Swedish Economy june by alicejenny

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									The Swedish
Economy
June 2006




Published by
The National Institute of Economic Research (NIER)
Stockholm 2006
The National Institute of Economic Research (NIER) prepares
analyses and forecasts of the Swedish and international economy
and conducts related research. The NIER is a government
agency accountable to the Ministry of Finance and is funded
largely by the Swedish government. Like other government
agencies, the NIER has an independent status and is responsible
for the assessments that it publishes.

The Swedish Economy contains analyses and forecasts of the
Swedish and international economy. It is the English translation
of the report in Swedish, Konjunkturläget, which is published in
both languages four times a year, in March, June, August and
December. The Statistical Appendix, a comprehensive set of
tables with numerical data, is issued together with The Swedish
Economy. However, the Statistical Appendix for the June report of
The Swedish Economy is published only on the NIER’s home page.

The report entitled Wage Formation in Sweden is published
annually by the NIER and provides analyses of the economic
conditions for wage formation in Sweden. It is the English
translation of the report in Swedish, Lönebildningsrapport.

In the Special Studies series, the NIER publishes reports based on
studies or other assignments commissioned by outside parties.
Research findings are published in the Working Paper series.
Some of these working papers appear in international scholarly
journals and are then reissued under the heading of Reprints.
Reports in these three series can be ordered at no charge. Most
publications can also be downloaded directly from the NIER’s
home page, www.konj.se.



NIER
Kungsgatan 12–14
Box 3116
SE-103 62 Stockholm
Sweden
Phone: +46-8-453 59 00 Fax: +46-8-453 59 80
E-mail: ki@konj.se     Home page: www.konj.se

ISSN 0039–7296
ISBN 91–89226–71–2
Preface
The Swedish Economy, June 2006, provides an economic forecast
for 2006–2008. The forecast covers both the Swedish and
international economies. In a special section, the new forecast is
compared with the assessments presented in March 2006.
    The preparation of this year’s report was led by Kristian
Nilsson, Deputy Director of Forecasting. The calculations were
completed on June 14, 2006.




Ingemar Hansson
Director General
Contents
Economic Forecast ................................................................................................................... 7
    Summary................................................................................................................................. 9
    Development of the International Economy................................................................. 17
     United States ................................................................................................................... 20
     Japan................................................................................................................................. 22
     Euro Zone ....................................................................................................................... 22
    Financial Markets................................................................................................................ 25
    GDP and Demand in Sweden .......................................................................................... 33
     Household Consumption.............................................................................................. 34
     General Government Consumption ........................................................................... 38
     Gross Fixed Capital Formation ................................................................................... 39
     Inventories....................................................................................................................... 41
     Exports............................................................................................................................. 42
     Imports ............................................................................................................................ 45
     Prices of Exports and Imports, Current Account .................................................... 47
    Output and Labour Market............................................................................................... 51
     Output, Productivity and Hours Worked .................................................................. 52
     Demand for Labour....................................................................................................... 55
     Labour Supply and Unemployment ............................................................................ 57
     Resource Utilization....................................................................................................... 59
    Wages, Profits and Prices .................................................................................................. 61
     Wages and Labour Costs............................................................................................... 62
     Competitive Situation and Profitability ...................................................................... 65
     Inflation ........................................................................................................................... 67
    Public Finances ................................................................................................................... 71
      Targets and Stance of Economic Policy..................................................................... 72
      Issues Relating to Taxes and Benefits......................................................................... 75
      Revenue and Expenditure of the General Government Sector ............................. 77
      Finances in Subsectors of General Government ...................................................... 80
Comparison of Forecasts ....................................................................................................... 85
   The International Tendency ......................................................................................... 86
   The Tendency in Sweden.............................................................................................. 88

Special Analysis
The NIERs Repo Rate Assessment ..................................................................................... 30
Economic Forecast
2006–2008
                                                                                                                                      9




Summary                                                                        Diagram 1 GDP – Worldwide
                                                                               Annual percentage change
                                                                               6                                                          6
Sweden’s strong economy is improving further and will create 150 000 new
jobs in 2005–2008. Favoured by a surprisingly large labour supply, GDP         5                                                          5

will grow by 3.8 percent this year, 3.2 percent in 2007 and 2.8 percent in
                                                                               4                                                          4
2008. Ill health and unemployment are decreasing, but nearly 1 million
persons of working age will still be supported by welfare benefits in 2008.    3                                                          3
Despite strong finances in the general government sector, reforms without
financial backing will be inappropriate in the next few years, when the        2                                                          2

Swedish economy will be running at full speed.                                 1                                                          1


                                                                               0                                                          0
                                                                                   85 87 89 91 93 95 97 99 01 03 05 07
                                                                                       Trend
World Economy Steaming Along                                                           Actual

                                                                               Note: Trend calculated with an HP filter.
The global economy has shown very strong growth in recent                      Sources: IMF, OECD, national sources and NIER.
years and has proved quite resistant to high prices of oil and
primary products. But unrest on stock markets in recent weeks
and high oil prices have led to greater uncertainty about the
                                                                               Diagram 2 GDP and Gross Fixed Capital
tendency of the economy, particularly in the United States,                    Formation – OECD
where households have begun showing signs of less optimism                     Percentage change, seasonally adjusted quarterly
                                                                               values
about the future.                                                               2.0                                                   2.0
    Nevertheless, rapid global growth will most probably
continue for the next few years. This year, worldwide GDP will                  1.5                                                   1.5

be up by 4.9 percent, whereas growth will be somewhat less in                   1.0                                                   1.0

2007 and 2008. Global growth will thus exceed its trend rate (see               0.5                                                   0.5
Diagram 1). Worldwide, resource utilization will therefore be
                                                                                0.0                                                   0.0
rising, and the spare resources of the world economy will
successively be put to use.                                                    -0.5                                                   -0.5

    Up to the present, the prime movers of growth have been                    -1.0                                                   -1.0
the United States and a number of expanding economies like
                                                                               -1.5                                                   -1.5
those of China and India. Growth has picked up in Japan as well                        01            03           05        07

after a long period of stagnation. In the euro zone, the economy                            GDP
                                                                                            Gross fixed capital formation
has been lagging behind, though recovery now appears to have                   Sources: IMF, OECD, national sources and NIER.
gained a foothold there. Growth is also comparatively high in
the new EU countries, Latin America, the Middle East and
Africa. Thus, all major regions of the world are involved in                   Diagram 3 Official Interest Rates
                                                                               Percent, daily values
global recovery.
                                                                               6                                                          6
    One reason for the improving world economy is an
expansionary monetary policy that has fuelled demand. In                       5                                                          5

combination with rising business profits and accumulated
                                                                               4                                                          4
investment needs, low interest rates have contributed to surging
investment (see Diagram 2). To a large degree, global recovery                 3                                                          3
has been driven by this cyclical upswing in investment.
                                                                               2                                                          2
    In the United States, employment has risen rapidly, and
resource utilization on the labour market is showing signs of                  1                                                          1
strain. In addition, inflationary pressure has increased, and the
US policy interest rate (federal funds rate) has been jacked up                0
                                                                                      02               04              06        08
                                                                                                                                          0

from 1.00 percent in June 2004 to 5.00 percent in May                                  Euro zone
                                                                                       US
2006 (see Diagram 3). With further rate hikes expected this year,
                                                                              Sources: National sources and NIER .
monetary policy will be slightly contractionary. In the euro zone,
recovery has made less progress. The European Central Bank
10 Summary




Diagram 4 Price of Oil                                                     has raised its policy interest rate (the refi rate), from 2.00 percent
Brent USD/barrel and SEK/barrel, respectively,
monthly values
                                                                           in December 2005 to 2.75 percent in June 2006, and will go on
75                                                                  750    raising it at a deliberate pace in the period ahead. In Japan, long
70                                                                  700    plagued by deflation, prices have begun increasing, and the Bank
65                                                                  650
                                                                           of Japan is expected to abandon its zero-interest-rate policy in
60                                                                  600
55                                                                  550
                                                                           the autumn of 2006.
50                                                                  500        With the strong worldwide growth of investment in recent
45                                                                  450    years, production capacity is now rising at a relatively high rate.
40                                                                  400
35                                                                  350
                                                                           Thus, the need for new investment is gradually diminishing. This
30                                                                  300    tendency, together with rising costs of financing, will mean more
25                                                                  250    subdued growth in investment for the next few years. Thus,
20                                                                  200
                                                                           household consumption, encouraged in numerous economies by
15                                                                  150
      00              02         04             06             08          rising employment and vigorous growth in incomes, will become
           Oil price in USD
           Oil price in SEK (right)                                        increasingly important in global growth.
Sources: Reuters EcoWin, International Petroleum                               In the United States, household consumption is abnormally
Exchange and NIER.                                                         high, and household saving is actually negative. In combination
                                                                           with massive US government deficits, this situation has
                                                                           contributed to today’s large global imbalances in net lending,
Diagram 5 GDP
Billions of SEK, constant prices and percent,                              with a massive current account deficit in the US and surpluses in
seasonally adjusted quarterly values
                                                                           most other countries. But the imbalances in net lending are also
760                                                                 2.4
                                                                           due in part to the high propensity for saving and net lending in
720                                                                 2.0    some Asian and oil-producing countries.
680                                                                 1.6
                                                                               In a somewhat longer-term perspective, US households will
                                                                           probably bring their saving up to more normal levels. For the
640                                                                 1.2
                                                                           global economy to maintain its healthy growth, consumption
600                                                                 0.8    and investment will have to increase at a comparatively high rate
560                                                                 0.4
                                                                           in countries other than the US. If this happens, the global
                                                                           imbalances in net lending may diminish in an orderly manner.
520                                                                 0.0
                                                                           But there is a danger that this will not be the case. For example,
480
      97         99         01        03        05        07
                                                                    -0.4   if there is a sudden increase in the propensity of US households
            Billions of SEK                                                to save, one short-run effect may be a substantial drop in global
            Percentage change (right)
                                                                           demand, with an abrupt slowdown in worldwide growth.
Sources: Statistics Sweden and NIER.
                                                                               There are other clouds on the horizon as well. The most
                                                                           evident are the recent turbulence on international stock markets
                                                                           and, above all, the price of oil. The NIER’s forecast is based on
Diagram 6 Consumer Confidence Indicator                                    the assumption of no dramatic change in stock prices in the
(CCI)
Balances, monthly values
                                                                           period ahead. The price of oil is forecast to recede gradually
40                                                                  40     from today’s level around 70 dollars a barrel to 54 dollars a
                                                                           barrel at the end of 2008 (see Diagram 4). But this assessment is
20                                                                  20
                                                                           highly uncertain. There is a substantial risk that the price of oil
                                                                           will develop differently than in the forecast, with resulting
                                                                           effects on the world economy.
 0                                                                  0



-20                                                                 -20
                                                                           Swedish Economy Running at Full Speed
-40                                                                 -40    GDP in Sweden was up by 2.7 percent in 2005. Growth
                                                                           gradually accelerated, but it then slackened in the fourth quarter,
-60                                                                 -60    one reason being weakness in exports of telecommunication
      93       95          97    99        01        03        05
Source: NIER.
                                                                           products. The slowdown was temporary, however, and in the
                                                                           first quarter of 2006, GDP rose by a full 1.2 percent compared
                                                                                                                    Summary 11




to the fourth quarter of 2005 (see Diagram 5). The high growth
is explainable largely by surging exports and investment.
Household consumption, though, showed a surprisingly weak
tendency. But with household incomes rapidly increasing and
the Consumer Confidence Indicator for some time at its highest
level since 2000, the slump in the growth of household
consumption is considered temporary (see Diagram 6).

Table 1 Selected Indicators
Annual percentage change and percent, respectively
                                     2004    2005    2006    2007    2008
GDP at market prices                   3.7     2.7     3.8     3.2     2.8
    GDP, calendar-adjusted             3.1     2.6     4.1     3.3     2.7
Real GNI per capita                    1.7     1.8     3.2     2.8     2.2
                     1
Current account                        6.6     6.0     6.6     6.7     7.0
Employment                            –0.5     0.7     1.7     1.2     0.7
                         2
Employment rate                       77.2    77.2    77.8    78.4    78.8
                                 1
General government net lending         1.6     2.8     2.8     2.5     2.3
                 3                                                           Diagram 7 World Market Growth for
Unemployment                           6.0     5.9     5.1     4.5     4.2
                                                                             Manufactured Goods
                                                                             Annual percentage change
Hourly earnings, business sector
(Short-term Wage and Salary                                                  12                                                12
Statistics)                            3.0     3.3     3.4     3.9     4.1
Labour costs. business sector                                                10                                                10
     4
(NA)                                   3.5     4.0     2.7     4.4     4.4
Productivity, business sector                                                 8                                                8
     4
(NA)                                   4.4     2.4     3.1     2.4     2.3
CPI, Dec.-Dec.                         0.3     0.9     2.0     2.2     2.9    6                                                6
UND1X, Dec.-Dec.                       0.7     1.2     1.5     1.2     1.9
            5
Repo rate                             2.00    1.50    2.25    3.50    4.75    4                                                4

Interest rate, 10-year
                    5
government bonds                       3.9     3.4     4.2     4.6     4.9    2                                                2
Index for the Swedish krona
      5
(KIX)                                111.0   120.9   115.6   115.1   114.5    0                                                0
                                                                                   97      99       01      03      05    07
1 Percent of GDP. Regular employment, percent of population aged 20–64.
                             2
3 Percent of labour force. 4 Calendar-adjusted. 5 At year-end.               Sources: OECD and NIER.

Sources: Statistics Sweden, Labour Market Board, the Riksbank and NIER.


In May and June, the Swedish stock market fell back. But this                Diagram 8 Exports of Manufactured Goods
                                                                             Billions of SEK, constant prices and percent,
adjustment is not particularly substantial in relation to the sharp          seasonally adjusted quarterly values

rise in recent years, and its impact on the economy is expected              300                                                 8

to be minor.                                                                 270                                                 6
    The economy will continue to strengthen this year and in the
                                                                             240                                                 4
next two years through the interaction of several different
forces. Monetary policy has been expansionary for some time,                 210                                                 2

and so will fiscal policy this year. Low interest rates have                 180                                                 0
boosted asset prices, and both households and firms show
                                                                             150                                                 -2
strong balance sheets. As in other countries, a cyclical upswing
in investment is driving economic growth. The strong world                   120                                                 -4

economy is also providing a rapidly expanding market for                      90                                                 -6
                                                                                   97       99       01      03      05   07
Swedish exports (see Diagram 7).                                                        Billions of SEK
    Swedish exports will be up by over 8 percent this year and                          Percentage change (right)

will continue to rise strongly in 2007 and 2008 (see Diagram 8).             Sources: Statistics Sweden and NIER.

Exports of services, i. e. transport, business services and foreign
12 Summary




Diagram 9 Household Consumption                                      consumption in Sweden, have been surging in recent years and
Billions of SEK, constant prices and percent,
seasonally adjusted quarterly values
                                                                     will continue to do so. With exports of services growing much
400                                                           3.6    faster than imports of services, trade in services is contributing
380                                                           3.0
                                                                     to the growing surplus in Sweden’s current account (see Table
                                                                     1).
360                                                           2.4
                                                                         After a weak start this year, household consumption picked
340                                                           1.8
                                                                     up again in the second quarter (see Diagram 9). A brightening
320                                                           1.2    labour market, low interest rates and high saving to begin with
300                                                           0.6    will further the growth of consumption in the period ahead.
280                                                           -0.0       The tendency of the labour market is contributing to
260                                                           -0.6
                                                                     household optimism about the future, thus encouraging
                                                                     consumption. More importantly, with employment on the rise
240                                                           -1.2
      97       99        01        03    05     07                   and wage increases that are accelerating, if ever so slightly,
           Billions of SEK
           Percentage change (right)                                 household incomes are going up rapidly. Since inflation is low,
Sources: Statistics Sweden and NIER.                                 real household disposable income will grow by a full 3.9 percent
                                                                     this year and by 3.0 and 2.1 percent, respectively, in 2007 and
                                                                     2008. All factors considered, household consumption is forecast
                                                                     to increase by 2.8 percent this year, 3.5 percent in 2007 and 2.9
Diagram 10 Gross Fixed Capital Formation
Billions of SEK, constant prices and percent,                        percent in 2008. Household saving will remain high at almost 8
seasonally adjusted quarterly values
                                                                     percent of disposable income in 2008.
135                                                            6
                                                                         With rising employment, the tax revenue of the local
126                                                            4     government sector will be growing rapidly. This will contribute
117                                                            2
                                                                     to a relative substantial increase of 1.6 percent in general
                                                                     government consumption this year, with a somewhat more
108                                                            0
                                                                     modest rise thereafter.
 99                                                            -2        Gross fixed capital formation was up by a full 8.5 percent last
 90                                                            -4
                                                                     year, and the strong tendency continued in the first quarter of
                                                                     this year (see Diagram 10). With rapid growth in demand, low
 81                                                            -6
                                                                     interest rates and high business profits, investment will be up by
 72
      97       99        01        03     05        07
                                                               -8    7.3 percent this year. As production capacity is added and
           Billions of SEK                                           monetary policy becomes less expansionary, growth in
           Percentage change (right)
                                                                     investment will slacken in 2007 and 2008.
Sources: Statistics Sweden and NIER.
                                                                         Thus, the Swedish economy is expanding on a broad front.
                                                                     Exports, consumption and investment are all providing
                                                                     significant contributions to growth. In total, GDP will be up by
Diagram 11 Employed and Hours Worked                                 3.8 percent this year, 3.2 percent in 2007 and 2.8 percent in
Index 1994=100, quarterly values
                                                                     2008. Growth adjusted for inter-year variations in the number of
112                                                           112
                                                                     working days – a more accurate reflection of the economic
110                                                           110
                                                                     tendency – will be 4.1 percent this year, 3.3 percent in 2007 and
108                                                           108    2.7 percent in 2008.
106                                                           106

104                                                           104

102                                                           102    Economic Recovery Creating 150 000 New Jobs
100                                                           100
                                                                     After several years of cyclical weakness, employment picked up
 98                                                           98
                                                                     in 2005. In the first quarter of the current year, employment rose
 96
      94     96     98        00    02   04    06        08
                                                              96     by 0.4 percent from the fourth quarter of 2005 (see Diagram 11).
           Employed                                                  Various indicators, including the NIER’s Business Tendency
           Hours worked
                                                                     Survey, point to a continued rise in employment. Hiring plans of
Sources: Statistics Sweden and NIER.
                                                                     firms are positive, particularly in the construction and service
                                                                     industries. The construction industry is now beginning to report
                                                                                                             Summary 13




shortages of labour, which threaten to curtail growth in output        Diagram 12 Labour Market Gap
                                                                       Percent of potential hours worked, seasonally
during the period ahead.                                               adjusted quarterly values
     For the labour market as a whole, however, resource               6                                                              6
utilization is still low. Except for the construction industry, the
percentage of firms reporting shortages in the Business                4                                                              4

Tendency Survey is small. Modest wage increases and low                2                                                              2
inflation also signal abundant spare resources on the labour
market. The so-called labour market gap, which measures the            0                                                              0

difference between actual and potential hours worked, is               -2                                                             -2
estimated to have been roughly -1.5 percent in the first quarter
of this year (see Diagram 12).                                         -4                                                             -4

     With output rapidly rising, spare resources will be put to use    -6                                                             -6
rather rapidly in the period ahead. Although productivity growth
in the business sector, which fell off slightly last year, increased   -8
                                                                            90    92   94   96     98   00   02        04   06   08
                                                                                                                                      -8

this year to 3.1 percent, it will slacken again in 2007 and 2008 as    Note: The labour market gap is calculated as the
the business cycle enters a more mature phase. With output             difference between the number of hours worked and
                                                                       its potential level.
rising much faster, employment will be up by 1.7 percent in 2006       Source: NIER.
and by 1.2 and 0.7 percent, respectively, in 2007 and 2008. In
total, employment will increase by some 150 000 persons
between 2005 and 2008.
     Consequently, even though the labour force will increase
substantially, in part because of a stronger labour market,
resource utilization will rise quickly, and the labour market gap is
expected to average 0.7 percent in 2008; in other words,
resource utilization will slightly exceed the level compatible with
2-percent inflation in the long run.
     However, the assessment of resource utilization on the
labour market is highly uncertain. In the past half-year, the
labour force has increased more than expected. Therefore, the
NIER has raised its estimate of the potential labour force – that
is, the level of the labour force compatible with 2-percent
inflation – by 0.3 percent compared to the assessment in March.
Potential employment has consequently been revised upward by
0.3 percent as well. Since the economic crisis of the early 1990’s,
resource utilization has only been strained for a brief period at
the outset of the 2000’s. Thus, there is little practical experience   Diagram 13 Unemployment and Labour
                                                                       Market Programs
with the functioning of the labour market when resource                Percent of labour force, quarterly values
utilization begins showing signs of strain. The potential labour       10                                                             10
force may turn out to be higher or lower than in the NIER’s
current assessment; if so, the assessment of potential                  8                                                             8
employment and the size of the labour market gap would also be
affected.                                                               6                                                             6

     The regular employment rate for age group 20-64 will rise
from 77.2 percent in 2005 to 78.8 percent in 2008, short of the         4                                                             4

Government’s targeted employment rate of 80 percent. To
                                                                        2                                                             2
achieve the target, an additional 67 000 persons would have to
be regularly employed. Since resource utilization is expected to
                                                                        0                                                             0
be somewhat strained in 2008, lasting achievement of the target              97        99     01        03        05        07
                                                                                  Unemployment
will require reforms that increase labour supply or lower the                     Labour market programs
level of equilibrium unemployment.                                     Sources: Labour Market Board, Statistics Sweden
                                                                       and NIER.
14 Summary




Diagram 14 Consumer Prices                                            With the strong employment tendency, the unemployment
Annual percentage change, quarterly values
                                                                  rate will fall from 5.9 percent in 2005 to 4.2 percent in 2008
3.5                                                         3.5
                                                                  (see Diagram 13). Particularly in 2006 and 2007, the drop will be
3.0                                                         3.0   due partly to an abnormal increase in labour market
2.5                                                         2.5   programmes. As resource utilization on the labour market will
                                                                  be somewhat strained toward the end of 2007, it is the NIER’s
2.0                                                         2.0
                                                                  assessment that the volume of programmes will be unjustifiably
1.5                                                         1.5   high from an economic policy standpoint, particularly this year.
1.0                                                         1.0

