-

36 Macroeconomic Development and Economic Policy 2012–2016mented in Spain and Italy, for example, and the innate dynamismof market forces, point to more gradual cost increases inthe less competitive countries. The euro area can thereby approachthe internal balance that will strengthen economicgrowth in the deficit countries. This will enhance the credibilityof claims that solvency can be achieved for banks and governments,which would support recovery in the euro area. 19 Despitethese measures, GDP growth in the next few years will be low,according to the forecast. Resource utilization will probably notreturn to normal until the end of the current decade.An Alternative Scenario: Recovery in theEuro Area Delayed 20RECESSION IN THE EURO AREA MORE PROLONGED ANDMORE SEVEREA basic assumption in the scenarios is that the concern aboutthe solvency of banks and countries persists next year and thatthe adjustment of costs is more sluggish than in the forecast.One reason for studying such scenarios is the high degree ofuncertainty surrounding the assessment in the forecast of thetiming and effects of necessary political decisions. It is not improbablethat the measures currently under consideration will beeither torpedoed or once again regarded as inadequate. In thatcase the uncertainty about government finances and the futureof the currency union will put a brake on growth in the euro areanext year as well, when growth will be positive, though low, inthe forecast. Another reason for such a development would bethat the structural reforms mentioned above might not have theintended effect, or might be repealed. Not the least importantfactor in this connection is the uncertainty about the politicalfuture in Italy, where parliamentary elections will be held in thespring of 2013. The current prime minister, Mario Monti – regardedby many as a key figure in the implementation of thereforms – has announced that he will not be available after theelection. It is not inconceivable that a new government wouldhave a less ambitious agenda for structural reforms than the19 Some support to the claim that the process of cost adjustment has begun can befound in recent developments.20 In The Swedish Economy, August 2011, an alternative scenario was presented inthe special analysis “Effects of a More Severe Debt Crisis in the Euro Area.” Thefocus of that special analysis was a severe recession in 2012 caused by increasinglyserious financing problems for banks and countries in the euro area. The alternativescenario presented here focuses instead on a more prolonged process of achievingcredibility for the solvency of governments and banks, as well as more sluggishadjustment of prices in the euro area. Both of these factors lead to slower realeconomic recovery in the euro area.

The Swedish Economy August 2012 37current one. Nor can one exclude the possibility of politicalturbulence and repealed reforms in countries such as Spain.Diagram 53 GDP in Euro AreaPercentage change44VERY LOW GROWTH IN THE EURO AREA IN 2013–2014As a consequence of the prolonged uncertainty, GDP growthwill be substantially lower in the euro area in the next few yearscompared to the NIER’s forecast. Next year, euro-area GDPwill decrease by 0.4 percent. Output will subsequently beginrising again in 2014. Hardest hit by the weaker development ofGDP will be the countries with weak government finances, butGDP will also increase more slowly in the core countries of theeuro area, for example Germany and France. Overall, growth inthe euro area in 2013 and 2014 will be roughly 1 percentagepoint lower per year than in the forecast (se Diagram 53). Thismeans that the output gap will be significantly lower in the euroarea in the next few years (see Diagram 54).GLOBAL GROWTH WILL ALSO BE LOWERThe uncertainty and the weakness of demand in the euro areaalso affect growth in other countries. The impact is apparentprimarily in the form of reduced world trade, but the uncertaintyalso contributes to increased precautionary saving and lowerinvestment in other countries. In total, worldwide GDP growthis 0.4 percentage points lower per year in 2013–2014, and thegrowth of the market for Swedish exports about 1.5 percentagepoints lower per year in the same period, compared to the forecast(see Diagram 55). The reason why the effect on the growthof the market for Swedish exports is not greater, despite thesubstantially lower growth in the euro area, is that the downturnhas a heavier impact on southern European countries that areless important as trading partners than countries like Germanyand Finland.LOW INFLATION AND VERY LOW POLICY RATES ABROADFOR A PROLONGED PERIODAs an effect of the lacklustre development in other countries,resource utilization decreases, putting downward pressure oninflation, primarily in the euro area, but also in other countries,reducing it by several tenths of a percentage point in the nextfew years compared to the forecast. As a result, many centralbanks keep their policy rates at low levels. The ECB and theFederal Reserve, whose policy rates in the forecast are at a levelthat can be considered a floor until the end of 2014, are not in aposition to lower their rates. Instead, central banks, primarily theECB, wait somewhat longer to raise policy rates and then do soat a more deliberate pace than in the forecast in 2015–2016 (seeDiagram 56).20-2-4-6000204060810Forecast, August 2012Lower euro area growthSources: Eurostat and NIER.1214161820-2-4-620Diagram 54 Output Gap in Euro AreaPercent420-2-4-6000204060810Forecast, August 2012Lower euro area growth12Sources:OECD, IMF and NIER.Diagram 55 Swedish Exports MarketPercentage change151050-5-10141618420-2-4-620-15-1500 02 04 06 08 10 12 14 16 18 20Forecast, August 2012Lower euro area growthSources: OECD, IMF and NIER.151050-5-10