0.5                                                         0.5
                                                                  Inflation Inching Upward
0.0                                                         0.0
       00            02           04         06        08
            UND1X                                                 UND1X inflation has been gradually rising during the year and
            UND1X excl. energy
                                                                  reached 1.6 percent in May (see Diagram 14). Apart from energy
Note: The shaded area represents the Riksbank’s
inflation target of 2 percent, with a tolerance interval
                                                                  prices, however, inflation is still very low. The main reason for
of plus/minus 1 percentage point.                                 the low inflation is that modest wage increases, combined with
Sources: Statistics Sweden and NIER.
                                                                  strong productivity growth, have kept unit labour costs in the
                                                                  business sector from rising very much in recent years (see
Diagram 15 Unit Labour Cost – Business
Sector
                                                                  Diagram 15). Consequently, underlying domestic inflationary
Annual percentage change, calendar-adjusted                       pressure has been low.
values
                                                                      This year, too, modest wage hikes and a strong productivity
8                                                            8
                                                                  tendency are curbing the increase in unit labour costs. In 2006
6                                                            6    firms are temporarily exempt from paying certain pension
                                                                  premiums. As a result, unit labour costs will be reduced by 0.6
4                                                            4    percentage point. Since the decrease is temporary, its effect on
                                                                  wages and prices is expected to be virtually negligible. If this
2                                                            2
                                                                  temporary effect is disregarded, unit labour costs will increase by
0                                                            0
                                                                  0.2 percent in 2006 and 1.3 percent in 2007. The reason for the
                                                                  faster increase in 2007 is that wages will be rising more rapidly
-2                                                           -2   and productivity growth will be dampened as the economy
      97        99        01       03        05   07
           Labour cost per hour
                                                                  improves. For the same reason, the rise in unit labour costs will
           Productivity
           Unit labour cost
                                                                  accelerate to 2.1 percent in 2008. Thus, unit labour costs in the
                                                                  business sector will outpace the reference rate of 1.6 percent
Sources: Statistics Sweden and NIER.
                                                                  considered compatible with 2-percent inflation in the long run.
                                                                      But even at the end of 2008, UND1X inflation will be below
Diagram 16 Repo Rate – Sweden                                     the inflation target. One reason is that unit labour costs affect
Percent, daily values
                                                                  inflation with a certain time lag. Moreover, there will be
5.0                                                         5.0
                                                                  comparatively little increase in prices of imports, partly because
                                                                  the krona will strengthen somewhat and oil prices will recede.
4.0                                                         4.0
                                                                  UND1X inflation excluding energy will be 2.1 percent at the end
                                                                  of 2008.
                                                                      In the NIER’s analysis of monetary policy, both inflation and
3.0                                                         3.0   resource utilization on the labour market are taken into account.
                                                                  In the current situation of low inflation and low resource
                                                                  utilization, the assessment is that the repo rate should be 2.25
2.0                                                         2.0
                                                                  percent for the rest of 2006 (see Diagram 16). Assuming events
                                                                  develop as in the NIER’s forecast, the repo rate should then be
1.0                                                         1.0
                                                                  raised rather quickly during 2007 and 2008 to avoid excessive
           02             04            06         08             resource utilization and overly high inflation thereafter.
Sources: The Riksbank and NIER.
                                                                  Consequently, it will be appropriate, in the NIER’s opinion, to
                                                                  raise the repo rate in steps during 2007-2008 to 4.75 percent at
                                                                                                                      Summary 15




the end of 2008, thereby limiting both the labour market gap             Diagram 17 Social Benefits, Ages 20-64,
and inflation in 2009-2011. The labour market gap will then              Full-Year Equivalents
                                                                         Thousands
gradually narrow toward zero, and inflation will be only slightly        1200                                                             1200
above 2 percent (see the special analysis “The NIER’s Repo
Rate Assessment”).
                                                                         1000                                                             1000



                                                                          800                                                             800
Strong Public Finances

Despite substantial unfinanced tax reductions and increases in            600                                                             600
expenditure in 2006, general government net lending will be 2.8
percent of GDP that year.
                                                                          400                                                             400
     One principal reason for Sweden’s strong public finances is                 90   92   94    96   98        00   02   04   06   08

that the costs of ill health are going down, partly because of a                      Social benefits, total
                                                                                      Ill health benefits
more rigorous sick-listing process in recent years. In terms of          Sources: Statistics Sweden and NIER.
full-year equivalents, ill health will decline from 652 000 persons
in 2005 to 621 000 in 2008 (see Diagram 17). Owing to the
reduction in ill health, potential employment will increase, and
                                                                         Diagram 18 Net Lending – General
potential GDP will be higher than otherwise. Thus, lower ill             Government Sector
health will in time lead to stronger public finances, not only           Percent of GDP

through lower expenditure, but also through higher tax revenue.          5                                                                  5

     The number of persons receiving unemployment
                                                                         4                                                                  4
compensation will decrease by 60 000 between 2005 and 2008.
In total, the number supported by social-welfare benefits will
                                                                         3                                                                  3
drop by almost 100 000 during the period (see Diagram 17). But
despite an expanding economy in 2008, with somewhat strained             2                                                                  2
resource utilization on the labour market, 975 000 persons will
still be living on welfare benefits. To bring this number down           1                                                                  1

further and to keep it there, structural reforms are required.
     Assuming no unfinanced tax reductions or expenditure                0                                                                  0

increases, general government finances will remain strong.
                                                                         -1                                                                 -1
General government net lending will be 2.5 percent of GDP in                    00          02             04             06         08

2007 and 2.3 percent of GDP in 2008 (see Diagram 18). For                Sources: Statistics Sweden and NIER.

2000-2008, a period considered equivalent to a business cycle,
net lending will average 2.1 percent, meeting the Government’s
and Parliament’s target of 2 percent over a business cycle.
     As far as can presently be seen, it would be inappropriate
from the standpoint of economic policy to let the strong
finances of the general government sector deteriorate through
unfinanced tax cuts or expenditure increases in the next few
years. Since resource utilization will already be slightly strained in
2008, it would be necessary to raise the repo rate more rapidly in
order offset a more expansionary fiscal policy. From the
standpoint of economic policy, it would be preferable to
preserve the strong public finances as a buffer in the next
economic downturn.
                                                                                                                                    17




Development of the International                                        Diagram 19 GDP – Selected Countries
                                                                        Annual percentage change
Economy                                                                 10                                                            10


                                                                            8                                                         8


Strong Global Expansion Continuing                                          6                                                         6


In recent years the global economy has been characterized by an             4                                                         4
expansionary monetary policy and a cyclical upswing in
investment. In addition, rapid transformation of certain growth             2                                                         2

economies has been contributing to high global GDP growth
(see Diagram 19). Rising resource utilization has led to mounting           0
                                                                                  02        03     04      05        06   07   08
                                                                                                                                      0

inflationary pressure. Monetary policy has therefore begun to                       World
                                                                                    Euro zone
                                                                                                      US
                                                                                                      China
shift in a less expansionary direction, with some further                           Japan

tightening this year and in 2007-2008.                                  Sources: IMF, OECD, national sources and NIER.
    With profits high and financing costs still relatively low, fixed
capital formation is still rising fairly rapidly. In the OECD area,
however, investment growth will slacken somewhat as capacity
expands and financing costs go up (see Diagram 20).                     Diagram 20 GDP and Gross Fixed Capital
                                                                        Formation – OECD
    Overall, households will benefit from gradual improvement           Percentage change, seasonally adjusted quarterly
of the labour market and somewhat accelerating growth in                values

incomes during the period ahead. But household consumption              2.0                                                          2.0

will continue to grow more slowly than GDP.                             1.5                                                          1.5

    The picture of investment-led expansion, with slower growth         1.0                                                          1.0
in household consumption, characterizes most major regions.
But the various regions are in different phases of the business         0.5                                                          0.5

cycle. In the United States, for example, resource utilization is       0.0                                                          0.0

high, and growth will fall off somewhat in 2007 and 2008. In the        -0.5                                                         -0.5
euro zone, on the other hand, the economy has just begun to
recover, and growth is expected to exceed its potential rate in         -1.0                                                         -1.0

2006 as well as 2007 and 2008.                                          -1.5
                                                                                   01            03             05        07
                                                                                                                                     -1.5

    In Sweden’s Nordic neighbours, growth has exceeded the                              GDP
euro zone average in recent years, primarily because of more                            Gross fixed capital formation

strongly rising domestic demand. Since GDP growth will remain           Sources: IMF, OECD, national sources and NIER.

buoyant in 2006-2008, resource utilization will continue to be
relatively tight there, in contrast to the euro zone.                   Diagram 21 GDP – Worldwide
    The tendency outside the OECD area has been extremely               Annual percentage change
dynamic in recent years. Many developing countries have                 6                                                                 6

benefited from comparatively low costs of borrowing. Growth
                                                                        5                                                                 5
has been particularly high in China and India. But in Russia,
Latin America and Africa as well, GDP has been surging. In the          4                                                                 4

past three years, China’s growth has been almost 10 percent per
                                                                        3                                                                 3
year. The principal driving forces have been rapidly rising
exports and investment, but growth in these sectors will fall off       2                                                                 2
somewhat in the period ahead. Household consumption, on the
                                                                        1                                                                 1
other hand, is expected to accelerate, and GDP growth in these
countries will remain high (see Table 2).                               0                                                                 0
                                                                                85 87 89 91 93 95 97 99 01 03 05 07
    The global growth in GDP will also remain high, at 4.9                         Trend
percent in 2006; it will then slacken to 4.6 and 4.3 percent,                      Actual

respectively, in 2007 and 2008 (see Diagram 21).                        Note: Trend calculated with an HP filter.
                                                                        Sources: IMF, OECD, national sources and NIER.
18 Development of the International Economy




Diagram 22 Exports – Worldwide                                                World trade increased by some 7 percent in the fourth
Annual percentage change, quarterly values
                                                                          quarter of 2005 compared to the same period the year before
20                                                                  20
                                                                          (see Diagram 22). With GDP growth still strong, world trade
15                                                                  15
                                                                          will maintain roughly the same growth rate in the next few years.

10                                                                  10    Table 2 GDP and the CPI in Other Countries 1
                                                                          Annual percentage change
 5                                                                  5
                                                                                                 GDP                 CPI
 0                                                                  0
                                                                                                  2005 2006 2007 2008 2005 2006 2007 2008
                                                                          United States            3.5   3.5     3.1    2.9    3.4    3.3    2.6    2.4
 -5                                                                 -5    Japan                    2.6   2.9     2.3    2.0   –0.3    0.6    0.9    1.2
                                                                                             2
                                                                          Nordic countries         2.6   2.9     2.5    2.3    1.3    1.9    2.1    2.0
-10                                                                 -10   Euro zone                1.4   2.1     2.0    2.2    2.2    2.1    2.1    1.8
          96           98         00            02        04
                                                                           Germany                 1.2   1.7     1.6    1.9    1.9    1.6    2.3    1.5
Source: IMF.
                                                                           France                  1.4   2.0     2.1    2.2    1.9    1.7    1.6    1.7
                                                                          United Kingdom           1.8   2.4     2.7    2.7    2.0    1.9    2.0    2.1
                                                                          New EU countries         4.5   5.0     4.9    4.7    2.5    1.9    2.4    2.6
                                                                          OECD                     2.8   3.1     2.8    2.7    2.6    2.6    2.3    2.1
Diagram 23 Price of Oil                                                   China                    9.9   9.6     9.0    8.5    1.8    1.8    2.3    2.3
Brent USD/barrel and SEK/barrel, respectively,
                                                                          Latin America            4.3   4.3     3.6    3.5    6.3    5.8    5.6    5.2
monthly values
                                                                          World                    4.8   4.9     4.6    4.3
75                                                                  750
70                                                                  700   1 The GDP figures are calendar-adjusted. 2 The Nordic countries include the

65                                                                  650   Nordic region except Sweden. The CPI figures for the EU countries show the
60                                                                  600   harmonized CPI, or HICP.
55                                                                  550   Sources: IMF, OECD and NIER
50                                                                  500
45                                                                  450
40                                                                  400
35                                                                  350   Considerable Uncertainty on the Oil Market
30                                                                  300
25                                                                  250   In early May this year, the price of oil reached a new record high
20                                                                  200
15                                                                  150
                                                                          of 75 dollars a barrel, but it has subsided slightly since then. For
         00             02            04             06        08         the month of May, the price averaged just below 70 dollars a
               Oil price in USD
               Oil price in SEK (right)                                   barrel (see Diagram 23). The soaring oil prices in recent months
Sources: Reuters EcoWin, International Petroleum                          have been due primarily to political unrest in Iran and Nigeria,
Exchange and NIER.                                                        both major oil-producers. One reason why the impact on prices
                                                                          has been so great is that the reserve capacity of the OPEC, i. e.
                                                                          its unutilized production capacity, is insufficient to make up for
Diagram 24 Real Oil Price at Today’s Price
Level                                                                     any substantial loss of output.
Index 2006-05-01=69.5, monthly values                                         In real terms, the price of oil is now much higher than during
100                                                                 100
                                                                          the first oil crisis, in the mid-1970’s, but it remains less than in
                                                                          the second oil crisis, at the end of the 1970’s (see Diagram 24).
 75                                                                 75
                                                                              Based on the forecast for global GDP growth, oil
                                                                          consumption is expected to rise by 1.5-2.0 percent per year in
                                                                          2006–2008. Total production capacity will increase somewhat
 50                                                                 50    more as a result of previous investment. In total, therefore,
                                                                          reserve capacity will increase from its historically low levels in
                                                                          2004 and 2005, but it will still be limited in relation to output.
 25                                                                 25
                                                                              Partly because of the increase in reserve capacity, the price of
                                                                          oil will go down in the longer run. The decline, however, will be
                                                                          relatively slow, as political unrest is expected to persist for the
     0                                                              0
         71       76        81   86        91        96   01              next few years. The price of oil is forecast to drop from 66
Note: WTI oil price deflated by consumption-
weighted CPI for 14 OECD countries in a common
currency. Deflator equal to 1 in May 2006.
Sources: Reuters EcoWin, International Petroleum
Exchange, OECD, national sources and NIER.
                                                                        Development of the International Economy 19




dollars a barrel in December 2006 to 54 dollars a barrel at the             Diagram 25 Official Interest Rates
                                                                            Percent, daily values
end of 2008.
                                                                             6                                         6


                                                                             5                                         5

Rising Resource Utilization Will Lead to Higher
                                                                             4                                         4
Policy Interest Rates
                                                                             3                                         3
Substantially higher energy prices have pushed up global
inflation in recent months. But relatively low resource utilization          2                                         2

has dampened inflationary pressure. One reason why higher                    1                                         1
energy prices have had a limited impact on other prices is the
strong confidence in monetary policy, which has helped to                    0
                                                                                 02           04        06        08
                                                                                                                       0

moderate the demands of wage-earners for compensation for                         Euro zone
                                                                                  US
higher costs of energy.
                                                                            Sources: National sources and NIER.
    So far, low underlying inflationary pressure has made it
possible to focus monetary policy on supporting demand. But
with rising resource utilization, and the resulting increase in
underlying inflationary pressure, the situation is changing. To
relieve mounting inflationary pressure, monetary policy will
gradually shift in a less expansionary direction.
    In the United States, the US central bank (the Fed) is
expected to raise the policy interest rate (federal funds rate)
further this summer in two steps, from 5.00 to 5.50 percent (see
Diagram 25). In the euro zone, where economic recovery has
not advanced as far as in the US, monetary policy is still clearly
expansionary. As signs of a self-sustaining economic upswing
become increasingly evident in the period ahead, the European
Central Bank (ECB) will continue cautiously raising interest
rates. In Japan, the period of deflation now seems to be over,
and in the second half of this year, the Japanese central bank is
expected to begin raising the policy interest rate for the first time
in five years.


International Risk Assessment

There are several elements of uncertainty about the outlook for
the world economy. With political unrest in Iran and Nigeria, for
example, there is a risk of further increases in oil prices. Since
the propensity for saving is higher – at least in the short run –
for oil-producing countries than for oil-importing countries,
supply disruptions leading to higher oil prices could weaken
global demand.
    The reason why the oil-price increase in recent years has had
a relatively limited impact so far may be that this price increase is
perceived to be temporary. If higher oil prices become more
widely viewed as permanent, both the pricing behaviour of firms
and the demands of wage-earners may change compared to
recent years. Such a shift of perception, combined with a further
increase in oil prices, could appreciably increase the risk of
 20 Development of the International Economy




                                                          inflation and of a tighter monetary policy that would dampen
                                                          growth in global demand.
                                                              Another risk is posed by the international saving imbalances,
                                                          with substantial current-account surpluses particularly is Asia
                                                          and in oil-exporting countries, and the massive current-account
                                                          deficits of the United States. Rapid correction could be triggered
                                                          by increased saving among US households, for example,
                                                          possibly in reaction to declining house prices. Demand in the US
                                                          would then drop. The US central bank (the Fed) would respond
                                                          to the fall in domestic demand with a more expansionary
                                                          monetary policy that would lead to a weaker dollar. Another
                                                          potential triggering factor would be an increase in the risk
                                                          premium on investments denominated in dollars. Such a
                                                          development could also cause a sharp drop in the dollar as well
                                                          as turbulence on financial markets. In both cases, global growth
                                                          would be curbed.


 Diagram 26 GDP and Demand – US
 Percentage change, seasonally adjusted quarterly
 values
                                                          United States
  4                                                  4

  3                                                  3
                                                          Economic Activity Approaching a Peak
  2                                                  2

  1                                                  1    According to preliminary statistics, the US economy grew by 1.3
  0                                                  0
                                                          percent in the first quarter of 2006 (see Diagram 26). The high
                                                          growth was due, among other things, to strong increases in
 -1                                                  -1
                                                          household consumption expenditure and gross fixed capital
 -2                                                  -2   formation.
 -3                                                  -3       Indicators for the second quarter of 2006 point to slackening
      01              03           05           07
           GDP                                            growth after the very strong first quarter. The Purchasing
           Gross fixed capital formation
           Household consumption
                                                          Manager Index remains high for both the manufacturing and the
 Sources: Bureau of Economic Analysis and NIER.
                                                          service sectors, a sign of strength in the economy (see Diagram
                                                          27), but the consumption outlook has weakened. In real terms,
                                                          household consumption expenditure rose only marginally in
                                                          April, and consumer confidence was down in May. The labour
 Diagram 27 Purchasing Manager Index (ISM)
 – US
                                                          market, on the other hand, has continued to improve.
 Index, monthly values                                    Employment was up by more than 1.4 percent in May compared
 70                                                  70   to the same month in 2005, and unemployment was 4.6 percent
 65                                                  65
                                                          (see Diagram 28), somewhat less than the equilibrium
                                                          unemployment rate.
 60                                                  60
                                                              Household consumption expenditure is growing in line with
 55                                                  55   its historical average. With the continued improvement of the
 50                                                  50   labour market, disposable income is increasing at a healthy rate,
                                                          stimulating growth in consumption. Rising interest rates and
 45                                                  45
                                                          higher oil prices, however, are tending to restrain consumption.
 40                                                  40   The household saving ratio is currently negative but is expected
 35                                                  35   to begin increasing again in the next few years. Consequently,
      98             00          02        04
           Manufacturing
                                                          growth in consumption will gradually slow down during the
           Service sector                                 forecast period and be somewhat less than its historical average
Source: Institute for Supply Management .
                                                          in 2007 as well as 2008.
                                                                                  Development of the International Economy 21




    Fixed capital formation will remain strong during the forecast                    Diagram 28 Labour Market – US
                                                                                      Annual percentage change and percent,
period, although the growth rate will successively decline.                           respectively, seasonally adjusted monthly values
Continued high profits of firms, confidence in the future and                          4                                                                8
high capacity utilization are driving business sector investment.
However, the increase in investment will gradually lose                                3                                                                7

momentum as an effect of higher interest rates and slackening                          2                                                                6
growth in demand.
    All factors considered, GDP will grow by 3.5 percent in                            1                                                                5

2006, 3.1 percent in 2007 and 2.9 percent in (see Table 3).                            0                                                                4
    The federal budget deficit will be limited this year by
surprisingly high tax revenue and thus be unchanged from 2005.                         -1                                                               3

Fiscal policy is expected to be neutral during the forecast period.
                                                                                       -2                                                               2
    Inflation has remained high during the first months of 2006,                            85    87   89   91   93   95     97   99    01   03    05
                                                                                                 Change in employment
primarily as a result of rising oil and energy prices. Core inflation                            Unemployment (right)
is also up and reached 2.3 percent in April (see Diagram 29).                         Sources: U.S. Department of Labour and Bureau of
The US economy is now approaching a situation of slightly                             Labour Statistics.

strained resource utilization for the first time since 2001,
bringing higher inflationary pressure. The Fed will therefore
                                                                                      Diagram 29 Inflation – US
continue to tighten monetary policy, and the policy interest rate                     Annual percentage change, monthly values
(federal funds rate) will reach 5.50 percent this summer. Once                         5                                                                5

the economy has peaked in the course of 2007, the Fed will start
to lower the federal funds rate, which will be 4.75 percent at the                     4                                                                4

end of 2008, signifying a neutral monetary policy.
    The current-account deficit was nearly 6.5 percent of GDP in                       3                                                                3

2005. It will remain substantial for the next two years,
                                                                                       2                                                                2
heightening the risk that the global saving imbalances in will be
abruptly corrected.
                                                                                       1                                                                1



Table 3 Selected Indicators – United States                                            0
                                                                                            95         97        99        01          03         05
                                                                                                                                                        0

Billions of dollars, current prices, and annual percentage change,                               Consumer prices (CPI)
constant prices.                                                                                 CPI excl. food and energy

                                                                                      Source: U.S. Department of Labour.
                                        2004    2005    2006        2007   2008
Household consumption                   8 214     3.5     3.2        3.0    2.8
expenditure
General government consumption          1 844     1.5     1.9        1.1    1.0
expenditure
Gross fixed capital formation           2 245     7.3     6.4        4.8    3.6
                     1
Stockbuilding                              55    –0.3     0.2        0.0    0.0
                 1
Net exports                             –624     –0.3    –0.5       –0.2    0.1
GDP                                    11 734     3.5     3.5        3.1    2.9


CPI                                               3.4     3.3        2.6    2.4
Unemployment                                      5.1     4.7        4.7    4.8
                         2, 3
Policy interest rate                             4.25    5.50       5.25   4.75
                                2, 4
Long-term interest rate                           4.5     5.6        5.4    5.4
             2
Yen/Dollar                                        118     111        108    105
                 2
Dollar/Euro                                      1.19    1.28       1.30   1.31
1 Billionsof dollars and contribution to GDP growth, respectively
2 At the end of each year 3 Federal Funds target rate
4 Rate on 10-year government bonds

Sources: Bureau of Economic Analysis and NIER.
22 Development of the International Economy




Diagram 30 GDP and Inflation – Japan
Annual percentage change and percent, respectively
                                                              Japan
3                                                       3


2                                                       2
                                                              Continued Healthy Growth
1                                                       1
                                                              The economic upswing in Japan continued in 2005, when GDP
0                                                       0     grew by 2.6 percent (see Diagram 30). GDP growth slackened,
                                                              however, from about 1 percent in the fourth quarter of 2005 to
-1                                                      -1
                                                              0.8 percent in the first quarter of this year. The slower growth
-2                                                      -2    was due primarily to slower in growth of exports. On the other
                                                              hand, investment in machinery picked up.
-3
       95        97   99      01      03     05   07
                                                        -3
                                                                  The economy will continue to expand in 2006–2008. GDP
            GDP                                               will increase by 2.9 percent this year, but growth will fall off to
            CPI
                                                              2.3 percent in 2007 and to 2.0 percent in 2008. Exports will
Sources: Cabinet Office, Management and
Coordination Agency, Japan and NIER.                          continue to surge, though dampened by the appreciation of the
                                                              yen against the dollar and slackening growth in China and the
                                                              US, both major export markets. Capacity utilization will stay
                                                              relatively high and profits healthy, helping to maintain a fairly
                                                              strong rate of increase in investment during the forecast years.
                                                              The upswing of investment in machinery, however, will be
                                                              slowed by more modest growth in exports. Household
                                                              consumption, too, will increase more slowly, one reason being
                                                              higher taxes.
                                                                  With the economy growing rapidly, resource utilization on
                                                              the labour market will continue rising, and unemployment will
                                                              gradually recede to about 3.5 percent in 2008. These
                                                              developments will cause hourly earnings to accelerate and
                                                              subsequently affect prices. After several years of decreasing
                                                              consumer prices, the CPI will be up by 0.6 percent this year, 0.9
                                                              percent in 2007 and 1.2 percent in 2008 (see Diagram 30). Rising
                                                              consumer prices will also lead Japan’s central bank to abandon
                                                              its zero-interest-rate policy during the second half of this year.



                                                              Euro Zone
Diagram 31 GDP and Demand – Euro Zone
Percentage change, seasonally adjusted quarterly
values
1.5                                                    1.5
                                                              Economy Strengthening
1.0                                                    1.0

0.5                                                    0.5    After gradually rising for the first three quarters of 2005, GDP
                                                              growth slackened to 0.3 percent in the fourth quarter (see
0.0                                                    0.0
                                                              Diagram 31). The slow growth reported for GDP is probably
-0.5                                                   -0.5
                                                              explainable in part by difficulties in calculating fourth-quarter
-1.0                                                   -1.0   developments in the National Accounts, as other indicators
-1.5                                                   -1.5   provided a somewhat different picture. It was therefore expected
                                                              that preliminary figures would show faster growth in the first
-2.0                                                   -2.0
            02           04            06         08          quarter of 2006. Particularly in household consumption and in
             GDP
             Gross fixed capital formation                    exports, the tendency strengthened, and GDP growth rose to
             Household consumption
                                                              0.6 percent.
Sources: Eurostat and NIER.                                       In the short run, the outlook is relatively bright. Consumer
                                                              confidence is up (see Diagram 32), and there are some signs that
                                                                        Development of the International Economy 23




household consumption will continue growing at a healthy rate               Diagram 32 Consumer Confidence – Euro
in the second quarter as well.                                              Zone
                                                                            Balances, monthly values
    Most indices based on surveys of firms were up in the first              10                                                           10
quarter and were still rising at the start of the second. In
                                                                              5                                                           5
Germany, not least, firms are optimistic (see Diagram 33). The
order situation in the euro zone has continued to improve for                 0                                                           0

both domestic and export markets.                                             -5                                                          -5

    Recovery will still be fuelled by strong demand from other               -10                                                          -10
countries. With the continued support of an expansionary
                                                                             -15                                                          -15
monetary policy, however, domestic demand will gradually
assume a larger role.                                                        -20                                                          -20

    Favoured by high profits and low financing costs, fixed                  -25
                                                                                   96         98        00       02        04
                                                                                                                                          -25

capital formation will recover after lacklustre growth in the                           Euro zone
fourth quarter of 2005 and the first quarter of 2006. Investment                        Germany
                                                                                        Historical average, Euro zone
will increase at a relatively brisk pace in the period ahead, despite       Source: EU-commission.
some slowdown in 2007 and 2008 (see Diagram 31). With the
labour market gradually improving, growth in household
consumption expenditure will also pick up, though dampened by
                                                                            Diagram 33 Business Climate Index (IFO) –
relatively subdued wage increases.                                          Germany
    In the period ahead, GDP growth is expected to maintain                 Index 1991=100, monthly values

roughly the same pace as in the first quarter of 2006. There will            110                                                          110

be a temporary downturn early in 2007 as Germany’s value-
                                                                             105                                                          105
added tax (VAT) is raised, curbing household consumption (see
Diagram 31).
                                                                             100                                                          100
    The VAT hike is one of the steps taken by the German
government to improve the country’s public finances. With the                 95                                                          95
tighter economic policy in Germany, fiscal policy for the euro
zone as a whole will be somewhat contractionary in 2007; in                   90                                                          90
2006 and 2008, it is expected to be largely neutral.
    All factors considered, GDP growth will rise from 1.4                     85
                                                                                   96         98        00     02       04           06
                                                                                                                                          85

percent in 2005 to 2.1 percent in 2006, 2.0 percent in 2007 and                         General index
2.2 percent in 2008 (see Table 4). It will thus be only slightly                        Expectations

higher than the potential growth rate. Recovery will therefore              Source: IFO.

take time, partly as a consequence of high oil prices.

                                                                            Diagram 34 Inflation – Euro Zone
                                                                            Percent, monthly values
Inflation to Remain Above ECB Target                                         3.5                                                          3.5

Sharply higher energy prices pushed euro zone inflation up to                3.0                                                          3.0
2.5 percent in May. But the so-called core inflation – the change
in the HICP excluding energy, food, alcohol and tobacco – has                2.5                                                          2.5

been much lower in the past year and was 1.5 percent in April                2.0                                                          2.0
(see Diagram 34). Nevertheless, that month was the third in a
row with rising core inflation, and the ECB has clearly expressed            1.5                                                          1.5

concern that inflationary pressure is on the rise.                           1.0                                                          1.0
    Despite the increases in the policy interest rate (refi rate)
from 2.00 percent in the autumn of 2005 to its current level of              0.5
                                                                                   99              01           03              05
                                                                                                                                          0.5

2.75 percent, monetary policy is clearly expansionary in the euro                       Consumer prices (HICP)
                                                                                        HICP excl. energy, food, alcohol and tobacco
zone. As inflation has continued to exceed the monetary policy
target (inflation just below 2 percent) and as economic recovery            Source: Eurostat.

becomes increasingly evident, the ECB is expected to continue
24 Development of the International Economy




                                              raising the refi rate gratually. The refi rate will be 3.00 percent at
                                              the end of 2006, 3.50 percent at the end of 2007 and 3.75
                                              percent at the end of 2008.

                                              Table 4 Selected Indicators – Euro Zone
                                              Billions of euros, current prices, and annual percentage change,
                                              constant prices
                                                                                        2005    2005    2006    2007       2008
                                              Household consumption                 4 560        1.4      1.9        1.7    2.0
                                              expenditure
                                              General government                    1 632        1.3      1.4        1.5    1.5
                                              consumption expenditure
                                              Gross fixed capital formation         1 631        2.6      2.8        3.2    2.7
                                                                1
                                              Stockbuilding                               37     0.1      0.1        0.0    0.0
                                                            1
                                              Net exports                                113     -0.3     0.1        0.1    0.1
                                              GDP                                   7 974        1.4      2.1        2.0    2.2


                                              HICP                                               2.2      2.1        2.1    1.8
                                              Unemployment                                       8.6      8.2        8.0    7.8
                                                                     2, 3
                                              Policy interest rate                              2.25     3.00       3.50   3.75
                                                                            2, 4
                                              Long-term interest rate                            3.4      4.2        4.4    4.6
                                                            2
                                              Dollar/Euro                                       1.19     1.28       1.30   1.31
                                              1 Billions of euros and contribution to   GDP growth, respectively.
                                              2 At the end of each year
                                              3 Refi rate
                                              4 Rate on 10-year government bonds
                                              Sources: Eurostat and NIER.
                                                                                                                                 25




Financial Markets                                                     Diagram 35 Stock Market – US and Sweden
                                                                      Index 2005-12-30=100, 5-days centred moving
                                                                      average
                                                                          120                                                         120

Turbulence on International Stock Markets
                                                                          100                                                         100
The tendency of international stock markets has recently been
turbulent. In mid-May share prices tumbled on most exchanges.
                                                                           80                                                         80
By mid-June, the Swedish stock market, which has reacted more
strongly than the markets in the United States and the euro
zone, was down by some 15 percent from mid-May, wiping out                 60                                                         60

its entire previous increase this year (see Diagram 35). US stock
market indices were at roughly the same level in mid-June as at            40                                                         40
                                                                                     03                           05
the start of the year, and euro zone indices were a few                             USA (S&P 500)
percentage points below their level on January 1.                                   Sweden (OMXS)

    Worry was aroused on stock markets by increasingly clear          Source: Reuters EcoWin.

signs of rising inflationary pressure in the US and consequent
expectations of a tighter monetary policy. There are no obvious
indications, however, that the recovery of the world economy          Diagram 36 P/E Ratio
has slowed down. The corrections in share prices can thus be          Monthly values

interpreted primarily as an adjustment to a new view of future        40                                                          40

monetary policy and to a changed risk assessment. Despite the         35                                                          35
corrections, stock markets on the whole have risen considerably
                                                                      30                                                          30
in recent years. As of mid-June of this year, the Swedish stock
market was soaring some 90 percent above its level at the outset      25                                                          25

of 2003.                                                              20                                                          20
    There are considerable differences between the situation
                                                                      15                                                          15
today and in 2000, when the ICT bubble burst. Around 2000,
listed shares were very highly valued, particularly in Sweden; in     10
                                                                            97            99        01       03            05
                                                                                                                                  10

terms of so-called P/E ratios, share prices were extremely high                  P/E ratio, US, Standard and Poor´s 500
in relation to expected future earnings (see Diagram 36). At                     Average (79-) - Standard and Poor´s 500
                                                                                 P/E ratio, Sweden, OMX-index
present, the valuation of stock markets is not especially high by                Average (95-) - OMX-index

historical standards. In both Sweden and the US, P/E ratios are       Note: P/E ratio: share price in relation to profits
                                                                      expected in the next 12 months.
around 15 for stock markets as a whole, somewhat below the            Sources: Prudential Equity Group, LCC, JCF.
long-term average for Sweden and just marginally above the US
average. Business profits are high, and the economy continues to
develop favourably in most parts of the world.                        Diagram 37 Official Interest Rates
                                                                      Percent, daily values
                                                                      6                                                               6


                                                                      5                                                               5
Internationally Tighter Monetary Policy
                                                                      4                                                               4
The US central bank (the Fed) has continued to raise its policy
interest rate (federal funds rate) during the spring of 2006. The     3                                                               3

federal funds rate has thus been jacked up from 1.00 percent in
                                                                      2                                                               2
the summer of 2004 to 5.00 percent this May. Since the neutral
level of the US policy interest rate is considered to be somewhat     1                                                               1

lower, 4.75 percent, the current monetary policy is slightly
                                                                      0                                                               0
contractionary. The continued strong growth of the US                       02                 04          06               08
                                                                                Euro zone
economy in 2006 and early 2007 will lead to rising resource                     US
utilization. Monetary policy will therefore be tightened further to   Sources: National sources and NIER.
prevent excessive inflation. The Fed is expected to lift the
federal funds rate to 5.50 during the summer of 2006, and in
 26 Financial Markets




 Diagram 38 Long-Term Interest Rates,                       2008 to relax its monetary policy and lower the rate in steps to
 10-Year Government Bonds
 Percent, monthly values
                                                            4.75 percent by the end of that year (see Diagram 37).
 6.0                                                  6.0
                                                                The European Central Bank (ECB) has raised its policy
                                                            interest rate (refi rate) from 2.00 percent on January 1 to 2.75
 5.5                                                  5.5
                                                            percent in June. The reason for the increase, according to the
 5.0                                                  5.0
                                                            ECB, is that euro zone inflation is above the upper limit of 2.0
 4.5                                                  4.5   percent for the inflation target. However, recovery is still making
 4.0                                                  4.0   slow headway in the euro zone, and to judge by the low core
 3.5                                                  3.5
                                                            inflation and the limited wage increases, there are abundant
                                                            spare resources in the economy. In view of the low inflationary
 3.0                                                  3.0
                                                            pressure, the ECB’s coming interest rate hikes are expected to
 2.5
         02          03         04        05    06
                                                      2.5   be modest. The refi rate will be raised to 3.00 percent during
         Sweden                                             2006 and then to 3.75 percent by the end of 2008.
         Germany
         US

 Source: The Riksbank.

                                                            Bond Rates Rising As the Economy Improves
Diagram 39 Interest Rate on Index-Linked
Bonds                                                       In Sweden as well as Germany and the US, interest rates on
Percent, weekly values                                      bonds have risen from a very low level in mid-2005 (see
4.0                                                  4.0
                                                            Diagram 38). Bond rates normally increase in a time of
                                                            economic recovery, as monetary policy becomes less
3.0                                                  3.0    expansionary. Despite the rising tendency, bond rates are
                                                            relatively low by historical standards. One factor holding back
2.0                                                  2.0    increases is that a high degree of confidence in monetary policy
                                                            tends to stabilize inflation expectations. Moreover, real interest
1.0                                                  1.0    rates on bonds are being curtailed by a high propensity for
                                                            saving in Asia and a number of oil-exporting countries (see
0.0                                                  0.0
                                                            Diagram 39).
       02           03         04     05       06
                                                                The strong confidence in monetary policy will help to
        US
        Sweden                                              stabilize inflation expectations at a low level during the forecast
        Euro zone
                                                            period despite rising resource utilization. Consequently, the
Note: Maturity is close to 10 years. The yield on a
French index-linked bond has been used for the              increase in bond rates will be limited. In the euro zone,
Euro zone.
Source: Reuters EcoWin.
                                                            economic recovery is expected to remain sluggish, and bond
                                                            rates will rise slowly, reaching 4.6 percent in 2008. In Sweden,
                                                            where economic recovery is proceeding more rapidly, bond rates
 Diagram 40 Real Interest Rate and Break-                   will go up to 4.9 percent in 2008. And in the US, which is farther
 even Inflation – Sweden                                    ahead in its business cycle, bond rates will continue increasing
 Percent, 5-days centred moving average
 3.0                                                  3.0
                                                            and reach 5.6 percent in 2006 before receding to 5.4 percent in
                                                            2007 and 2008.
 2.5                                                  2.5


                                                            Sweden’s Monetary Policy Should Be Less
 2.0                                                  2.0
                                                            Expansionary in the Period Ahead

 1.5                                                  1.5
                                                            Monetary policy in Sweden remains highly expansionary. Even
                                                            after the latest increases, the repo rate is still low and is thus
                                                            stimulating demand.
 1.0                                                  1.0
            03            04         05        06               Inflation is also low, much lower than the euro zone average,
         Index-linked bond yield
         Break-even inflation
                                                            for instance. In May 2006, Sweden’s rate of inflation, as
 Note: Break-even inflation is the difference
                                                            measured by the HICP, was 1.9 percent. In the euro zone, HICP
 between the yields on a nominal long-term bond             inflation in the same month was 2.5 percent.
 and an index-linked bond with similar maturities.
 Maturity approximately 10 years.
 Source: Reuters EcoWin.
                                                                                                     Financial Markets 27




    Inflation expectations, measured as break-even inflation,          Diagram 41 Expected Repo Rate in Sweden
have risen during the spring but remain less than 2 percent (see       According to Implicit Forward Interest Rates
                                                                       Percent, monthly values
Diagram 40). Rising inflation expectations have contributed to a       5.0                                                        5.0
gradual shift in expectations about the future repo rate among
market operators, who are betting increasingly on an earlier and
                                                                       4.0                                                        4.0
more substantial response by the Riksbank (see Diagram 41).
Inflationary pressure in the Swedish economy is still low.
Although employment in Sweden has been rising relatively               3.0                                                        3.0

rapidly in the past year, there are still ample spare resources on
the labour market. The low level of resource utilization is            2.0                                                        2.0
reflected, for instance, in a modest rate of wage increases. In the
first quarter of 2006, hourly earnings in the business sector rose     1.0                                                        1.0
by 2.9 percent, much less than the reference rate of about 4.0                    2006               2007             2008
                                                                              15/6       2006
percent that is considered compatible with a 2-percent inflation              14/3       2006

rate in the longer term.                                               Sources: Reuters and NIER.
    Expansionary monetary and fiscal policies, together with the
international economic upswing, are contributing to Sweden’s
current high growth. The spare resources on the labour market
will therefore be put to use fairly rapidly. This labour market
tendency will entail rising resource utilization and consequently,
with a certain time lag, lead to higher wage and price increases.
    Monetary policy is thus facing a difficult choice. On the one
hand, inflation and resource utilization are currently modest and
will remain so in the immediate future, conditions that typically
call for a low repo rate. On the other hand, resource utilization
is rapidly rising, leading to larger wage increases and mounting
inflationary pressure in the period ahead; this development
would seem to justify increasing the repo rate.
    If the repo rate is raised too much at the outset of the
forecast period, inflation may stay below its target level too long.
But if the repo rate is raised too little in 2007 and 2008, the
consequence may be strained resource utilization followed by
excessive inflation in the latter part of 2008 and thereafter (see
box the special analysis ”The NIER’s Repo Rate Assessment”).
    The Riksbank has clearly signalled that the repo rate will be
raised in June 2006. It is therefore assumed in the present            Diagram 42 Repo Rate – Sweden
                                                                       Percent, daily values
forecast that the repo rate will be increased to 2.25 percent in
                                                                       5.0                                                        5.0
June. According to the NIER’s current assessment, there will be
no need for further repo rate hikes this year. As resource
                                                                       4.0                                                        4.0
utilization successively rises in 2007 and 2008, it will become
somewhat strained, particularly in 2008. Inflation will therefore
                                                                       3.0                                                        3.0
go up, though at a modest rate, and it will remain below its
target level in 2006 and in 2007 and 2008 as well. But with
                                                                       2.0                                                        2.0
resource utilization rapidly rising, it will be appropriate to raise
the repo rate rather briskly to 3.50 percent by the end of 2007
                                                                       1.0                                                        1.0
and thereafter to 4.75 percent by the end of 2008 (see Diagram               03          04     05          06   07          08

42). Thus, monetary policy will be slightly contractionary in the             Repo rate
                                                                              Implicit forward repo rate, June 15, 2006
second half of 2008, counteracting excessive resource utilization             Implicit forward repo rate, March 14, 2006
                                                                              Expected repo rate in 3, 12 and 24 months
and keeping inflation from getting too high in 2009–2010.              Note: According to the yield curve and Prospera’s
                                                                       survey of May 17, 2006.
                                                                       Sources: The Riksbank, Reuters, Prospera and
                                                                       NIER.
 28 Financial Markets




 Diagram 43 Nominal Exchange Rates                          International Saving Imbalances Will Affect the
 5-days centred moving average                              Dollar
 1.40                                                 99

 1.32                                                 102   The US current account showed a deficit of roughly 6.5 percent
 1.25                                                 105
                                                            of GDP in 2005 and has continued to detoriate. The deficit is
                                                            being financed by other countries, particular in Asia and among
 1.17                                                 108
                                                            oil producers. Such a large current-account deficit is not
 1.10                                                 111
                                                            sustainable in the long run, and in time the dollar will most
 1.02                                                 114   probably depreciate.
 0.95                                                 117       In recent years, repeated interest rate hikes by the Fed have
 0.88                                                 120   bolstered the dollar, whereas policy interest rates have not risen
 0.80                                                 123
                                                            to the same extent in other countries. This difference has
                 04                    05                   counteracted the more fundamental factors that are tending to
             Dollar/Euro
             Yen/Dollar (right)                             weaken the dollar. The Fed’s cycle of raising interest rates will
 Source: Reuters EcoWin.                                    soon be ending, while elsewhere in the world – in the euro zone,
                                                            Sweden and Japan, for example – a period of higher interest
                                                            rates lies ahead. Thus, the dollar will lose the support of interest-
                                                            rate policy in the period ahead.
 Diagram 44 Effective Exchange Rate Indices                     So far this year, the dollar has gone down by about 4 percent
 Index 1992-11-18=100, monthly values
                                                            in effective terms. Its depreciation has been relatively substantial
 145                                                  145
                                                            against the euro and the Japanese yen (see Diagram 43). If the
 140                                                  140
                                                            turbulence on financial markets persists, it may help to
 135                                                  135
                                                            strengthen the dollar temporarily as investors withdraw from
 130                                                  130   uncertain financial holdings in growth economies. In the longer
 125                                                  125   term, however, the dollar is expected to continue weakening,
 120                                                  120   particularly against a number of Asian currencies.
 115                                                  115