38 Macroeconomic Development and Economic Policy 2012–2016Diagram 56 Foreign Policy RatesPercent, yearly average543210000204060810Forecast, August 2012Lower euro area growth1214161854321020Note: The rate is a weighted mean – 1/3 Federalfunds target rate and 2/3 ECB refi rate.Sources: Federal Reserve, ECB and NIER.Diagram 57 Nominal EffectiveExchange Rate – KIX16Index, 1992-11-18=10014514013513012512011511014514013513012512011511010510500 02 04 06 08 10 12 14 16 18 20Forecast, August 2012Lower euro area growthLower euro area growth and stronger kronaSources: The Rikbank and NIER.Diagram 58 Real Effective ExchangeRate – KIX16Index, 1992-11-18=100145140145140DEVELOPMENT OF THE EXCHANGE RATE UNCERTAINContinued lack of confidence in government finances and banksin portions of the euro area can affect flows on the foreign exchangemarket in different directions. The recent appreciation ofthe krona has cast a spotlight on how such a development affectsthe real economic development in the Sweden. It is notinconceivable that continuing problems of confidence in theeuro area may contribute to increased demand for Swedish currency,as investments in Sweden in such a situation may be consideredrelatively safe compared to assets in euros. The effectwould be a strengthening of the krona. But it is not clearwhether this would happen if concerns on an international scalewere greater than in the forecast. On the contrary, historicalexperience indicates that the krona has weakened when globaluncertainty has increased.In the scenario of weaker growth in the euro area, it is notassumed that the krona strengthens further as a consequence ofprolonged worries, in part because of the difficulty in determiningthe magnitude of such movements. Instead, an additionalscenario is studied, one of “Lower Euro Area Growth andStronger Krona”. This scenario includes the same weakening ofgrowth in the euro area as in the first scenario, but it also illustrateswhat happens when the krona strengthens against the euroand ends up with an exchange rate of SEK 8 per euro in 2013. 21This is equivalent to an appreciation of about 4 percent in 2013of the nominal exchange rate index KIX16 22 relative to the forecast(see Diagram 57). In real terms the krona strengthens byabout 5 percent relative to the forecast for 2013 (see Diagram58).In the scenario with no appreciation of the krona, the exchangerate weakens in the next few years compared to the forecast,a development explained by the fact that the Riksbank,unlike central banks in the US and the euro area, can lower thepolicy rate. As a consequence, the differential between Swedishand foreign interest rates is less than in the forecast, leading to aweaker krona relative to the forecast.13513513013012512512012011511011000 02 04 06 08 10 12 14 16 18 20Forecast, August 2012Lower euro area growthLower euro area growth and stronger kronaSources: The Riksbank and NIER.11521 The strengthening of the krona in the scenario ”Lower Euro Area Growth andStronger Krona” is assumed to have negligible consequences for the developmentof the economy in other countries.22 KIX16 is a variant of KIX that includes narrower range of countries. The16 countries included are the following: Germany, Belgium, Canada, Denmark,Spain, Finland, France, Italy, Japan, the Netherlands, Norway, Austria, the UnitedKingdom, the US, Australia and Switzerland. The full KIX also includes an additional16 countries, primarily emerging economies.