 110                                                  110
                                                            Gradual Appreciation of the Swedish Krona
 105                                                  105
        00            02          04        06   08
             TCW                                            In terms of the effective exchange rate index KIX the Swedish
             KIX
                                                            krona has strengthened by a few percentage points during the
Note: An inc reasing index indicates a                      year (see Diagram 44). The exchange rate against the euro has
weaker krona.                                               been fairly stable, and the principal fluctuations have been
                                                            against other currencies, primarily the dollar. The appreciation of
                                                            the krona is due partly to the relatively strong economic
                                                            tendency in Sweden, which has led market operators to raise
                                                            their expectations about the future repo rate.
                                                                 The krona is expected to continue appreciating in line with
                                                            its trend for next few years. This tendency will be driven by
                                                            Sweden’s current-account surpluses, which are steadily
                                                            improving Sweden’s net position in relation to foreign countries.
                                                            Relatively strong productivity growth in Sweden compared to
                                                            other countries will also contribute to a stronger krona in the
                                                            longer term.
                                                                 At the end of 2008, the KIX index is expected to be 114.5,
                                                            an appreciation of 2.7 percent compared to the average in May
                                                            (see Diagram 44). A euro is forecast to cost SEK 9:20 and a
                                                            dollar about SEK 7:00 at this time.
                                                                               Financial Markets 29




Table 5 Interest Rates and Exchange Rates at the End of
Each Year
                                    2004       2005    2006    2007    2008
Policy interest rates
  Sweden                             2.00       1.50    2.25    3.50    4.75
  Euro zone                          2.00       2.25    3.00    3.50    3.75
  United States                      2.25       4.25    5.50    5.25    4.75
             1
Bond rates
  Sweden                              3.9        3.4     4.2     4.6     4.9
  Germany                             3.6        3.4     4.2     4.4     4.6
  United States                       4.2        4.5     5.6     5.4     5.4
Exchange rates
  Krona/Euro                         8.98       9.44    9.21    9.20    9.20
  Krona/Dollar                       6.70       7.95    7.18    7.10    7.02
  Dollar/Euro                        1.34       1.19    1.28    1.30    1.31
  TCW index                         122.4      131.2   126.4   125.9   125.4
  KIX index                         111.0      120.9   115.6   115.1   114.5
1 Interestrates on 10-year government bonds.
Sources: the Riksbank and NIER.
30 Financial Markets




                                                     The NIER’s Repo Rate Assessment
                                                     The assessment of monetary policy presented in The Swedish
                                                     Economy is based on the Riksbank’s inflation target and the
                                                     objective that monetary policy, without disregarding the goal of
                                                     price stability, should further the development of the real
                                                     economy. A policy with this dual aim is customarily termed a
                                                     flexible inflation-target policy. The path of the repo rate is based
                                                     on the NIER’s own forecasts of inflation and resource
                                                     utilization. For this reason, it should be regarded as an opinion
                                                     as to what constitutes a well-balanced monetary policy in light of
                                                     these forecasts, not as a prediction of what the Riksbank is going
                                                     to do.
                                                         The repo rate affects the economy with a certain time lag.
                                                     Thus, to judge what repo rate would be appropriate at the end
                                                     of 2008, for example, consideration must also be given to the
                                                     development of the economy thereafter. For this reason, the
                                                     NIER will present a long-term calculation together with the
Diagram 45 Labour Market Gap
Percent, quarterly values                            publication of The Swedish Economy.
1.0                                           1.0        To show the considerations underlying the NIER’s opinion
                                                     on an appropriate path for the repo rate, it is illustrative to
                                                     compare what would happen with hypothetical alternative paths
0.5                                           0.5
                                                     for the repo rate. These alternative paths can then be compared
                                                     with the recommended path in respect to the development of
0.0                                           0.0
                                                     inflation and resource utilization.
                                                         The starting point for the analysis is the underlying inflation
                                                     rate, UND1X, the measure of inflation that serves as the
-0.5                                          -0.5   principal guidepost for the Riksbank’s decisions on monetary
                                                     policy. As a measure of resource utilization, the so-called labour
                                                     market gap is used. In the NIER’s opinion, the labour market
-1.0
         07         09       11         13
                                              -1.0
                                                     gap is the primary measure of resource utilization in the
Source: NIER.                                        economy.


                                                     The Economic Tendency in the Medium Term
Diagram 46 UND1X Inflation
Annual percentage change, quarterly values
                                                     The Swedish economy is currently in a phase of strong recovery,
2.4                                           2.4
                                                     where spare resources are quickly being put to use. The labour
2.2                                           2.2    market gap will therefore close rapidly and turn positive in the
                                                     second half of 2007 (see Diagram 45). Growth will remain
2.0                                           2.0
                                                     relatively high during 2008 as well, when resource utilization will
1.8                                           1.8    become even tighter. The labour market gap will then diminish
                                                     again in response to a well-balanced monetary policy.
1.6                                           1.6
                                                         Inflation is currently low, primarily because unit labour costs
1.4                                           1.4    in the business sector have been very slack in recent years owing
                                                     to relatively modest wage increases in combination with strong
1.2                                           1.2
                                                     growth in productivity. As spare resources on the labour market
1.0                                           1.0
                                                     are put to use, inflationary pressure will rise, and inflation will
        07          09        11         13
                                                     approach 2 percent. With resource utilization increasingly
Source: NIER.
                                                     strained, inflation will be slightly higher than 2 percent in 2009–
                                                     2011 (see Diagram 46). At present, monetary policy is clearly
                                                                                                      Financial Markets 31




expansionary on the assumption that the repo rate will be 2.25               Diagram 47 Repo Rate
                                                                             Percent, quarterly values
percent at the end of June 2006. The low inflation rate and the
                                                                              5.0                                              5.0
modest level of resource utilization in 2006 are considered in the
NIER’s assessment that the repo rate can remain at that level for             4.5                                              4.5
the rest of the year. Beginning in the second half of 2007,
resource utilization will be somewhat strained, and inflation will            4.0                                              4.0
successively rise toward 2 percent. Therefore, the repo rate
should be jacked up rather briskly from 2.25 percent at the end               3.5                                              3.5

of 2006 to 4.75 percent at the end of 2008 (see Diagram 47).
Monetary policy will thus be slightly contractionary in late 2008             3.0                                              3.0

and early 2009. This stance will be necessary to avoid excessively
                                                                              2.5                                              2.5
tight resource utilization that would lead to unacceptably high
inflation in 2009–2011 (see Table 6).                                         2.0                                              2.0
    In the NIER’s current analysis, a repo rate that follows this                      07          09           11       13
                                                                             Source: NIER.
path will keep inflation and resource utilization on a proper
course from the standpoint of economic policy.

Table 6 Selected Indicators 2006–2011
Annual percentage change and percent, respectively
                                  2006 2007 2008 2009 2010 2011
GDP, calendar-adjusted              4.1    3.3    2.7    2.2    2.0    2.1
UND1X                               1.3    1.4    1.6    2.2    2.3    2.2
Labour market gap                  –1.0    0.1    0.7    0.7    0.3    0.0
            1
Repo rate                          2.25   3.50   4.75   4.75   4.25   4.25
1 Atyear-end
Source: NIER



Developments in Case of Alternative Paths for the
Repo Rate

The NIER’s opinion on an appropriate path for the repo rate is
based on assessments of the deviation of inflation from its target
rate and of the size of the labour market gap. 1 In the short run,
the current low rate of inflation and low level of resource
utilization call for keeping the repo rate low to stimulate the              Diagram 48 Repo Rate
                                                                             Percent, quarterly values
economy. If the repo rate is raised too quickly, there will be a
                                                                             5.5                                              5.5
danger of curbing economic recovery too soon; in other words,
both inflation and resource utilization would be too low in the              5.0                                              5.0

next few years. On the other hand, too long a period with a low              4.5                                              4.5

repo rate would lead to an overheated economy with excessive                 4.0                                              4.0
inflation. It is therefore illustrative to show how the economy
                                                                             3.5                                              3.5
would develop with two alternative paths for the repo rate,
neither of which the NIER recommends.                                        3.0                                              3.0

    In the first alternative scenario, with a tighter monetary               2.5                                              2.5

policy, the repo rate is raised to 4.75 percent by the end of 2007           2.0                                              2.0
                                                                                     07          09           11        13
rather than to 3.50 percent as in the main scenario. In the other                   NIER's repo-rate recommendation
                                                                                    Tighter monetary policy
                                                                                    More expansionary monetary policy
1Thus, to some extent the method recommended by Lars E. O. Svensson is
                                                                             Source: NIER.
used; see, for example, Svensson, L.E.O., ”Optimal Inflation Targeting:
Further Developments of Inflation Targeting”, www.princeton.edu/svensson.
The central bank of Norway uses a similar approach; see www.norgesbank.no.
32 Financial Markets




Diagram 49 Labour Market Gap                                   alternative scenario, with a more expansionary monetary policy,
Percent, quarterly values
                                                               the repo rate is unchanged until the end of 2007 and is thereafter
1.5                                                    1.5
                                                               raised to 3.75 percent by the end of 2008 (see Diagram 48). In
1.0                                                    1.0
                                                               both alternative scenarios, the path of the repo rate from 2009
                                                               on is determined with the aid of the NIER’s simulation model,
0.5                                                    0.5     KLEM, which ensures that inflation approaches its target rate
                                                               and the labour market gap approaches zero.
0.0                                                    0.0         In the alternative of a tighter monetary policy, economic
                                                               growth is curbed substantially, partly by a stronger exchange
-0.5                                                   -0.5
                                                               rate. Resource utilization rises relatively slowly in 2007 (see
-1.0                                                   -1.0
                                                               Diagram 49). The comparatively lower degree of resource
         07          09          11          13
                                                               utilization leads to an inflation rate even farther below the
        NIER's repo-rate recommendation
        Tighter monetary policy                                inflation target in 2007–2008 (see Diagram 50).
        More expansionary monetary policy
                                                                   In the scenario of a more expansionary monetary policy,
Source: NIER.
                                                               resource utilization rises even faster than in the main scenario
                                                               and becomes somewhat strained in 2008–2009 (see Diagram 49).
                                                               With the greater strain on resource utilization, the inflation rate
                                                               rises well above 2 percent in 2009–2011 (see Diagram 50).
Diagram 50 UND1X Inflation
Annual percentage change, quarterly values                         The alternative scenarios clearly illustrate the difficulty
  3.0                                                    3.0   confronting makers of monetary policy. On the one hand,
                                                               raising the repo rate too soon and too quickly would risk curbing
  2.5                                                    2.5   economic recovery and keeping the inflation rate even farther
                                                               below the inflation target in the next few years. On the other
  2.0                                                    2.0
                                                               hand, adjusting the repo rate too late or too slowly would lead to
  1.5                                                    1.5
                                                               excessive strain on resource utilization and thus to unacceptably
                                                               high inflation somewhat later on.
  1.0                                                    1.0       Consequently, the NIER recommends that the repo rate be
                                                               kept constant at 2.25 percent for the rest of the year. Thereafter,
  0.5
          07          09           11             13
                                                         0.5
                                                               it should be raised quickly during 2007-2008 to 4.75 percent by
         NIER's repo-rate recommendation                       the end of 2008. This recommendation may be modified as new
         Tighter monetary policy
         More expansionary monetary policy                     information becomes available and forecasts of both actual and
Source: NIER.                                                  potential variables are revised.
                                                                                                                              33




GDP and Demand in Sweden                                                   Diagram 51 GDP
                                                                           Billions of SEK, constant prices and percent,
                                                                           seasonally adjusted quarterly values
GDP was up strongly in the first quarter of this year, 1.2 percent         760                                                 2.4
higher than in the fourth quarter of last year (see Diagram 51).           720                                                 2.0
The robust GDP growth was driven primarily by surging
investment and exports. Household consumption, by contrast                 680                                                 1.6

showed surprising weakness, and household saving remains                   640                                                 1.2

high. At the same time, firms depleted their inventories. In               600                                                 0.8
combination with lacklustre consumption, this led to a weak
tendency in imports.                                                       560                                                 0.4

    The underlying forces driving growth will remain favourable,           520                                                 0.0

particularly this year, when both monetary and fiscal policies are         480                                                 -0.4
expansionary. Together with rising employment, this will                         97        99        01    03      05    07
                                                                                       Billions of SEK
strengthen growth in consumption. Higher employment will also                          Percentage change (right)

generate more revenue for local governments, improving their               Sources: Statistics Sweden and NIER.
margin for consumption. Healthy business profits, low interest
rates and high capacity utilization will continue to stimulate
investment by firms. At the same time, international demand will
                                                                           Diagram 52 Demand
maintain its fairly rapid growth, favouring exports despite the            Contribution to GDP growth, percentage points
somewhat inhibiting effect of an appreciated Swedish krona.                8                                                       8

Thus, the tendency appears strong in most items of supply and
                                                                           6                                                       6
demand (see Diagram 52).
                                                                           4                                                       4

Table 7 Supply and Demand
                                                                           2                                                       2
Billions of SEK, current prices, and percentage change, constant
prices                                                                     0                                                       0
                                       2005    2005   2006   2007   2008
                                       2 673    2.7    3.8    3.2    2.8   -2                                                      -2
GDP                                                                              01             03          05          07
GDP, calendar adjusted                          2.6    4.1    3.3    2.7              Household consumption
                                                                                      General government consumption
Real GNI per capita                             1.8    3.2    2.8    2.2              Gross fixed capital formation
Household consumption                  1 283    2.4    2.8    3.5    2.9              Exports
expenditure                                                                Sources: Statistics Sweden and NIER.
General government consumption          728     0.7    1.6    1.3    0.9
expenditure
Gross fixed-capital formation           455     8.5    7.3    4.9    3.5
                  1
Stockbuilding                             2    –0.2    0.0    0.0    0.0
Exports of goods and services          1 299    6.4    8.2    6.7    5.9
Imports of goods and services          1 093    7.3    7.8    7.2    5.6
Total domestic demand                  2 467    2.7    3.3    3.1    2.4
              1
Net exports                             206     0.2    0.8    0.3    0.6
                      2
Current account                         159     6.0    6.6    6.7    7.0
1 Contribution to GDP growth
2 Percentage of GDP, current prices

Sources: Statistics Sweden and NIER.


Share prices on the Swedish stock market have fallen in May and
June. But in relation to their sharp increase in recent years, this
correction is not very substantial, and the impact on the
development of the economy is expected to be minor. The
economy will continue to strengthen this year and for the
following two years, although growth will be somewhat slower
as resource utilization rises and economic policy becomes less
34 Output and Labour Market




                                                      expansionary. GDP growth, which will be 3.8 percent this year,
                                                      will therefore slacken successively in the following two years (see
                                                      Diagram 51 and Table 7).
                                                          Household disposable income will rise strongly this year and
                                                      will continue to do so next year as the labour market improves,
                                                      leading to a surge in consumption. In 2008, growth in incomes
                                                      will slacken, but household consumption is still expected to
                                                      increase rather rapidly as households reduce their high level of
                                                      saving somewhat. General government consumption will show a
                                                      relatively vigorous increase during the forecast period. Higher
                                                      appropriations, strong finances and increased tax revenue will
                                                      allow general government consumption to increase somewhat
                                                      more than in recent years. Growth in investment will fall off
                                                      somewhat in 2007 and 2008 as interest rates rise and production
                                                      capacity is expanded. Exports will continue to benefit from the
                                                      global investment tendency and will increase rather substantially
                                                      throughout the forecast period despite some slowdown in the
                                                      growth of international demand. Surging domestic demand will
                                                      keep imports rising at a relatively fast pace. Moreover, imports
                                                      will be stimulated by a price decrease partly attributable to a
                                                      stronger Swedish krona.
                                                          With household saving still high and general government
                                                      finances still strong, aggregate saving and net lending in Sweden
                                                      will remain high in 2006–2008. Moreover, the net lending of the
                                                      business sector will be increasing. The current account will
                                                      therefore strengthen somewhat further during the forecast
                                                      period to 7 percent of GDP in 2008. Real GNI per capita, which
                                                      is more accurate than GDP as a measure of living standards,
                                                      will be rising somewhat more slowly than GDP in 2006-2008,
                                                      primarily because of population growth in Sweden.



                                                      Household Consumption

Diagram 53 Household Disposable Income
Annual percentage change, constant prices             Household Income Surging in 2006
8                                                8
                                                      Real disposable household income is forecast to increase this
6                                                6
                                                      year by 3.9 percent, with increases of 3.0 and 2.1 percent,
                                                      respectively, in 2007 and 2008 (see Table 8 and Diagram 53).
                                                          The rather strong rise in real disposable income this year will
4                                                4
                                                      be due primarily to the rapid increase in employment and thus in
                                                      total earnings. In addition, there will be a positive contribution
2                                                2
                                                      from tax cuts and a favourable tendency in household net
                                                      interest, or the difference between the total interest income and
0                                                0    total interest expenses of households. In monetary amount, the
                                                      largest tax cut will be the final step in compensating taxpayers
-2
     94   96   98   00    02   04      06   08
                                                 -2   for the individual pension contribution. Higher transfer
Sources: Statistics Sweden and NIER.
                                                      payments from the central government will also contribute to
                                                      rising household income. For instance, the child-care allowance
                                                                                           Output and Labour Market 35




has been increased, and the income ceiling in the systems of
health and parental insurance will be raised at the end of June.
    Hourly earnings and the number of hours worked will add to
the increase in income in the next few years. In 2007 and 2008
taxes will be higher while net interest and central government
transfer payments will show a weaker tendency. Together with
somewhat more sharply rising prices, these developments will
result in a more modest increase in real household income (see
Table 8).

Table 8 Household Income
Billions of SEK, current prices, and percentage change
                                     2005    2005    2006 2007       2008
Total earnings                       1 082     4.1     5.2   5.3      4.9
    Hourly earnings according to
                           1
    National Accounts (NA)                     3.6     3.5   3.9      4.2
                   1
    Hours worked                               0.4     1.6   1.4      0.7
Other factor incomes                   250     4.7     4.9   3.8      2.5
Transfers from the
general government sector              483     1.2     2.8   2.0      2.5
Transfers from the household
sector                                 56     –4.4     4.5   2.7      2.7
Taxes and contributions              –533      4.0     3.1   3.6      4.4
Disposable income                    1 338     2.8     5.1   4.4      3.8
                   2
Consumer prices                                1.0     1.2   1.4      1.6
Real disposable income                         1.8     3.9   3.0      2.1
1Adjusted for inter-year differences in the number of working days
2Implicit price index for household consumption expenditure
Sources: Statistics Sweden and NIER



Relatively Weak First Quarter Growth in
Consumption This Year

In the first quarter of this year, household consumption was up
by 2.8 from the first quarter of last year, but compared to the
final quarter of last year, the increase was only 0.1 percent. The
                                                                            Diagram 54 Household Consumption
latter figure is for seasonally adjusted consumption and suggests           Billions of SEK, constant prices and percent,
weakness there, particularly since consumption increased by only            seasonally adjusted quarterly values

0.3 percent from the third to the fourth quarter last year (see             400                                              3.6

Diagram 54). But there is strong evidence that the underlying               380                                              3.0

tendency was not really so weak. For instance, the weak                     360                                              2.4
seasonally adjusted figure may understate the actual tendency, as           340                                              1.8
the seasonal pattern has probably been affected by the new
                                                                            320                                              1.2
practice, beginning in 2005, of disbursing large sums in the form
                                                                            300                                              0.6

                                                                            280                                              0.0

                                                                            260                                              -0.6

                                                                            240                                              -1.2
                                                                                  97       99      01      03      05   07
                                                                                       Billions of SEK
                                                                                       Percentage change (right)

                                                                            Sources: Statistics Sweden and NIER.
36 Output and Labour Market




Diagram 55 Consumer Confidence Indicator                          of tax refunds as early as June 2 . Moreover, other indicators,
(CCI)
Balances, monthly values
                                                                  especially household expectations, are inconsistent with a
40                                                         40
                                                                  conclusion that households have become more cautious in their
                                                                  consumption.
20                                                         20
                                                                      Consumption in Sweden by foreign visitors continued to
                                                                  soar during the first quarter of 2006, as it has now been doing
                                                                  for five or six quarters. Compared to the first quarter of last
 0                                                         0
                                                                  year, this consumption was up by more than 20 percent,
                                                                  according to the National Accounts. The statistics are not based
-20                                                        -20
                                                                  on data directly showing what foreign visitors have consumed,
                                                                  but are derived from information on travel currency exchanged.
-40                                                        -40    There is thus a relatively high risk of measurement error.
                                                                  Consumption by Swedish households is calculated as total
-60
      93       95     97        99        01    03    05
                                                           -60    consumption minus consumption by foreign visitors to Sweden.
Source: NIER.
                                                                  Consequently, the surprisingly low first-quarter consumption
                                                                  recorded for Swedish households this year may be due in part to
                                                                  measurement error in this regard.
Diagram 56 Retail Sales, Durable Goods
Volume index 2000=100, constant prices,
seasonally adjusted monthly values
                                                                  Indicators Suggest Stronger Consumption
220                                                        1.8

200                                                        1.5    Various indicators suggest that there has been a rather strong
180                                                        1.2
                                                                  overall increase in consumption in the first two quarters of this
                                                                  year. In the first five months, households have been more
160                                                        0.9
                                                                  optimistic than at any time since 2000, when household
140                                                        0.6    consumption increased by more than 4 percent (see Diagram
120                                                        0.3
                                                                  55). However, expectations are less positive than in 2000, and
                                                                  the Consumer Confidence Indicator (CCI) is still considerably
100                                                        0.0
                                                                  lower than it was then. So far this year, the number of persons
 80                                                        -0.3   employed has risen rapidly. This tendency has influenced
       99            01              03          05
            Seasonally adjusted level                             consumers, who are now more optimistic about the future
            Percentage change, trend (right)
                                                                  tendency of the labour market, according to the NIER’s
Source: Statistics Sweden.                                        Consumer Survey. Retail sales rose modestly in the first three
                                                                  months of this year, but surged in April, particularly for
                                                                  consumer durables (see Diagram 56). On the real-estate market
Diagram 57 Real Estate Market, Single Family                      for single-family homes, turnover remained high and prices rose
Homes                                                             during the first five months of the year (see Diagram 57). High
Thousands and annual percentage change, monthly
values                                                            turnover on the real-estate market is usually followed with a
6.0                                                         15    certain time lag by rising retail sales of furniture and various
                                                                  building commodities.
5.5                                                         13


5.0                                                         10


4.5                                                         8

                                                                  2 Last year, SEK 8.4 billion were disbursed in June, equivalent to almost 2.5
4.0                                                         5
                                                                  percent of disposable income in the second quarter. This year the
                                                                  disbursement is expected to be even larger as it has become increasingly
3.5                                                         3
                                                                  common to file tax returns via the Internet. For many households, there is
                                                                  probably a powerful effect on the seasonal pattern of consumption. However,
3.0                                                         0
       01                  03                   05                the changed seasonal pattern is not yet fully captured in the calculation of a
           Turn over, trend                                       seasonally adjusted data series, as the change is so recent. The result will
           Purchase-price coefficient (right)                     probably be an overstatement of the seasonally adjusted level for the second
Source: Statistics Sweden.                                        quarter and possibly the third as well, and a corresponding understatement of
                                                                  the level for the two other quarters.
                                                                                                   Output and Labour Market 37




Table 9 Household Consumption Expenditure
Billions of SEK, current prices, and percentage change, constant
prices
                                       2005     2005    2006    2007    2008
Consumption expenditure                1 283      2.4     2.8     3.5       2.9
of which:
         Durable goods                   251      7.9     8.0     6.6       4.2
         Automobiles                      43      4.7    –2.0     5.3       3.2
         Everyday commodities            195      2.2     2.2     2.2       2.1
         Consumption abroad               55      4.2     9.7     7.2       4.9
         Services excl. housing          356      2.8     3.6     4.6       4.6
               1
Saving ratio                             108      7.8     8.8     8.3       7.7
Saving ratio excl. negotiated
         1
pensions                                  55      4.1     5.1     4.6       3.9
1Saving in billions of SEK, current prices, and saving as a percentage of
disposable income (saving ratio)
Sources: Statistics Sweden and NIER.


                                                                                  Diagram 58 Household Savings
Consumption to Pick Up in the Period Ahead                                        Percent of disposable income, current prices
                                                                                  12                                                       12
Household incomes are surging this year and will continue to do                   10                                                       10
so for the next two years. Employment is steadily rising,                          8                                                       8
providing a basis for the strong tendency in income that is
                                                                                   6                                                       6
driving consumption. With higher household saving at the
outset, there is a margin for consumption to increase faster than                  4                                                       4

incomes. In previous periods of conspicuously buoyant                              2                                                       2

consumption, the saving ratio has dropped and even turned                          0                                                       0

negative (refers to saving excluding negotiated pensions), but                    -2                                                       -2
that is not expected to happen either this year or in 2007–2008                   -4                                                       -4
(see Diagram 58). The fall-off in consumption after 2000 was                           93     95     97    99     01     03    05     07
                                                                                            Saving ratio
limited, and consumption has been increasing continually since                              Saving ratio, excl. negotiated pensions

then. There is consequently no great pent-up need for                             Sources: Statistics Sweden and NIER.
consumption in the household sector. Low interest rates have
already been stimulating consumption of durable goods, which
has been growing vigorously for several years. The forecast is
that consumption will rise rapidly during the period covered,
much faster than the annual average of 1.8 percent for the past
20 years. Consumption is expected to increase by 2.8 percent
this year and by 3.5 and 2.9 percent, respectively, in 2007 and
2008 (see Table 9). There is substantial uncertainty in that
estimate, however, with some downside risk for consumption
this year.
38 Output and Labour Market




Diagram 59 General Government                               General Government Consumption
Consumption
Annual percentage change, constant prices and
percent of GDP, current prices
6                                                      30
                                                            General Government Consumption Also Continuing
                                                            to Increase
4                                                      28
                                                            General government consumption was up by 0.7 percent in
                                                            2005 (see Table 10 and Diagram 59). It will rise by 1.6 this year
2                                                      26
                                                            and by 1.3 and 0.9 percent, respectively, in 2007 and 2008.

0                                                      24
                                                            Table 10 General Government Consumption Expenditure
                                                            Billions of SEK, current prices, and annual percentage change,
-2
     93     95    97     99        01   03   05   07
                                                       22   constant prices
          Percentage change                                                                       2005   2005   2006   2007   2008
          Percent of GDP (right)
                                                            General government                     728    0.7    1.6    1.3    0.9
Note: The change in 2000 is affected by the transfer
                                                            consumption expenditure
of the ecclesiastical districts beginning that year
from the local government sector to the household           Percent of GDP, current prices               27.2   26.9   26.8   26.7
sector.
                                                             Central government consumption        201   –1.5    1.3    0.8    0.3
Sources: Statistics Sweden and NIER.
                                                             Percent of GDP, current prices               7.5    7.4    7.3    7.3
                                                             Local government consumption          527    1.6    1.8    1.5    1.1
                                                             Percent of GDP, current prices              19.7   19.5   19.5   19.4
                                                            Sources: Statistics Sweden and NIER


                                                            Central government consumption was down by 1.5 percent in 2005.
                                                            To a large extent, the decrease is explainable by the prohibition
                                                            against central government authorities’ using unspent
                                                            appropriations saved from previous years, as well as downward
                                                            adjustment of appropriations by 0.6 percent. There was also a
                                                            sharp drop in consumption for national defence. This year
                                                            authorities are allowed to use their unspent appropriations and
                                                            certain appropriations will be increased, contributing to higher
                                                            consumption. The Swedish Migration Board will receive a larger
                                                            appropriation to improve the reception of asylum seekers. In
                                                            addition, enrolment capacity will be expanded at universities and
                                                            colleges. In 2007 and 2008, central government consumption
                                                            will continue rising, though more slowly than in 2006. One
                                                            change that will contribute to higher consumption expenditure is
                                                            a dental care reform. Beginning in 2007, the initial diagnostic
                                                            visit to a dentist will cost no more than an outpatient visit in the
                                                            system of health and medical care – a maximum of SEK 200.
                                                            Most of the remaining cost will be borne by the central
                                                            government and reported as central government consumption.
                                                                The consumption of the local government sector rose by 1.6
                                                            percent in 2005. With higher central government subsidies and
                                                            tax revenue, both municipalities and county council districts
                                                            increased their consumption. The revenue of the local
                                                            government sector will remain high, leading to increased
                                                            consumption in 2006-2008 as well. This year and next year, the
                                                            consumption of the local government sector will be driven
                                                            primarily by labour market programmes. By the outset of 2007,
                                                            all 17 000 so-called ”Plus Jobs” are expected to be filled.
                                                                                          Output and Labour Market 39




Consumption will be further increased by higher appropriations         Diagram 60 Gross Fixed Capital Formation
                                                                       Billions of SEK, constant prices and percent,
for care of the elderly and the reception of asylum seekers.           seasonally adjusted quarterly values
                                                                       135                                                          6

                                                                       126                                                          4
Gross Fixed Capital Formation                                          117                                                          2

                                                                       108                                                          0


Investment Surge to Recede in the Period Ahead                          99                                                          -2

                                                                        90                                                          -4
Gross fixed capital formation was up by 8.5 percent in 2005 and
rose very vigorously in the first quarter of this year as well (see     81                                                          -6

Diagram 60).                                                            72                                                          -8
                                                                              97          99        01     03        05        07
    Indicators for investment remain strong. Capacity utilization                   Billions of SEK
is high in manufacturing (see Diagram 61). According to the                         Percentage change (right)

Business Tendency Survey, a larger proportion of firms in              Sources: Statistics Sweden and NIER.

private service industries are fully utilizing their resources.
Demand from both export and domestic markets remains
robust. Together with favourable financing conditions in the           Diagram 61 Capacity Utilization –
form of low interest rates and the high profits of firms, this         Manufacturing
                                                                       Percent, seasonally adjusted quarterly values
indicates that the investment tendency in the business sector will
                                                                       92                                                           92
remain relatively strong. In the period ahead, growth in
investment will fall off with slackening growth in demand, more        90                                                           90

production capacity and a less expansionary monetary policy.
                                                                       88                                                           88
    This year and next year, most parts of the business sector will
contribute to continued growth in investment. The investment           86                                                           86

of public authorities will increase as well during the forecast
                                                                       84                                                           84
period, partly because of investment in railways.
    In total, gross fixed capital formation will rise by 7.3 percent   82                                                           82
in 2006 and by 4.9 and 3.5 percent, respectively, in 2007 and
2008 (see Table 11).                                                   80
                                                                             91      93        95    97   99    01        03   05
                                                                                                                                    80

                                                                                   Statistics Sweden
                                                                                   NIER

                                                                       Source: Statistics Sweden and NIER.
Broad-Based Upswing of Investment in
Manufacturing and Service Industries

In most manufacturing industries, investment will be increasing        Diagram 62 Investment – Manufacturing
                                                                       Billions of SEK, constant prices and percent,
in 2006. Generally high capacity utilization in manufacturing,         seasonally adjusted quarterly values
further acceleration of demand and healthy profitability will help     24                                                           8

to sustain relatively strong growth in investment. The rate of this
growth will be 6.5 percent this year and 3.6 and 2.8 percent,          22                                                           4
respectively, in 2007 and 2008 (see Diagram 62). The principal
contribution will be provided by investment in machinery;
                                                                       20                                                           0
however, after decreasing in 2001–2005, investment by
manufacturing firms in buildings and structures will also be
rising again during the forecast period.                               18                                                           -4

    In the basic industries, there will be massive investments in
2006. Growth in investment will be greatest at ironworks and           16                                                           -8
steelworks and in the mining industry. After major investments               97           99
                                                                                   Billions of SEK
                                                                                                    01    03         05        07

in the pulp and paper industry in 2005, the rate of investment                     Percentage change (right)

there will be considerably lower in 2006. But even with this           Sources: Statistics Sweden and NIER.
decrease, investment activity will remain high in that industry.
40 Output and Labour Market




Diagram 63 Capacity Utilization – Service                               Investment in the machinery industry will increase strongly in
Industries excl. Finance and Real Estate
Ratio
                                                                    2006, one reason being that the international economic upswing
0.94                                                         0.94
                                                                    is substantially investment-led. As a result, demand for products
                                                                    of the machinery industry is accelerating. Similarly, investment
0.92                                                         0.92   will be relatively substantial in the transport-vehicle industry in
0.90                                                         0.90
                                                                    2006.
                                                                        As for other goods industries, the growth of investment in
0.88                                                         0.88   the energy sector will remain high throughout the forecast
0.86                                                         0.86
                                                                    period, the principal increase being in energy-related investment
                                                                    by power companies. The investment of the construction sector
0.84                                                         0.84   will continue rising in 2006 and 2007, though at a much lesser
                                                                    rate than in 2005. Investment is expected to decrease in the
0.82                                                         0.82
                                                                    construction sector in 2008. In service industries excluding
0.80
        93      95    97    99    01     03        05   07
                                                             0.80   housing, investment will be up by 7.3 percent in 2006. This
Note: Value added/stock of capital.
                                                                    forecast is supported by various indicators. According to the
Sources: Statistics Sweden and NIER.                                Business Tendency Survey, demand for services of firms has
                                                                    increased, and a higher proportion than before are showing
                                                                    healthy profitability. Moreover, capacity utilization in service
Diagram 64 Investment – Service Industries
Billions of SEK, constant prices and percent,                       industries excluding finance and real estate will continue
seasonally adjusted quarterly values
                                                                    increasing during the forecast period, though at a diminishing
52                                                            12
                                                                    rate (see Diagram 63). These developments signal relatively
48                                                            9     strong investment growth in the future as well. Investment will
44                                                            6
                                                                    be up by 4.4 and 4.0 percent, respectively, in 2007 and 2008 (see
                                                                    Diagram 64).
40                                                            3

36                                                            0
                                                                    Table 11 Gross Fixed Capital Formation
32                                                            -3    Billions of SEK, current prices, and percentage change, constant
                                                                    prices
28                                                            -6
                                                                                                           2005     2005     2006     2007     2008
24                                                            -9
       97        99        01     03          05        07          Manufacturing                            81     12.6       6.5      3.6      2.8
             Billions of SEK                                                                 1
                                                                    Other goods industries                   54     17.1       8.0      4.5      2.8
             Percentage change (right)
                                                                    Service industries excl.                172       5.1      7.3      4.4      4.0
Note: Excl. housing, ships and aircrafts.                           housing
Sources: Statistics Sweden and NIER.
                                                                    Housing                                  75     16.9      10.2      8.3      5.0
                                                                    Business sector                         382     10.4       7.8      5.0      3.8
                                                                    Public authorities                       73     –0.5       4.9      4.0      1.7
                                                                    Investment                              455       8.5      7.3      4.9      3.5
                                                                    1The  aggregate of other goods industries includes the following: agriculture,
                                                                    hunting, forestry and fishing; electricity, gas, steam and hot water supply;
                                                                    collection, purification and distribution of water; and construction (SNI 01, 02,
                                                                    05, 40, 41, 45).
                                                                    Sources: Statistics Sweden and NIER.



                                                                    Strong Increase in Housing Investment

                                                                    Housing investment was up by 16.9 percent in 2005 and is
                                                                    expected to increase by 10.2 percent this year. In 2007 and 2008,
                                                                    the surge will recede somewhat further, but housing investment
                                                                    will still rise by 8.3 and 5.0 percent, respectively, in those two
                                                                    years. The level of housing investment will thus be higher than
                                                                                       Output and Labour Market 41




at any time since 1992, but it will not be exceptional in a longer-   Diagram 65 Investment in Housing
                                                                      Billions of SEK, constant prices
term historical perspective (see Diagram 65).
                                                                      140                                                   140
    Turnover remains high on the markets for existing single-
family and tenant-owned homes. Prices of single-family homes          120                                                   120
have risen by some 11 percent over the last twelve months.
Slightly higher interest rates, and expectations that they will go    100                                                   100
up even further, will curtail price increases in the period ahead.
    The Business Tendency Survey for May confirms the                  80                                                   80

impression of a very strong tendency in residential construction,
but it also shows that construction firms are struggling with          60                                                   60

bottlenecks in the supply of labour. The stock of orders on hand
                                                                       40                                                   40
is substantial and is expected to grow further in the period
ahead. Shortage of labour is cited by 80 percent of construction       20                                                   20
firms as the principal obstacle to increasing output. At the same            80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
                                                                      Sources: Statistics Sweden and NIER.
time, 58 percent of them have expanded their personnel in the
last three months, and 85 percent indicate that they are planning
to add even more employees. In addition to these signals of a
sharp increase in residential construction, there are clear
                                                                      Diagram 66 Investment – Public Authorities
indications that prices are rising. Some 54 percent of housing-       Billions of SEK, constant prices, seasonally adjusted
construction firms expect acceptance of higher prices in their        quarterly values and percent

bids.                                                                 20.8                                                  12

                                                                      20.0                                                  8

                                                                      19.2                                                  4
Higher General Government Investment in 2006-2008
                                                                      18.4                                                  0

In 2005 general government investment was down for the third          17.6                                                  -4

year in a row (see Diagram 66). Unlike 2003 and 2004, the drop        16.8                                                  -8
was due to decreased central government investment in roads
and in national defence. Local government investment, on the          16.0                                                  -12

other hand, was up last year. In the period 2006-2008, general        15.2                                                  -16
                                                                              97       99      01      03      05   07
government investment will increase. Solid finances in local                       Billions of SEK
government will create a margin for investment that had                            Percentage change (right)

previously been postponed. In addition, increased central             Sources: Statistics Sweden and NIER.

government subsidies to local governments for health care and
care of the elderly will mean higher local government investment
in 2007 and 2008. In addition, central government investment
will rise in 2006-2008, primarily through investment in railways.



Inventories


Unchanged Inventories in Manufacturing and Trade
This Year

In the first quarter of this year, a surge in manufacturing output
led to depletion of stocks of inputs in that sector. Inventories of
work in progress and finished goods increased, however. Trade
inventories, which in 2005 had grown too large in relation to
sales, were reduced.
42 Output and Labour Market




                                                                    Manufacturing is expected to continue reducing its
                                                               inventories of inputs for the rest of 2006. Inventories of work in
                                                               progress and finished goods will accumulate further as output
                                                               rises higher. As the latest Business Tendency Survey indicates
                                                               that trade inventories are now increasing again, inventory
                                                               depletion will be rather limited. More substantial depletion of
                                                               inventories in the energy sector will also tend to curb the total
                                                               increase in inventories this year.
                                                                    In relation to manufacturing output and consumer demand,
                                                               respectively, inventories in manufacturing and trade will decrease
                                                               in line with their trend. This tendency is expected to continue
                                                               during 2007–2008 and will lead to depletion of inventories in
                                                               manufacturing and trade. At the same time, forest growth in
                                                               these years will be more normal – though not as high as before –
                                                               after the weakness last year due to the felling of trees by the
                                                               storm.
                                                                    Since stockbuilding will vary marginally in 2005–2008, the
                                                               contribution of inventories to GDP growth will be very minor
Diagram 67 Exports
Billions of SEK, constant prices and percent,                  (see Table 12).
seasonally adjusted quarterly values
440                                                      10
                                                               Table 12 Change in Inventories and Contribution to GDP
400                                                      8
                                                               Billions of SEK, constant prices
360                                                      6
                                                                                                          2005       2006       2007       2008
320                                                      4     Inputs                                      –1.6       –1.1       –0.8       –0.8
                                                               Work in progress and finished               –4.9        1.4       –1.9       –2.7
280                                                      2
                                                               goods
240                                                      0     Trade inventories                            5.0       –0.3       –0.7       –0.9
                                                                                   1
                                                               Other inventories                            3.1        1.8        5.3        5.4
200                                                      -2
                                                               Total change in inventories                  1.6        1.7        1.9        1.0
                                                                                    2
160                                                      -4    Stockbuilding effect                        –4.7        0.1        0.1       –0.9
      97        99        01        03   05      07
                                                               Contribution to GDP growth                  –0.2        0.0        0.0        0.0
           Billions of SEK
           Percentage change (right)                           1 Other inventories consist primarily of inventories of forest products and
Sources: Statistics Sweden and NIER.                           timber stands. This category also includes inventories in agriculture and the
                                                               electric power and gas industries.
                                                               2 The stockbuilding effect is the change in inventories in the current year minus

                                                               the change in inventories the prior year. Sources: Statistics Sweden and NIER.
Diagram 68 New Export Orders –
Manufacturing
Annual percentage change and percentage change,
monthly values, trend
                                                               Exports
20                                                        4

15                                                        3
                                                               World Economy to Remain Strong, Providing
10                                                        2    Favourable Conditions for Exports
 5                                                        1
                                                               The international economy will maintain its strong tendency in
 0                                                        0    the next few years despite some slackening in global GDP
 -5                                                       -1   growth. Moreover, the development of the economy will be
                                                               investment-led, a feature especially beneficial to Swedish exports
-10                                                       -2
                                                               (see the chapter “Development of the International Economy”).
-15
      97             99        01        03       05
                                                          -3   Conditions will thus be favourable throughout the forecast
           Compared with the same per. in the preceding year   period for relatively strong growth in exports, though growth
           Compared with the previous period (right)
                                                               will be curtailed somewhat by an appreciating krona. Exports,
Source: Statistics Sweden.
                                                               which were up 2.3 percent in the first quarter, will therefore
                                                                                           Output and Labour Market 43




maintain their relatively strong growth for the entire forecast            Diagram 69 New Export Orders –
period. Although growth will be highest this year, it will still be        Manufacturing
                                                                           Balances, monthly values
almost 1.5 percent per quarter even in 2008 (see Diagram 67).              60                                                  60
    As far as the short-term tendency is concerned, the forecast
is supported by various indicators. Statistics Sweden notes a              40                                                  40

continued rise in demand from abroad (see Diagram 68). In the
Business Tendency Survey, a majority of manufacturing firms                20                                                  20

have reported further increases in new orders for exports this
                                                                            0                                                  0
spring; one third report no change (see Diagram 69). A full three
firms out of four express satisfaction with their stock of orders
                                                                           -20                                                 -20
on hand. The Purchasing Manager Index reflects a similar
positive view of demand, and company reports are generally                 -40                                                 -40
optimistic about developments in the next few quarters.
                                                                           -60                                                 -60
                                                                                  97           99        01        03     05

Table 13 Exports                                                           Source: NIER.

Billions of SEK, current prices, and percentage change, constant
prices

                                       2005    2005   2006   2007   2008   Diagram 70 Exports of Manufactured Goods
                                                                           Billions of SEK, constant prices and percent,
Exports of goods                        974     4.9    7.4    6.5    5.8   seasonally adjusted quarterly values
of which: Manufactured products         811     4.4    7.7    7.0    6.3   300                                                     8
          Primary products              159     7.4    5.6    3.5    3.0
                                                                           270                                                     6
Exports of services                     325    11.1   10.7    7.2    6.4
Exports                                1 299    6.4    8.2    6.7    5.9   240                                                     4

Sources: Statistics Sweden and NIER.                                       210                                                     2

                                                                           180                                                     0

                                                                           150                                                     -2
International Demand for Manufactured Products
Strongly Increasing                                                        120                                                     -4


After a weak fourth-quarter last year, exports of manufactured              90
                                                                                 97        99       01        03    05   07
                                                                                                                                   -6

products were up by 2.8 percent in the first quarter of 2006 (see                      Billions of SEK
                                                                                       Percentage change (right)
Diagram 70). International demand will continue rising
                                                                           Sources: Statistics Sweden and NIER.
vigorously. The market for exports of Swedish manufactured
goods will grow by 8.3 percent this year, 6.8 percent in 2007 and
6.3 percent in 2008 (see Diagram 71). These conditions favour a
strong increase in exports throughout the forecast period.                 Diagram 71 World Market Growth for
                                                                           Manufactured Goods
    Exports of telecommunication products are expected to                  Annual percentage change
surge in coming years. Demand for telecommunication services               12                                                  12

will keep on rising throughout the world, particularly in Asia,
where further expansion of telecommunication networks will be              10                                                  10

required. With the investment tendency, particularly in the basic
                                                                            8                                                  8
industries, remaining robust, the order situation for both the
machinery and electrical products industries will continue to be            6                                                  6
strong.
    After a weak year the market for the motor vehicle industry             4                                                  4
has strengthened again. Primarily for truck manufacturers, new
orders are sharply up as demand for transport services has                  2                                                  2

surged. Reinforcing the tendency are new European regulations
on exhaust emissions. Exports of passenger cars, on the other               0
                                                                                 97       99        01        03   05    07
                                                                                                                               0

hand, have been sluggish because of the weak US market. But                Sources: OECD and NIER.
there now appears to be a positive trend in new car registrations
44 Output and Labour Market




                                                              in Europe. The tendency of passenger car exports is thus
                                                              expected to strengthen as new models are launched.
                                                                 The steel industry, which went through a somewhat weak
                                                              period last year as steel consumers depleted their inventories, is
                                                              now encountering stronger demand. Probably the paper industry
                                                              can also look forward to a relatively healthy tendency in the next
                                                              few years as worldwide growth gains further momentum.