The Swedish Economy August 2012 39Effects on the Swedish Economy in 2013–2016 23Diagram 59 Swedish ExportsPercentage change1515LOWER DEMAND FOR EXPORTS AND HIGHPRECAUTIONARY SAVING REDUCE GDP GROWTH105105With the continuing concern about the resolution of the eurocrisis, Swedish households take greater precautions to limit theirconsumption, in contrast with the forecast. At the same time,lower growth in the euro area, which includes several of Sweden’sprincipal trading partners, depress demand for Swedishexports. Swedish GDP growth is then lower in 2013–2014 thanin the forecast. Growth is 0.7 percentage points less in 2013 thanin the forecast in the scenario of a strengthening krona, sincethis one entails even lower net exports (see Diagram 59 andDiagram 60).0-5-10-15-1500 02 04 06 08 10 12 14 16 18 20Forecast, August 2012Lower euro area growthLower euro area growth and stronger kronaSources: Statistics Sweden and NIER.0-5-10RIKSBANK TO COUNTERACT THE WEAKENING ECONOMYWITH A LOWER REPO RATEDiagram 60 GDP in SwedenPercentage change66With lower growth, the recession deepens; that is, resource utilizationis lower than in the forecast (see Diagram 61). This contributesto lower inflation (see Diagram 62). Inflation and resourceutilization are substantially lower in the scenario with astrong exchange rate for the krona, as this contributes to lowerGDP and prices of imports compared with the forecast and thescenario “Lower Euro Area Growth”. Lower resource utilizationand lower inflation mean that the Riksbank is following a moreexpansionary monetary policy than in the forecast. Lower resourceutilization and inflation in the scenario with a strongerexchange rate warrant even greater reductions in interest rates.In this scenario the Riksbank moves very rapidly down to a reporate of 0.25 percent, which as a practical matter may be consideredthe lower limit for Sweden’s policy rate (see Diagram 63).By easing monetary policy, the Riksbank contributes to recovery,and growth in 2015–2016 will be faster than in the forecast (seeDiagram 60). Nevertheless, in both scenarios recovery in Swedentakes more time than in the forecast, and the output gapcloses about one and three years later in the respective scenarios(see Diagram 61).420-2-4-600020406081012141618Forecast, August 2012Lower euro area growthLower euro area growth and stronger kronaSources: Statistics Sweden and NIER.Diagram 61 Output Gap in SwedenPercent420-2-4420-2-4-620420-2-4UNEMPLOYMENT ONLY TEMPORARILY HIGHERAs a result of lower growth in demand, employment is lowerand unemployment higher than in the forecast through 2016.-6-8-1000-1002 04 06 08 10 12 14 16 18 20Forecast, August 2012Lower euro area growthLower euro area growth and stronger krona-6-823 The effects on the Swedish economy have been calculated with the aid of KIMOD,the NIER’s macroeconomic model; see Bergvall, A. et al., ”KIMOD 1.0 –Documentation of the NIER’s Dynamic Macroeconomic General Equilibrium Model ofthe Swedish Economy,” Working Paper No. 100, NIER, 2007.Source: NIER.

40 Macroeconomic Development and Economic Policy 2012–2016Diagram 62 CPIF InflationPercent3.02.52.01.51.00.50.000020406081012141618Forecast, August 2012Lower euro area growthLower euro area growth and stronger kronaSources: Statistics Sweden and NIER.Diagram 63 Repo RatePercent, yearly average543210-100020406081012141618Forecast, August 2012Lower euro area growthLower euro area growth and stronger kronaSources: The Riksbank and NIER.Diagram 64 UnemploymentPercent of labour force8.58.03.02.52.01.51.00.50.020543210-1208.58.0The increase in unemployment, however, is relatively modest inthe scenario where the krona does not initially strengthen (seeDiagram 64). To some extent the rise in unemployment is limitedby the Riksbank’s repo rate cuts, but monetary policy is notcapable of entirely neutralizing lower demand. Another factorthat limits to some extent the increase in unemployment comparedwith the forecast is that much of the drop in growth is dueto lower demand in the relatively capital-intensive exportingsector.The calculations in the scenarios do not include any longtermnegative effects on unemployment and employment. It isprobable, however, that there are such effects, particularly in thescenario with a stronger krona, where unemployment exceedsthe forecast for the entire period until 2020. In the scenario withlower growth only in the euro area, this statement is less applicable.Since the calculations do not include any long-term negativeconsequences for the labour market, the GDP effects in thescenarios are only temporary, and the margin for unfunded fiscalpolicy measures does not differ significantly from the forecast.On average the net lending of the general government sector asa share of GDP is a few tenths of one percent lower during theperiod.The alternative scenarios include the same discretionary fiscalpolicy as in the forecast. But since the recession deepens somuch that the Riksbank in the scenario with a stronger kronareaches what may be regarded as a lower limit for the repo rate,a more expansionary fiscal policy may be called for, at least inthis scenario. If such a policy is followed, it would help to curbthe decline in GDP growth and the increase in unemployment.Possible lasting negative effects on the labour market, which arenot considered in the calculations, are also a reason for adoptinga more expansionary fiscal policy. Another option for stabilizationpolicy, in addition to reducing interest rates, would be forthe Riksbank to intervene on the foreign exchange market withthe aim of weakening the exchange rate of the krona. Thiswould help to maintain the desired rate of inflation and demandfor exports.7.57.57.07.06.56.56.06.05.500020406081012141618Forecast, August 2012Lower euro area growthLower euro area growth and stronger krona5.520Sources: Statistics Sweden and NIER.