                                                              Tendency in Exports of Primary Products Not Quite
                                                              So Strong This Year

                                                              Exports of primary products were up 7.4 percent last year (see
                                                              Table 13 and Diagram 72). The increase was due mainly to a
                                                              continued surge in exports of petroleum products, electricity,
                                                              food and fresh fish (see Diagram 73).
                                                                  Demand from other countries will increase rather
                                                              substantially in 2006, and investment-related growth in China
Diagram 72 Exports of Primary Products
Billions of SEK, constant prices and percent,
                                                              will remain robust. This year, however, exports of Swedish
seasonally adjusted quarterly values and yearly               primary products will be rising more slowly than last year, as
values
52
                                                              exports of food, which dipped slightly in the first quarter this
                                                         12
                                                              year, are increasing less strongly. Growth in exports of sawn
48                                                       10
                                                              wood, while benefiting from a decreased supply from Finland,
44                                                       8    will be more modest this year owing to lack of capacity. Capacity
40                                                       6
                                                              shortages will also limit exports of iron ore and metals.
                                                              Furthermore, exports of lumber will be down following a
36                                                       4
                                                              temporary high last year after the felling of trees by the storm in
32                                                       2    southern Sweden. Exports of petroleum, on the other hand, will
28                                                       0
                                                              increase more this year than in 2005 now that refinery capacity
                                                              has been expanded. Swedish exports of pulp, which stagnated
24
      97       99        01        03        05    07
                                                         -2
                                                              last year, will benefit this year from the closure of several
           Billions of SEK
           Percentage change (right)
                                                              production plants in North America.
                                                                  Worldwide growth will remain high in 2007 and 2008.
Sources: Statistics Sweden and NIER.
                                                              Moreover, high export prices will stimulate Sweden’s exports of
                                                              primary products, which will continue rising despite a stronger
Diagram 73 Exports of the Three Largest                       krona. The greatest increase will be in petroleum and food
Groups of Primary Produtcts                                   exports. Exports of sawn wood, on the other hand, will be down
Index 1999=100, constant prices, seasonally
adjusted quarterly values                                     in 2007, as a larger share of output will go to the Swedish
250                                                     250   market. For the same reason, exports of iron ore will also show
                                                              a weaker tendency next year. In total, exports of Swedish
200                                                     200   primary products will still increase at a healthy rate in 2007 and
                                                              2008, though not as much as in the preceding years.
150                                                     150



100                                                     100
                                                              Rapid Growth in Exports of Services

                                                              Exports of services stagnated in the first quarter of this year,
 50
       99           01        03        05        07
                                                        50    with a sharp drop in exports of various business services except
            Petroleum products                                for freight. But this weakness is considered temporary, and
            Food-stuffs
            Sawn and planed goods                             growth in exports of services is forecast to pick up by the
Sources: Statistics Sweden and NIER.
                                                                                                Output and Labour Market 45




second quarter. Consumption by foreign visitors 3 to Sweden                     Diagram 74 Exports of Services
                                                                                Billions of SEK, constant prices and percent,
continued to grow vigorously even in the first quarter.                         seasonally adjusted quarterly values
    Despite some slowdown, the world economy will maintain                      160                                                 12
its relatively strong growth for the entire forecast period.
                                                                                140                                                 9
Consequently, conditions will be present for a fairly robust
tendency in exports of services (see Diagram 74 and Table 13).                  120                                                 6

Demand for various business services will be growing fast in                    100                                                 3
coming years, not least for a range of telecommunication
                                                                                 80                                                 0
services. Exports of transport services will continue their strong
increase thanks to growing world trade. At the same time,                        60                                                 -3

consumption by foreign visitors to Sweden will be surging again                  40                                                 -6
this year, but is expected to show a more subdued tendency in
                                                                                 20                                                 -9
2007 and 2008.                                                                         97       99      01       03     05   07
                                                                                            Billions of SEK
                                                                                            Percentage change (right)

                                                                                Sources: Statistics Sweden and NIER.

Imports

                                                                                Diagram 75 Imports
                                                                                Billions of SEK, constant prices and percent,
Strong Growth in Imports After Temporary                                        seasonally adjusted quarterly values
Slowdown                                                                        360                                                 6


After increasing strongly last year, imports were down in the first             320                                                 4
quarter. Even disregarding lacklustre household consumption
and depleted inventories of imported goods, the tendency of                     280                                                 2
imports is still remarkably weak. However, demand 4 will be
showing relative strong growth for the rest of the year, with                   240                                                 0

rapid increases in consumption as well as investment and
exports. Thus, the soft tendency of imports in the first quarter is             200                                                 -2

considered temporary. Imports are expected to pick up again
and to surge in the next few quarters.                                          160
                                                                                       97       99       01      03     05   07
                                                                                                                                    -4

    Despite slackening somewhat, growth in demand will be                                   Billions of SEK
                                                                                            Percentage change (right)
relatively strong next year as well. Moreover, the krona will
                                                                                Sources: Statistics Sweden and NIER.
strengthen, further boosting imports, which will continue to
grow vigorously in 2007. In 2008, when growth in demand has
slowed further, so will the rise in imports (see Diagram 75 and
Table 14). In relation to demand, imports will thus be growing                  Diagram 76 Imports
                                                                                Percent, share of demand, constant prices
roughly in line with the trend, both in 2007 and in 2008 (see                   32                                                  32
Diagram 76).
                                                                                30                                                  30


                                                                                28                                                  28


                                                                                26                                                  26


                                                                                24                                                  24


3This item shows expenditure by foreigners in connection with visits to         22                                                  22
Sweden. The statistics are based on data for purchases and sales of travel
currency and on reports from credit-card companies on the use of these cards    20                                                  20
by foreign visitors to Sweden. In addition to expenditure normally associated
with tourism, this item also includes, for example, cross-border trade and      18                                                  18
                                                                                     80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
expenditure in connection with a temporary work-related stay in the country.
                                                                                Sources: Statistics Sweden and NIER.
4The total of domestic consumption and investment, with the addition of
exports. Demand is met by domestic output (GDP) and imports.
46 Output and Labour Market




Diagram 77 Imports of Manufactured Goods               Table 14 Imports
Billions of SEK, constant prices and percent,
seasonally adjusted quarterly values
                                                       Billions of SEK, current prices, and annual percentage change,
                                                       constant prices
220                                               8
                                                                                          2005      2005   2006   2007   2008
200                                               6
                                                       Imports of goods                       827    7.9    7.2    7.5    5.6
180                                               4    of which: Manufactured                 620    9.7    8.8    9.1    6.9
                                                                 products
160                                               2
                                                                 Primary products             212    1.6    2.1    3.1    1.4
140                                               0    Imports of services                    265    5.2    9.4    6.5    5.7
                                                       Imports                            1 093      7.3    7.8    7.2    5.6
120                                               -2
                                                       Sources: Statistics Sweden and NIER.
100                                               -4

 80                                               -6
      97        99       01      03     05   07
            Billions of SEK                            Strong Demand Boosting Imports of Manufactures
            Percentage change (right)

Sources: Statistics Sweden and NIER.                   Imports of manufactured goods, which increased on a broad
                                                       front in 2005, dropped by a substantial 2.7 percent in the first
                                                       quarter. Imports of telecommunication products plummeted
Diagram 78 Imports of Primary Products
                                                       over 11 percent, while imports of other manufactured goods
Billions of SEK, constant prices and percent,          were down by 1.8 percent. In addition to telecommunication
seasonally adjusted quarterly values and yearly
values                                                 products, the tendency in construction elements and investment
60                                                12   goods, for example, was also unexpectedly weak. In the next few
57                                                10
                                                       quarters, however, imports of manufactured goods will show a
                                                       stronger tendency as growth in demand will remain relatively
54                                                8
                                                       robust (see Diagram 77).
51                                                6        The increase in imports of inputs by exporting industries will
48                                                4
                                                       be particularly substantial. After a weak first quarter, household
                                                       consumption will also be showing stronger growth, boosting
45                                                2
                                                       imports further. In addition, the tendency of investment in
42                                                0    machinery will remain relatively firm. Furthermore, it is
39                                                -2
                                                       reasonable to expect an upturn in imports for inventory by the
      97       99       01      03      05   07
                                                       second quarter.
           Billions of SEK
           Percentage change (right)                       In 2007 domestic demand will be increasing at roughly the
Sources: Statistics Sweden and NIER.                   same rate as this year, whereas exports will be rising somewhat
                                                       more slowly. Given the composition of the increase in demand,
                                                       however, imports of manufactured goods are expected to
                                                       increase at about the same rate as this year. For instance, faster
                                                       growth in household consumption will mean more rapidly rising
                                                       imports of consumer durables. In 2008 the demand tendency
                                                       will slacken further, slowing the increase in imports of
                                                       manufactured goods.


                                                       Imports of Primary Products to Pick Up Again in
                                                       2006 and 2007

                                                       The tendency in imports of primary products will be stronger
                                                       this year than in 2005 (see Table 14 and Diagram 78). The oil-
                                                       refining industry needs to replenish its inventories after two
                                                       years of depletion. Imports of metals and agricultural products,
                                                       which surged in the first quarter, will also contribute to the
                                                       upturn in imports this year. One explanation why imports of
                                                                                      Output and Labour Market 47




primary products will increase by no more than 2.1 percent is        Diagram 79 Imports of Services
                                                                     Billions of SEK, constant prices and percent,
that imports of food and petroleum products were down in the         seasonally adjusted quarterly values
first quarter of this year. Moreover, demand for imported timber     84                                                       10
is less because of the trees felled by the storm in southern
                                                                     77                                                       8
Sweden in 2005. In 2007 imports of primary products will be
rising somewhat faster than this year as imports of food and         70                                                       6

petroleum return to more normal levels. In 2008 imports of           63                                                       4
primary products will be limited by a decrease in imports of
                                                                     56                                                       2
crude oil.
                                                                     49                                                       0

                                                                     42                                                       -2

Stronger Growth in All Types of Imported Services                    35                                                       -4
                                                                           97       99        01        03        05    07

In the first quarter of this year, imports of services grew by 3.3              Billions of SEK
                                                                                Percentage change (right)
percent. While the increase was particularly noticeable in imports   Sources: Statistics Sweden and NIER.
of various business services, Swedish consumption abroad was
also considerably higher.
    For the full year 2006 as well, imports of business services
                                                                     Diagram 80 Export Price
are expected to show relatively brisk growth. Swedish                Index 2005=100
consumption abroad will also be rising strongly with increasing      130                                                     130
incomes and a stronger krona. Given the rapid growth in trade        120                                                     120
with other countries, imports of transport services will increase
rather substantially. In 2007 and 2008, growth in demand will        110                                                     110

slacken, slowing the tendency in imports of services (see            100                                                     100

Diagram 79).                                                          90                                                     90

                                                                      80                                                     80

                                                                      70                                                     70
Prices of Exports and Imports, Current                                60                                                     60
Account                                                                     99           01
                                                                                 Manufactured goods
                                                                                                   03        05        07

                                                                                 Primary products
                                                                                 Services

                                                                     Sources: Statistics Sweden and NIER.
Prices of Exports and Imports Affected Most by
Primary Products and the Swedish Krona

Last year, prices of exports and imports rose by 3.3 and 4.7
                                                                     Diagram 81 Import Price
percent, respectively (see Table 15), owing to a weakened krona      Index 2005=100
a well as sharply higher prices of primary products.                 120                                                     120
   This year as well, surging prices of primary products will lead
                                                                     110                                                     110
to higher prices of exports and imports. Even though the
Swedish krona has strengthened over the year, especially against     100                                                     100

the dollar, the average exchange rate of the krona for the year as    90                                                     90

a whole will be virtually unchanged from last year.                   80                                                     80
   In 2007 and 2008 the krona will appreciate further, generally
                                                                      70                                                     70
reducing internationally determined prices expressed in Swedish
currency. Another feature of these years will be declining world-     60                                                     60

market prices of primary products (see Diagrams 80 and 81).           50
                                                                            99           01        03        05        07
                                                                                                                             50

                                                                                 Manufactured goods
                                                                                 Primary products
                                                                                 Services

                                                                     Sources: Statistics Sweden and NIER.
48 Output and Labour Market




                                                                 Table 15 Prices of Exports and Imports
                                                                 Annual percentage change
                                                                                                        2005   2006   2007   2008
                                                                 Prices of exports, total                3.3    3.1   –0.8   –1.2
                                                                  Manufactured products                  1.6    1.7   –0.6   –0.7
                                                                  Primary products                      11.9   16.6   –2.5   –6.2
                                                                  Services                               3.6    0.0    0.0    0.5

                                                                 Prices of imports, total                4.7    3.4   –1.1   –1.1
                                                                  Manufactured products                  0.8    1.0   –0.4   –0.5
                                                                  Primary products                      20.5   16.0   –5.4   –6.1
                                                                  Services                               3.4   -0.5    1.0    1.4
                                                                 Sources: Statistics Sweden and NIER.



                                                                 Current Account to Strengthen Further

                                                                 Total net lending is the sum of the net saving of households and
                                                                 the net lending of firms and the general government sector
Diagram 82 Current Account
Percent of GDP, current prices
                                                                 against other countries. When so-called capital transfers are
8                                                           8
                                                                 added, the sum is the current account. In 2005 the current
                                                                 account showed a surplus of 6.0 percent of GDP (see Diagram
6                                                           6    82 and Table 16). The net lending of the general government
                                                                 sector rose to 2.8 percent of GDP. Household saving was
4                                                           4    reduced to 3.2 percent in 2005 but should still be considered
                                                                 high. It has been so since the early 1990’s, one reason being the
2                                                           2
                                                                 high level of pension saving. With surging investment and
                                                                 unusually large tax payments, the net lending of firms was down
0                                                           0
                                                                 considerably last year.
-2                                                          -2       This year total net lending will rise to the equivalent of 6.6
                                                                 percent of GDP, primarily because of increased household
-4                                                          -4   saving. It will continue to go up thereafter, reaching 7.0 percent
     50 55 60 65 70 75 80 85 90 95 00 05
Sources: The Riksbank 1950–1992, Statistics
                                                                 of GDP in 2008. General government net lending, however, will
Sweden 1993–2005 and NIER.                                       decrease slightly, mainly because of a lower tax ratio. Household
                                                                 saving will be down somewhat in 2007 and 2008 owing to a
                                                                 relatively strong increase in consumption. The net lending of
Diagram 83 Net Lending                                           firms will be higher in 2007 and 2008. One reason will be lower
Percent of GDP, current prices                                   tax payments in proportion to GDP compared to 2005 and
10                                                      10       2006; another will be a more subdued increase in investment in
                                                                 reaction to rising interest rates (see Diagram 83).
     5                                                  5


     0                                                  0


 -5                                                     -5


-10                                                     -10


-15                                                     -15
         80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
             Households
             Public sector
             Business sector

Sources: Statistics Sweden and NIER.
                                                                   Output and Labour Market 49




Table 16 Current Account, Net Lending and Saving
Billions of SEK, current prices
                                       2005   2006   2007   2008
Balance of trade                        147    160    167    178
Balance of services                      60     70     74     79
Wages and salaries, net                  –1     –1     –1     –2
Return on capital, net                  –10    –12     –5      0
Transfers etc., net                     –33    –30    –34    –36
Current account                         159    185    200    218
Percent of GDP                          6.0    6.6    6.7    7.0

Capital transfers                         2      2      2      1
Net lending , saving                    161    187    202    219
Percent of GDP                          6.0    6.6    6.8    7.0
 General government sector               74     78     76     73
 Percent of GDP                         2.8    2.8    2.5    2.3
 Households                              85    100     97     90
 Percent of GDP                         3.2    3.6    3.2    2.9
 Firms                                    2      8     29     56
 Percent of GDP                         0.1    0.3    1.0    1.8
Sources: Statistics Sweden and NIER.
                                                                                                                      51




Output and Labour Market                                                Diagram 84 Output and Employment
                                                                        Annual percentage change, calandar-adjusted
                                                                        values
There was an upturn in the Swedish labour market last year after        5                                                  5
several years of decline. Employment has now shown relatively           4                                                  4
solid growth for almost a year. GDP growth is expected to be            3                                                  3
very strong this year, and the economy will be expanding rapidly        2                                                  2
in 2007 and 2008 as well. Thus, despite vigorously rising
                                                                        1                                                  1
productivity, hours worked will increase by an annual average of
                                                                        0                                                  0
1.2 percent in 2006-2008 (see Diagram 84).
                                                                        -1                                                 -1
    Employment will be up by 1.7 percent in 2006, the largest
increase since 2001, and by an average of 1 percent per year in         -2
                                                                             01            03            05    07
                                                                                                                           -2

2007 and 2008. In total, employment will rise by some 153 000                     Output
                                                                                  Productivity
persons between 2005 and 2008. The regular employment rate in                     Hours worked
                                                                                  Average hours worked
age group 20-64 will climb to 78.8 percent in 2008. To achieve                    Employment

the Government’s and Parliament’s employment target of 80               Sources: Statistics Sweden and NIER.
percent, employment would have to increase by an additional
67 000 persons.
    In the past half-year, there has been an unexpectedly rapid
increase in the labour force. Consequently, the unemployment
rate is only marginally less despite strongly increasing
employment. The labour force will grow by about 0.6 percent
per year in 2006-2008. The relatively substantial increase is
explainable by population growth, an improved outlook for the
labour market and fewer sick persons outside the labour force.
At the same time, the increase in the labour force is being
curbed by an unfavourable shift in the age structure of the
population, by expansion in labour market training programmes
and by a higher number of persons in regular education.
    In part because of the unexpectedly large labour force, the
NIER is making an upward revision of 0.3 percentage point in
the potential labour force, i. e. the labour force compatible with
inflation in line with the targeted rate.
    Unemployment will be decreasing in the period ahead, both
because of rising employment and because of an increase in the
number participants in labour market programmes. The
unemployment rate will drop to 4.2 percent in 2008.
    Initially low, resource utilization will rise successively during
the forecast period. The labour market gap will narrow because
of strong growth in employment and will turn positive in the
second quarter of 2007. In 2008, resource utilization on the
Swedish labour market will become somewhat strained.
52 Output and Labour Market




Diagram 85 Output
Index 2000=100, constant prices, seasonally
adjusted quarterly values
130                                                      130   Output, Productivity and Hours Worked
125                                                      125

120                                                      120

115                                                      115
                                                               Surging Output
110                                                      110   GDP growth has picked up again after slackening slightly last
105                                                      105   autumn (see Table 17 and Diagram 85). Business-sector output
100                                                      100
                                                               surged in 2006 and will also show strong growth in 2007 as a
                                                               result of the demand tendency noted in the previous chapter
 95                                                      95
      00          02            04        06        08         (see Diagram 86). In addition, the output of public authorities
           GDP (basic prices)
           Public authorities
                                                               will be up considerably. In 2007 and 2008, resource utilization
           Business sector                                     will become increasingly strained, slowing GDP growth.
Sources: Statistics Sweden and NIER.

                                                               Table 17 Output
                                                               Billions of SEK, current prices, and percentage change, constant
Diagram 86 Output – Business Sector                            prices
Index 2000=100, constant prices, seasonally
adjusted quarterly values                                                                            2005    2005    2006       2007   2008
150                                                      150                                                   Calendar adjusted
                                                               Goods industries                        683     2.5    6.1      4.7      3.5
140                                                      140
                                                               of which: Manufacturing                 483     2.6     6.7       5.1    4.0
130                                                      130             Construction                  109     7.1     6.4       3.7    2.6
                                                               Service industries                    1 122     3.7     4.2       3.3    3.1
120                                                      120   of which: Trade                         253     5.0     8.0       4.6    3.4
                                                                         Business services             230     5.3     7.5       5.0    4.1
110                                                      110
                                                               Total, business sector                1 804     3.2     4.9       3.8    3.3
100                                                      100   Public authorities                      491     0.1     1.6       1.4    0.5
                                                                                            1
                                                               Total output (basic prices)           2 330     2.5     4.1       3.3    2.7
 90                                                      90
      00          02            04        06        08         Product taxes/subsidies                 335     3.5     4.1       3.4    2.8
                                                                                        1
           Manufacturing                                       GDP (market prices)                   2 665     2.6     4.1       3.3    2.7
           Construction
           Services                                                                                            Not calendar adjusted
                                                               Business sector                       1 809     3.3     4.6     3.7      3.4
Sources: Statistics Sweden and NIER.
                                                               Public authorities                      494     0.1     1.1       1.1    0.7
                                                                                     1
                                                               GDP (market prices)                   2 673     2.7     3.8       3.2    2.8
                                                               1Including output of nonprofit institutions serving households
Diagram 87 Confidence Indicator –                              Note: Output refers to value added.
Manufacturing                                                  Sources: Statistics Sweden and NIER
Balances, seasonally adjusted monthly values
20                                                       20

                                                               Manufacturing output decreased slightly in early 2005 after a period
10                                                       10    of slackness in new exportorders (see Diagram 86). Thereafter,
                                                               new orders and output increased successively during 2005 and
 0                                                       0
                                                               the first quarter of 2006. The Business Tendency Survey
                                                               confidence indicator for manufacturing passed a low point in the
                                                               second quarter of 2005 and has subsequently risen considerably
-10                                                      -10
                                                               (see Diagram 87). Manufacturing firms are optimistic as the
                                                               second half-year of 2006 approaches and are expecting a
-20                                                      -20
                                                               continued healthy increase in orders, though a somewhat
                                                               subdued one on export markets.
-30
      96        98         00        02        04
                                                         -30
                                                                   Construction output rose strongly last year, and in the first
Note: Assessment of orders on hand – assessment                quarter of this year, the tendency in construction strengthened
of finished goods inventory + expected output. Mean
1995–2006=0.                                                   further. There has been an appreciable increase in the
Source: NIER.
                                                                                           Output and Labour Market 53




confidence indicator, which is now at a very high level (see          Diagram 88 Confidence Indicator –
Diagram 88). Construction firms are also optimistic about the         Construction
                                                                      Balances, seasonally adjusted monthly values
tendency one year ahead and are expecting a continued increase        60                                                             60
in new orders and construction in both buildings and structures.
    In most service industries, output rose during 2005 and in the    40                                                             40

first quarter of this year. The increase in output was strongest in   20                                                             20
trade and business services. In the service industries there is
generally continued optimism about the future.                             0                                                         0

    In summary, growth in business sector output has recovered,       -20                                                            -20
primarily because of the increasingly strong pick-up in
manufacturing output. Business sector output will continue to         -40                                                            -40

grow appreciably during the forecast years, one reason being
                                                                      -60                                                            -60
rapid, though gradually slowing, growth in demand from other
countries. At the same time, domestic demand will continue            -80
                                                                                96         98          00        02        04
                                                                                                                                     -80

rising rapidly. Consequently, business sector output will surge       Note: Assessment of orders on hand + expected
this year, but its growth will slacken somewhat in 2007. The          change in number employed. Mean 1995–2006=0.
                                                                      Source: NIER.
output of the general government sector will also show a
relatively substantial increase in 2006 and 2007. Gradually,
                                                                      Diagram 89 Output and Hours Worked –
resource utilization will tighten, and growth in output will slow     Business Sector
down further.                                                         Percentage change, seasonally adjusted quarterly
                                                                      values
                                                                      3                                                                  3


Productivity Increase to Slacken in the Period Ahead                  2                                                                  2


The slowdown in productivity growth last year was due primarily       1                                                                  1

to temporary softening of the tendency in manufacturing (see
Table 18 and Diagrams 89 and 90). With this tendency                  0                                                                  0

strengthening this year, growth in business sector productivity       -1                                                                 -1
will accelerate slightly and rise above its trend rate (see Diagram
90). The increase in business sector productivity will slacken in     -2                                                                 -2
                                                                                00           02             04        06        08
2007 and 2008, when the economy will have been expanding so                          Output
long that fewer and fewer opportunities will be left for efficiency                  Number of hours worked
                                                                                     Productivity
gains.
                                                                      Sources: Statistics Sweden and NIER.




                                                                      Diagram 90 Productivity – Business Sector
                                                                      Annual percentage change, calendar-adjusted
                                                                      values
                                                                      12                                                             12

                                                                      10                                                             10

                                                                       8                                                             8

                                                                       6                                                             6

                                                                       4                                                             4

                                                                       2                                                             2

                                                                       0                                                             0

                                                                      -2                                                             -2

                                                                      -4                                                             -4
                                                                               81 83 85 87 89 91 93 95 97 99 01 03 05 07
                                                                                     Business sector
                                                                                     Manufacturing
                                                                                     Services

                                                                      Sources: Statistics Sweden and NIER.
54 Output and Labour Market




Diagram 91 Productivity – Business Sector                  Table 18 Productivity
Annual percentage change, calendar-adjusted
values
                                                           SEK per hour and annual percentage change, constant prices
5                                                      5                                          2005    2005     2006   2007     2008
                                                                                                           Calendar adjusted
4                                                      4   Goods industries                      367.3     3.2    5.5      4.0      3.4
                                                           of which: Manufacturing               413.3      4.7     7.0    4.8      4.3
3                                                      3               Construction              252.9      2.7     1.5    1.3      1.1
                                                           Service industries                    391.8      1.9     1.7    1.5      1.6
2                                                      2   of which: Trade                       270.2      3.2     4.5    2.1      2.3
                                                                       Business services         348.8      1.2     2.3    1.9      2.0
1                                                      1   Business sector                       382.1      2.4     3.1    2.4      2.3
                                                           Public authorities                    252.9      0.5     0.0    0.0      0.3
                                                           Total1                                340.6      2.0     2.4    1.9      1.9
0                                                      0
    81 83 85 87 89 91 93 95 97 99 01 03 05 07                                                              Not calendar adjusted
         Business sector
         Business sector, trend                            Business sector                       381.6     2.4     3.4     2.6      2.2
                                                           Public authorities                    253.2      0.5     0.2    0.2      0.3
Sources: Statistics Sweden and NIER.
                                                           Total1                                340.3      2.0     2.7    2.1      1.8
                                                           1Including nonprofit institutions serving households.
                                                           Sources: Statistics Sweden and NIER.
Diagram 92 Hours Worked
Index 2000=100, seasonally adjusted quarterly
values
106                                               106      Substantial Increase in Hours Worked
104                                               104
                                                           After decreasing since 2001, hours worked began rising again in
102                                               102      2005 and have continued to do so in 2006 (see Diagram 92). In
                                                           the construction and service industries, the increase has been
100                                               100
                                                           significant. In service industries the rise has been strongest in
    98                                            98       services focused on business firms. In manufacturing, the
    96                                            96
                                                           number of hours worked was up slightly in the first quarter of
                                                           this year after a period of substantial weakening. The number of
    94
         00           02           04   06   08
                                                  94       hours worked at public authorities has also gone up slightly.
              Total
              Public authorities
              Business sector
                                                           Table 19 Hours Worked
Sources: Statistics Sweden and NIER.
                                                           Millions of hours and annual percentage change
                                                                                                  2005    2005     2006   2007     2008
                                                                                                           Calendar adjusted
                                                           Goods industries                      1 859     –0.7   0.6      0.7      0.2
                                                           of which: Manufacturing               1 169     –2.1    –0.3    0.3     –0.2
                                                                       Construction                431      4.3     4.9    2.4      1.5
                                                           Service industries                    2 863      1.8     2.4    1.8      1.4
                                                           of which: Trade                         934      1.7     3.4    2.5      1.1
                                                                       Business services           659      4.1     5.1    3.1      2.1
                                                           Business sector                       4 722      0.8     1.7    1.4      0.9
                                                           Public authorities                    1 942     –0.4     1.6    1.3      0.2
                                                           Total1                                6 842      0.5     1.7    1.4      0.7
                                                                                                           Not calendar adjusted
                                                           Business sector                       4 740     0.9     1.2     1.1      1.2
                                                           Public authorities                    1 950     –0.4     0.9    0.9      0.4
                                                                   1
                                                           Total                                 6 869      0.5     1.1    1.1      1.0
                                                           1Including hours worked at nonprofit institutions serving households.
                                                           Sources: Statistics Sweden and NIER.
                                                                                          Output and Labour Market 55




For the rest of 2006 and 2007, hours worked are expected to
increase at a brisk pace, particularly in the construction and
service industries, though much more slowly in manufacturing.
At public authorities, a more appreciable increase is anticipated.
In total, calendar-adjusted hours worked will be up by 1.7
percent in 2006 and by 1.4 percent in 2007 (see Table 19).
Thereafter, the number of hours worked will be rising more
slowly as resource utilization tightens increasingly. In
manufacturing, the downward trend in hours worked is expected
to continue.



Demand for Labour


Increasingly Brighter Labour Market

With the strong growth in GDP, the labour market has                 Diagram 93 Layoff Notices and Vacancies
successively brightened. In 2005 employment rose after two           Thousands, 3-month moving average

years of decline. This year the number employed has continued        60                                                         20

rising. According to the National Accounts, employment was up
by 1.1 percent in the first quarter of this year compared to the     45                                                         15

same period in 2005. The improvement is equivalent to some
49 000 more persons with employment, the highest figure since        30                                                         10
2001. The upswing in employment is broad-based but is
particularly noticeable in the construction and service industries
and in the local government subsector. The number of persons         15                                                         5

employed in central government, on the other hand, continued
to decrease in the first quarter of this year.                        0                                                         0
                                                                           93        95     97      99   01     03     05
    The statistics of the Labour Market Board (AMS) also show a                 Newly reported vacancies, seasonally adjusted
positive labour market tendency. The number of job openings                     Layoff notices (right)

reported to the Employment Exchange has risen sharply this           Source: Labour Market Board.

year and is on a par with the situation in early 2000 (see Diagram
93). The number of job openings soared by some 36 percent in
the first five months of this year compared to the same period in
                                                                     Diagram 94 Job Openings and Unfilled Jobs
2005. Demand for labour is higher in most industries, but            Thousands, actual quarterly values
particularly in the engineering products, construction and           120                                                        35
business services industries and in freight and passenger
transport. Only in agriculture and forestry has the number of job    100                                                        30
openings decreased. The statistics on the number of job
openings should be interpreted with caution, however, since           80                                                        25

according to the Labour Market Board there has been some
double counting. As job openings have increased, the number of        60                                                        20

layoff notices has fallen to its lowest level in five years. In
construction and in freight and passenger transport, there has        40                                                        15

been a marked drop in layoff notices. Statistics Sweden’s data on
                                                                      20                                                        10
the number of job openings also show a continued increase this                  01                03            05
                                                                                 job openings
year (see Diagram 94).                                                           Unfilled jobs (right)
    According to the Business Tendency Survey, firms plan to         Source: Statistics Sweden.
continue hiring more staff, particularly in the construction and
service industries. With the increase in construction activity,
56 Output and Labour Market




Diagram 95 Shortage of Labour –                                     firms are encountering major problems in recruiting skilled
Construction
Proportion of firms in percent, seasonally adjusted
                                                                    labour. In April, some 70 percent of firms reported that
monthly values                                                      shortages of labour were the principal obstacle to growth (see
70                                                           70     Diagram 95). In service industries, the most highly expansionary
60                                                           60     hiring plans are found primarily in computer and related
                                                                    activities and other business activities, whereas postal and
50                                                           50
                                                                    telecommunication employees can expect continued cutbacks.
40                                                           40

30                                                           30

20                                                           20
                                                                    Number Employed to Increase by 153 000

10                                                           10     The number of persons employed is continuing to increase.
  0                                                          0
                                                                    According to Statistics Sweden’s Labour Force Surveys (LFS),
                                                                    employment was up by 0.7 percent in 2005, roughly equivalent
-10
       96          98       00         02         04
                                                             -10
                                                                    to 30 000 persons. In the first quarter of this year, the number
Source: NIER.                                                       employed rose by 0.4 percent. Continued strong demand for
                                                                    labour and positive labour market indicators suggest that
                                                                    employment will go on surging. Employment is forecast to
Diagram 96 Labour Market Programmes
Thousands, seasonally adjusted quarterly values                     increase by 1.7 percent this year, 1.2 percent next year and 0.7
250                                                          250    percent in 2008 (see Table 20). This adds up to an increase of
                                                                    some 153 000 persons from 2005 to 2008.
200                                                          200        Labour market programmes, which consist of training and
                                                                    employment programmes, will increase considerably in 2006 (see
150                                                          150
                                                                    Diagram 96). Much of the expansion will be in so-called ”Plus
100                                                          100
                                                                    Jobs”. Employment programmes contribute to higher
                                                                    employment but are also expected to cause some crowding out
 50                                                          50     of regular employment 5 . Regular employment will thus be rising
                                                                    less strongly than total employment in 2006 (see Diagram 97).
  0
       93     95    97     99     01   03        05    07
                                                             0      According to the spring Budget Bill the number of participants
             Labour-market programmes                               in labour market training programmes will be 68 000 in 2006.
             Employment programmes
             Training programmes                                    Based on previous experience, however, the NIER estimates
Sources: Labour Market Board and NIER.                              that employment programmes will be fewer on average than
                                                                    indicated in the Budget Bill. Aside from the purely practical
                                                                    difficulties in achieving such a high volume in such a short time,
                                                                    Plus Jobs are considered likely to crowd out other kinds of
Diagram 97 Employment                                               employment programmes, such as employment support, because
Percentage change, seasonally adjusted quarterly
values
                                                                    of the relatively high subsidization of Plus Jobs. With the labour
2.0                                                          2.0    market strengthening, labour market programmes are expected
                                                                    to decrease during 2007 and 2008.
1.5                                                          1.5        From the standpoint of economic policy, the number of
                                                                    labour market programmes should vary countercyclically; in
1.0                                                          1.0    other words, they should increase in an economic downturn and
                                                                    decrease in an economic upswing. It is therefore the NIER’s
0.5                                                          0.5    assessment that the number of labour market programmes will
                                                                    be far too high from an economic policy standpoint, particularly
0.0                                                          0.0
                                                                    in 2007, when the labour market gap turns positive.
-0.5                                                         -0.5
        00          02           04         06          08
             Number employed
             Number employed excl. participants in empl. prog.

Sources: Statistics Sweden, Labour Market Board
and NIER.
                                                                    5Regular employment refers to employed persons aged 16–64 excluding
                                                                    participants in labour market employment programmes.
                                                                                                 Output and Labour Market 57




Table 20 Key Numbers for the Labour Market                                      Diagram 98 Regular Employment Ratio
                                                                                Percent of population aged 20–64, seasonally
Level in thousands of persons and annual percentage change                      adjusted quarterly values
                                      2005     2005    2006    2007     2008    82                                                   82
                           1
Total output (basic prices)           2 338      2.5     4.1      3.3     2.7   81                                                   81
            2
Productivity                            340      2.0     2.4      1.9     1.9
                                                                                80                                                   80
                3
Hours worked                          6 869      0.5     1.7      1.4     0.7
                                                                                79                                                   79

                                                                                78                                                   78
Average hours worked for                 31    –0.2      0.0      0.1     0.0
                 4
employed persons                                                                77                                                   77
Number of persons employed            4 258      0.7     1.7      1.2     0.7   76                                                   76

                                                                                75                                                   75
                    5
Unemployment                            269      5.9     5.1      4.5     4.2
                                                                                74                                                   74
Number participating in labour-
                    5                                                           73                                                   73
market programmes                       123      2.7     3.2      3.0     2.5        93     95    97    99    01    03     05   07
                          6
Regular employment rate               4 101    77.2     77.8    78.4     78.8             Regularly employed, aged 20-64
                                                                                          Employment target
1 Billions of SEK, calendar adjusted. 2 SEK per hour, calendar adjusted.
3 Millions of hours, calendar adjusted. 4 Hours per week, calendar adjusted.    Note: Series adjusted backward in time by the NIER.
5 Level and percent of labour force. 6 Proportion of persons aged 20–64 with    Sources: Statistics Sweden and NIER.
employment, excl. participants in labour-market employment programmes.
Sources: Statistics Sweden, Labour Market Board and NIER.


The regular employment rate 6 for persons aged 20–64 will rise
from 77.2 percent in 2005 to 78.8 percent in 2008. It will thus
fall short of the Government’s and Parliament’s target rate of 80
percent by 1.2 percentage points, equivalent to some 67 000
persons (see Table 20 and Diagram 98).
    Allowing for the substantial uncertainty about factors like the
level of equilibrium unemployment, the labour market gap is
forecast to be 0.8 percentage point in the fourth quarter of 2008.
This means that sustainable achievement of the employment
target is only possible if labour supply increases or if equilibrium
employment is lowered. It is therefore the NIER’s view that
changes in applicable rules or other changes that increase labour
supply or reduce equilibrium unemployment are necessary in
order to reach the employment target and remain there.



Labour Supply and Unemployment


Labour Force to Increase in the Years Ahead

The labour force has been increasing for seven years in a row
and will continue to do so through 2008. From the end of 2005
and so far this year, the level of the labour force has been
unexpectedly high, leading the NIER to raise the growth
forecast for the labour force in 2006 by 0.3 percentage point.
   The population of working age, i. e. aged 16–64, will increase
by some 113 000 from 2005 to 2008. This increase will provide


6The regular employment rate refers to the proportion of employed persons
aged 16–64 excluding participants in labour market employment programmes.
58 Output and Labour Market




Diagram 99 Full-Time Students and Sick                        an average annual contribution of 0.8 percentage point to the
Persons Outside the Labour Force
Thousands, seasonally adjusted quarterly values
                                                              labour force (see Table 21).
700                                                     700
                                                                  The two largest categories of persons outside the labour
                                                              force consist of those who are sick and those pursuing full-time
600                                                     600   study (see Diagram 99). The number of sick persons outside the
                                                              labour force increased sharply through 2004, but decreased last
500                                                     500   year and will drop somewhat further before levelling out. The
                                                              category of full-time students consists of students in regular
400                                                     400   education and participants in labour market training
                                                              programmes. The number of students in regular education is
300                                                     300
                                                              normally a factor tending to limit the labour force, but in 2006
                                                              this effect will be weak, one reason being an offsetting tendency
200                                                     200
      93    95     97    99    01     03    05     07         for a growing number of students, attracted by an improving
           Full-time students
           Sick persons outside the labour force              labour market, to begin looking for work. Training programmes
Note: The category of sick persons outside the
                                                              will increase this year but decrease in the next two years. The
labour force consists primarily of those receiving            number of persons receiving negotiated pensions was up sharply
sickness and activity compensation for health-
related reasons. Series adjusted backward in time             last year after falling for four consecutive years. This year and
by the NIER.
Sources: Statitics Sweden and NIER.
                                                              next year, the increase will continue, with a restraining effect on
                                                              the labour force (see Table 21).



                                                              Table 21 Net Contribution to Labour Force
                                                              Level in thousands of persons, annual percentage change and net
                                                              contribution in percentage points
                                                                                                     2005     2005     2006     2007     2008
                                                              Labour force                          4 527       0.7      0.8       0.5      0.4
                                                              of which net contribution from:
                                                              Population aged 16–64                 5 771       0.8      1.1       0.9      0.5
                                                                           1
                                                              Sick persons                            397       0.4      0.1       0.0      0.0
                                                                                              2
                                                              Students in regular education           444      –0.1     –0.1     –0.3     –0.5
                                                              Participants in training                  82      0.0     –0.2       0.2      0.4
                                                                           3
                                                              programmes
                                                              Recipients of negotiated                  76     –0.1     –0.2     –0.2       0.0
                                                                       4
                                                              pensions
                                                                      5
                                                              Other                                   244      –0.2      0.1       0.0      0.0
                                                              1 The category of sick persons outside the labour force consists primarily of
Diagram 100 Unemployment Rate                                 individuals receiving sickness compensation or activity compensation for
Percent of labour force, seasonally adjusted                  health-related reasons. 2 Full-time students excl. participants in labour market
quarterly values                                              training programmes. 3 Training programme participants outside the labour
10                                                      10    force, according to the Labour Market Board. 4 Old-age pensions, retirement
                                                              pensions and disability pensions for labour-market-related reasons. 5 This
 9                                                      9     category consists of homemakers, persons on leave, residents abroad etc.
                                                              Sources: Statistics Sweden, Labour Market Board and NIER.
 8                                                      8


 7                                                      7

                                                              Unemployment Rate Down to 5.1 Percent This Year
 6                                                      6


 5                                                      5
                                                              Unemployment is continuing to decrease. In 2005 the
                                                              unemployment rate averaged 5.9 percent, and in the first quarter
 4                                                      4     of 2006 it was down to 5.6 percent (see Diagram 100). The
                                                              unemployment will drop to an average of 5.1 percent this year,
 3                                                      3
      93    95    97     99    01     03     05    07         4.5 percent next year and 4.2 percent in 2008. The decrease in
Sources: Statistics Sweden and NIER.                          unemployment is due primarily to rising demand for labour. But
                                                                                                Output and Labour Market 59




while employment is rising, so is the labour force, thus limiting      Diagram 101 Shortage of Labour – Business
the decrease in the unemployment rate.                                 Sector
                                                                       Proportion of firms in percent, quarterly values
    In 2005 there was a change in the Labour Force Surveys that        40                                                                             40
makes it harder to compare unemployment in 2005 and
thereafter with unemployment in previous years. The
changeover in the statistics is estimated by Statistics Sweden to      30                                                                             30

have raised reported unemployment by 0.4 percentage point (for
further discussion, see the special analysis in The Swedish Economy
                                                                       20                                                                             20
– August 2005, “Changeover in LFS Complicates Interpretation
of the Labour Market Situation”).
                                                                       10                                                                             10



Resource Utilization
                                                                           0                                                                          0
                                                                                93         95         97        99         01        03    05
Although resource utilization has been increasing in the past          Note: Weighted average of industries in the
year, there are still abundant spare resources in the Swedish          Business Tendency Survey.
                                                                       Source: NIER.
economy. Responses to the Business Tendency Survey questions
on labour shortage are a key indicator of resource utilization on      Diagram 102 Labour Market Gap, Hourly
the labour market. There has been a growing shortage of labour         Earnings and UND1X-Inflation
                                                                       Percent of potential hours worked and annual
in the business sector since 2003, but except for the                  percentage change, respectively, quarterly values
construction industry, it is still modest (see Diagram 101),           7                                                                              6
indicating plentiful unused resources on the labour market.
                                                                       6                                                                              4
    Other indications of ample spare resources are the modest
wage increases and low inflation rate (see Diagram 102). In 2005       5                                                                              2

wages in the business sector rose by 3.2 percent, somewhat             4                                                                              0

more than in 2004 but considerably less than 4 percent, the rate       3                                                                              -2
considered compatible in the longer run with 2-percent inflation.      2                                                                              -4
The inflation rate has remained well below the inflation target of
2 percent for some time.                                               1                                                                              -6

    The NIER’s assessment of resource utilization is summarized        0
                                                                               93      95        97        99        01     03        05    07
                                                                                                                                                      -8

in the labour market gap, defined as the percentage deviation of                     UND1X
                                                                                     Hourly earning, business sector
actual hours worked from potential hours worked. Potential                           Labour market gap (right)
hours worked are determined in turn by equilibrium                     Sources. Statistics Sweden, National Mediation
unemployment and the potential labour force. Equilibrium               Office and NIER.

unemployment is the level of unemployment compatible with
inflation on a level with the inflation target. Equilibrium            Diagram 103 Labour Market Gap
                                                                       Percent of potential hours worked, seasonally
unemployment is determined mainly by how well the labour               adjusted quarterly values
market and wage formation are functioning. At present the              6                                                                              6

equilibrium unemployment rate is 4.5 percent and is expected
                                                                       4                                                                              4
for demographic reasons to rise slightly in coming years.
Similarly, the potential labour force is defined as the level of the   2                                                                              2

labour force compatible with inflation close to the inflation
                                                                       0                                                                              0
target. The potential labour force is determined primarily by
factors affecting labour supply, such as demography and the            -2                                                                             -2
number of sick persons outside the labour force.
    In the past half-year, the level of the labour force has been      -4                                                                             -4

unexpectedly high. Partly in view of this outcome, the NIER has        -6                                                                             -6
revised the potential labour force upward by about 0.3 percent.
Primarily for demographic reasons, little growth in the potential      -8
                                                                               90     92        94    96        98    00        02   04    06    08
                                                                                                                                                      -8

labour force can be expected in coming years.                          Note: The labour market gap is calculated as the
                                                                       difference between the number of hours worked and
                                                                       its potential level.
                                                                       Source: NIER.
60 Output and Labour Market




Diagram 104 Output and Productivity Gaps                             However, the NIER’s estimates of equilibrium
Percent of potential GDP and potential productivity,
respectively, seasonally adjusted quarterly values
                                                                 unemployment as well as the potential labour force are quite
  4                                                         4    uncertain. Since the economic crisis of the early 1990’s, resource
                                                                 utilization has been strained, in the NIER’s opinion, for only a
  2                                                         2
                                                                 short period at the outset of 2000. Consequently, there is little
  0                                                         0
                                                                 experience with the functioning of the labour market in such a
                                                                 situation, and thus only a limited basis for a well-founded
 -2                                                         -2   estimate of equilibrium unemployment and the potential labour
 -4                                                         -4
                                                                 force. As the Swedish labour market approaches cyclical balance,
                                                                 the NIER will be in a better position to estimate the potential
 -6                                                         -6   labour force. As this estimate is a critical part of the foundation
                                                                 for the NIER’s recommendations on economic policy, it will be
 -8                                                         -8
      90    92   94    96     98   00   02   04   06   08        reviewed continually in light of new information.
           Output gap
           Productivity gap                                          In the next few years, actual hours worked will be rising
Source: NIER.                                                    much faster than potential hours worked. The labour market gap
                                                                 will therefore close, turn positive in the second quarter of 2007
                                                                 and remain so in 2008, when it will average 0.7 percent for the
                                                                 year. This means that resource utilization will be somewhat
                                                                 strained at that time (see Diagram 103).
                                                                     The GDP gap is defined as the percentage by which actual
                                                                 GDP deviates from potential GDP. The GDP gap will close
                                                                 somewhat earlier than the labour market gap (see Diagram 104).
                                                                 The explanation is that the productivity gap will be slightly
                                                                 positive at the end of 2006. From then on, therefore, average
                                                                 GDP cannot increase faster than its potential growth rate
                                                                 without driving resource utilization in the Swedish economy up
                                                                 so far that wage increases and thus inflation would be untenably
                                                                 high.

                                                                 Table 22 GDP Gap
                                                                 Level in millions, percent and annual percentage change
                                                                                                       2005     2005     2006     2007     2008
                                                                 Equilibrium unemployment rate                    4.5      4.5      4.6      4.6
                                                                 Official unemployment rate                       5.9      5.1      4.5      4.2
                                                                 Potential hours worked                7 000      0.4      0.4      0.2      0.1
                                                                 Actual hours worked                   6 842      0.5      1.7      1.4      0.7
                                                                                      1
                                                                 Labour market gap                               –2.3     –1.0      0.1      0.7
                                                                                  2
                                                                 Potential GDP    P                    2 713      2.8      2.7      2.6      2.4
                                                                       2
                                                                 GDP                                   2 665      2.6      4.1      3.3      2.7
                                                                              3
                                                                 GDP gap                                         –1.8     –0.4      0.3      0.5
                                                                 1 Difference between actual hours worked and potential hours worked.
                                                                 2 Billionsof SEK.
                                                                 3 Difference between actual GDP and potential GDP.

                                                                 Note: The calculations are adjusted for inter-year differences in the number of
                                                                 working days.
                                                                 Sources: Statistics Sweden and NIER.
                                                                                                                           61




Wages, Profits and Prices                                             Diagram 105 Labour Market Gap, Hourly
                                                                      Earnings and UND1X-Inflation
                                                                      Percent of potential hours worked and annual
The rate of wage increases in the business sector has been            percentage change, respectively, quarterly values

relatively low in the past three years owing to a cyclically weak     7                                                         6

labour market. The rate of wage increases was lowest in 2004          6                                                         4

and marginally higher in 2005. With rising employment and             5                                                         2
gradually increasing resource utilization, wage increases will also
                                                                      4                                                         0
accelerate in the period ahead (see Diagram 105). Wages in the
business sector will increase by more than 4 percent in 2008,         3                                                         -2

roughly the rate considered compatible with the 2-percent             2                                                         -4

inflation target in the long run.                                     1                                                         -6
    With the modest rate of wage increases and surging
                                                                      0                                                         -8
productivity, unit labour costs in the business sector have               93     95     97    99     01     03   05   07
                                                                               UND1X
remained virtually unchanged for the past four years. Unit labour              Hourly earning, business sector
costs will decrease in 2006 because of nonrecurring factors, but               Labour market gap (right)

will be rising fairly rapidly in 2008. The profit share in the        Sources. Statistics Sweden, National Mediation
                                                                      Office and NIER.
business sector, which has recovered in the past few years,
decreased slightly in 2005 but will increase somewhat in 2006–
2008.
    UND1X inflation has been less than the Riksbank’s 2-
percent target since October 2003, and on average it has also
been under the Riksbank’s lower tolerance limit of 1 percent.
The principal explanation for this situation is that unit labour
costs have been virtually unchanged for the past four years.
Moreover, inflation rate has been lower in Sweden than in most
of the other 24 EU member countries, an indication that the low
inflation rate is due primarily to Swedish rather than
international conditions.
    In 2007 and 2008 resource utilization will gradually go up,
resulting in acceleration of wages and unit labour costs.
However, the inflation rate will be held in check by initially low
increases in rents, a strengthening krona and decreasing oil
prices. UND1X inflation will rise to 1.6 percent in 2008, 1.9
percent if energy is excluded. Thus, inflation will remain below
the inflation target.
62 Wages, Profits and Prices




Diagram 106 Hourly Earnings – Business                                               Wages and Labour Costs
Sector, Local Government Sector and Central
Government
Annual percentage change, quarterly values
10                                                                           10
                                                                                     Higher Wage Increases as Labour Market Improves
 8                                                                           8
                                                                                     Wage increases in the business sector were smallest in 2004 and
 6                                                                           6
                                                                                     rose by 0.1 percentage point to 3.2 percent in 2005, including
                                                                                     retroactive wages paid in addition.
 4                                                                           4           However, wage increases were slightly more limited in the
                                                                                     first quarter of this year than in the first quarter of last year (see
 2                                                                           2       Diagram 106). This was the case primarily for employees in
                                                                                     manufacturing, trade, hotels and restaurants and the credit
 0                                                                           0
      93      95     97        99        01        03    05        07                industry, whereas wage increases were higher than a year ago in
            Business sector
            Local government sector
                                                                                     the transport sector.
            Central government                                                           In recent years, resource utilization on the labour market has
Note: Incl. additional retroactive payments from April                               been low, curbing wage increases. In 2005 and early in 2006,
2005 on.
Sources: National Mediation Office and NIER.                                         employment rose (see Diagram 107). There are other indicators
                                                                                     as well that the labour market has improved in the past year (see
Diagram 107 Employment – Business Sector
Index first quarter 1995=100                                                         the section ”Output and Labour Market”). In the Business
130                                                                         130      Tendency Survey, the percentages of firms reporting labour
                                                                                     shortages have increased from a low point in 2003, but are still
120                                                                         120      relatively modest (see Diagram 108). Resource utilization will
                                                                                     continue rising in the period ahead, and increasingly difficulties
110                                                                         110      of firms in finding labour will gradually push up the rate of wage
                                                                                     increases. The labour market gap will turn positive in the second
100                                                                         100      quarter of 2007.
                                                                                         Hourly earnings in the business sector will rise by 3.4 percent
 90                                                                         90       in 2006, 3.9 percent in 2007 and 4.1 percent in 2008. The rate of
       95       97        99        01        03        05        07
             Business sector
                                                                                     wage increases will be close to the 4 percent level considered
             Manufacturing
             Construction
                                                                                     compatible in the long run with 2-percent inflation. 7
             Service industries

Sources: Statistics Sweden and NIER.

                                                                                     Wage Increases Smaller in Manufacturing and
                                                                                     Larger in Construction

Diagram 108 Labour Shortage and Hourly                                               The productivity tendency in manufacturing has been strong since
Earnings – Business Sector
Proportion of firms, percent and annual percentage
                                                                                     2002, although it softened temporarily in 2005. It has therefore
change, respectively, quarterly values                                               been possible to achieve higher output rapidly without
40                                                                               7   increasing the number of hours worked. The rise in employment
                                                                                     has been more limited in manufacturing than in the business
30                                                                               6
                                                                                     sector on average. Partly for this reason, wages in manufacturing
                                                                                     are continuing to rise somewhat more slowly than in the
20                                                                               5
                                                                                     business sector as a whole (see Diagram 107 and Table 23).
                                                                                         Employment in the construction industry was up substantially
10                                                                               4
                                                                                     in 2005 and early 2006 (see Diagram 109). The percentages of
 0                                                                               3
                                                                                     construction firms reporting labour shortages in the Business
                                                                                     Tendency Survey are at their highest levels since early in 2000.
-10                                                                              2   As a result of the increased demand for labour in the
      93      95     97        99        01        03        05        07
            Labour shortage, business sector
            Hourly earnings, business sector (right)

Note: Weighted measure based on industries in the
                                                                                     7See ”Productivity and Wages Through 2015”, Special Study No. 6, NIER,
Business Tendency Survey.                                                            2005.
Source: NIER.
                                                                                                Wages, Profits and Prices 63




construction industry, wage increases in that subsector will           Diagram 109 Hiring Plans and Employment –
remain higher than in the business sector as a whole.                  Construction Industries
                                                                       Balances and annual percentage change, quarterly
                                                                       values
                                                                           50                                                       10
Table 23 Hourly Earnings According to the Short-Term
Wage and Salary Statistics
Annual percentage change
                                                                            0                                                       0
                              2005        2006       2007      2008
Manufacturing                   3.2            3.2    3.6       3.8
Construction                    3.4            3.9    4.2       4.2
                                                                           -50                                                      -10
Service industries              3.4            3.5    4.0       4.2
Business sector                 3.3            3.4    3.9       4.1
Local government                3.0            3.4    3.6       3.7
                                                                       -100                                                         -20
Central government              3.0            3.4    3.6       3.7               94       96     98    00      02   04   06   08
                                                                                         Hiring plans
Total                           3.1            3.4    3.8       4.0
                                                                                         Hours worked (right)
Sources: National Mediation Office and NIER.                           Sources: Statistics Sweden and NIER.



Demand for labour in service industries has been rising for some
time (see also the section ”Demand for Labour” and Diagram
107). Wages will increase somewhat faster than in the business
sector as a whole in 2006. Business-related service industries are
meeting increased demand for commissioned assignments and
consulting services, and these industries are now experiencing an
increasing shortage of labour. In trade as well, particularly
retailing, there is optimism about the immediate future. Also in
the period ahead, the strong increase in demand for services will
lead to somewhat higher wage increases in service industries
than in the business sector as a whole (see Diagram 107 and
Table 23).
     The rate of wage increases in the local government subsector is
expected to end up at 3.4 percent for 2006, the average for the
business sector. When resource utilization on the labour market
is rising, wages increase more slowly in the general government
sector than in the business sector, as resource utilization affects
wage increases in the business sector to a higher degree.
Therefore, wages will not be rising as fast in the general             Diagram 110 Hourly Wage and Labour Costs
                                                                       According to National Accounts – Business
government sector as in the business sector as a whole in 2007         Sector
and 2008.                                                              Annual percentage change, calendar-adjusted
                                                                       values
                                                                       7                                                                7

                                                                       6                                                                6
Unit Labour Costs Temporarily Decreasing in 2006
                                                                       5                                                                5

                                                                       4                                                                4
Legislated employer contributions have been lowered by 0.18
percentage point this year. Partly for this reason, labour costs in    3                                                                3

the business sector will be increasing more slowly than hourly         2                                                                2
earnings, according to the National Accounts (see Diagram 110
                                                                       1                                                                1
and Table 24). The discrepancy between the Short Term Wage
and Salary Statistics (STWS) and the National Accounts (NA) in         0
                                                                                 01               03            05        07
                                                                                                                                        0

respect to the increase in hourly earnings is due to differences in                   Hourly wage
                                                                                      Labour cost per hour
definitions. The primary purpose of the STWS is to measure
                                                                       Sources: Statistics Sweden and NIER.
64 Wages, Profits and Prices




                                                     wages received for time worked, whereas the NA statistics are
                                                     intended to show the aggregate revenue and expenditure of the
                                                     economy. Consequently, disbursements of basic wages and
                                                     salaries in the NA statistics are supplemented by all additional
                                                     compensation and other expenditure affecting earned income.
                                                     For this reason, among others, hourly earnings normally increase
                                                     more according to the NA statistics than in the STWS.
                                                        This year firms covered by the SAF-LO negotiated pension
                                                     scheme are temporarily exempt from paying pension premiums
                                                     and the cost of insurance for exemption from payment of
                                                     premiums. Therefore, negotiated employer contributions will be
                                                     down temporarily in 2006, lowering labour costs by 0.6
                                                     percentage point. 8 Since the exemption from payment of
                                                     premium is temporary, labour costs will increase at a
                                                     correspondingly higher rate in 2007, and the effects on wages
                                                     and prices are expected to be insignificant.


Diagram 111 Unit Labour Cost – Business              Table 24 Labour Costs and Earnings per Hour and per
Sector                                               Unit of Output – Business Sector
Annual percentage change, calendar-adjusted
values                                               Annual percentage change, calendar adjusted
8                                               8                                    2005       2006       2007      2008
                                                     Hourly earnings (STWS)            3.3        3.4        3.9        4.1
6                                               6
                                                     Hourly earnings (NA)              4.0        3.6        4.1        4.3
                                                     Employer contributions
4                                               4    (NA)                              4.0        0.7        5.1        4.6
                                                     Labour costs (NA)                 4.0        2.7        4.4        4.4
2                                               2                1
                                                     Productivity                      2.5        3.1        2.4        2.3
                                                     Unit labour costs                 1.4       –0.4        1.9        2.1
0                                               0
                                                     Note: Employer contributions include social security contributions and payroll
                                                     taxes. STWS (KL) stands for Short Term Wage and Salary Statistics and NA
-2
     97        99      01        03   05   07
                                                -2   for the National Accounts.
                                                     1 The development of productivity in this table is based solely on hours worked
          Labour cost per hour
          Productivity                               by employees; thus, hours worked by business proprietors are not included.
          Unit labour cost
                                                     Sources: Statistics Sweden, National Mediation Office and NIER.
Sources: Statistics Sweden and NIER.


                                                     Unit labour costs, or cost per unit of output, increased in the
                                                     business sector by 1.4 percent in 2005 (see Diagram 111). The
                                                     increase was higher than the previous one, primarily because of a
                                                     more limited productivity increase. This year, unit labour costs
                                                     will decrease by 0.4 percent, and next year they will rise by 1.9
                                                     percent. Adjusted for the temporary exemption from payment
                                                     of premiums, unit labour costs will increase by 0.2 percent in
                                                     2006, 1.3 percent in 2007 and 2.1 percent in 2008. This
                                                     successively higher increase in unit labour costs is a consequence
                                                     of accelerating wage increases when resource utilization is rising,
                                                     as well as the gradual slackening of the productivity increase due
                                                     to cyclical factors. In 2008 unit labour costs will be rising faster

                                                     8The exemption from payment of premium is not included in the National
                                                     Accounts for the first quarter of 2006. In all probability, however, the National
                                                     Accounts will revise the statistics and take the exemption from payment of
                                                     premium into consideration. In the data it is assumed that the exemption is
                                                     considered for the entire year 2006.
                                                                                                     Wages, Profits and Prices 65




than the rate of increase of 1.6 percent considered compatible                     Diagram 112 Cost of Labour According to
with 2-percent inflation in the long run. 9                                        Labour Cost Index (LCI) – Business Sector
                                                                                   Index 1997=100
                                                                                   140                                                          140

Competitive Situation and Profitability                                            130                                                          130


                                                                                   120                                                          120
Relative Labour Costs Increasing
                                                                                   110                                                          110
As measured by the Labour Cost Index (LCI), labour costs have
increased much more in Sweden than in the euro zone since                          100                                                          100
1997 (see Diagram 112). The larger cost increase, however, has
been offset by a stronger rise in productivity. Measured in a                       90
                                                                                          97            99         01           03         05
                                                                                                                                                90

common currency, relative unit labour costs take into account                                  Euro zone
both cost and productivity increases as well as changes in                                     Sweden

exchange rates (see Diagram 113).                                                  Note: Excl. health and other care, study, social and
                                                                                   personal services.
    Relative unit labour costs in a common currency will be low                    Source: Eurostat.

in 2006-2008 compared to the second half of the 1990’s. But to
assess the competitive position of the Swedish business sector, it                 Diagram 113 Unit Labour Cost in Relation to
                                                                                   the Euro Zone – Business Sector and
is also necessary to consider that the terms of trade, or the                      Manufacturing
relationship between prices of exports and prices of imports,                      Index 1997=100

have weakened. The principal cause is the decrease in prices of                    110                                                          110

telecommunication products, which weigh rather heavily in
Swedish exports (see the section “Terms of Trade, Current                          105                                                          105

Account and Gross National Income”).
    In the profit level discussed in the next section, consideration               100                                                          100
is also given to the tendency of prices, providing a better picture
of the international competitive position of the Swedish business                   95                                                          95
sector.
                                                                                    90                                                          90


Business Sector Profitability to Stabilize                                          85                                                          85
                                                                                         95        97        99    01      03        05    07
The profit share 10 in the business sector was down slightly in                    Note: In the comparison, Swedish unit labour costs
                                                                                   are calculated excluding payroll taxes as defined by
2005 after recovering from a low point in 2001. The profit share                   the OECD.
will rise this year before dipping a little in 2007 and 2008 (see                  Sources: OECD and NIER.

Table 25 and Diagram 114). The strong increase in the profit                       Diagram 114 Profit Share – Business Sector
share this year, like the decrease next year, will be due partly to                Percent

the temporary exemption from payment of premium this year.                         50                                                           50


                                                                                   45                                                           45


                                                                                   40                                                           40


                                                                                   35                                                           35


                                                                                   30                                                           30


                                                                                   25                                                           25
                                                                                        80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
                                                                                              Profit share, total
9 See ”Productivity and Wages Through 2015,” Special Study No. 6, NIER,                       Profit share excl. finance and real estate
2005.
10 Gross profit as a share of value added at factor prices. The profit share       Sources: Statistics Sweden and NIER.

normally rises if the value-added price increases faster than unit labour costs.
66 Wages, Profits and Prices




Diagram 115 Procuct Price and Input Price –                  Table 25 Prices, Costs of Output and
Business Sector                                              Profit Shares – Business Sector
Annual percentage change
                                                             Annual percentage change
5                                                       5
                                                                                                     2004     2005    2006    2007    2008
4                                                       4                                                     Not calendar adjusted
                                                             Value-added price1                         0.6    1.2     1.8     1.8       1.5
3                                                       3
                                                               Product price                            1.6     2.4     3.4     1.7      1.2
2                                                       2      Input price                              2.5     3.9     4.4     1.6      1.0
                                                             Unit labour cost (ULC)                   –1.7      1.4    –0.2     2.0      1.9
1                                                       1      Hourly cost of labour                    2.5     3.9     3.2     4.6      4.2
                                                               Productivity2                            4.3     2.5     3.3     2.6      2.2
0                                                       0
                                                             Profit share3                              1.4    -0.1     1.1    –0.1    –0.3
                                                                                                              Calendar adjusted
-1                                                      -1
     97        99         01     03       05       07        Unit labour cost (ULC)                   –1.3     1.4    -0.4    1.9        2.1
          Product price
          Input price
                                                               Hourly cost of labour                    3.5     4.0     2.6     4.4      4.4
                                                               Productivity2                            4.8     2.5     3.1     2.4      2.3
Sources: Statistics Sweden and NIER.
                                                             Profit share3                              1.1    –0.2     1.3    –0.1    –0.3
                                                             1 The value-added price is calculated by deducting the average price of inputs
                                                             consumed (input price) from the average price of the output produced
Diagram 116 Value Added Price and Unit                       (product price).
Labour Cost – Business Sector                                2 The development of productivity in this table has been calculated only for
Annual percentage change                                     employees; in other words, hours worked by business proprietors are not
8                                                       8    included.
                                                             3 Gross profit is divided by value added at factor prices, with consideration
6                                                       6    given to taxation and subsidization of output. The change is expressed in
                                                             percentage points.
4                                                       4    Source: NIER.
2                                                       2


0                                                       0
                                                             The product price, and to a still greater extent the input price,
                                                             rose appreciably last year with the soaring prices of petroleum
-2                                                      -2
                                                             and metals (see Diagram 115). The overall effect was a fairly
-4                                                      -4   minor increase in the value-added price (see Diagram 116).
     97        99         01     03       05       07
          Value added price
                                                             Nevertheless, the profit share in the business sector fell only
          Unit labour cost                                   insignificantly because of fairly healthy productivity growth and
          Change in profit share (percentage points)
                                                             relatively small increases in labour costs.
Sources: Statistics Sweden and NIER.
                                                                 In manufacturing the profit share rose substantially for the
                                                             second year in a row (see Diagram 117). At the same time,
                                                             strong growth in domestic demand created a margin for service
Diagram 117 Profit Shares – Manufacturing
Percent
                                                             industries in general to maintain their profit shares (see Diagram
60                                                      60
                                                             118). With the lacklustre tendency for real-estate firms, however,
                                                             the profit share in the service industries as a whole was down.
50                                                      50       This year the profit share in the business sector will rise
                                                             further. The value-added price will be up considerably, while
40                                                      40   unit labour costs will show a slight decrease. The rising trend in
                                                             hourly labour costs will be interrupted this year by the temporary
30                                                      30
                                                             exemption from payment of premium. In 2007 and 2008, unit
20                                                      20
                                                             labour costs in the business sector will rise much faster than this
                                                             year, resulting in a somewhat reduced profit share. There will be
10                                                      10   a cyclical slackening of the increase in productivity, while the
     80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
          Total manufacturing                                wage increases will accelerate as resource utilization rises.
          Manufacturing, primary products
          Manufacturing, investment goods
                                                             Moreover, the temporary exemption from payment of premium
Sources: Statistics Sweden and NIER.
                                                             will no longer be in effect. Thus, in the business sector excluding
                                                             finance and real estate, the profit share in 2008 will end up at
                                                                                                        Wages, Profits and Prices 67




roughly the same level as the average for the last 25 years (see                       Diagram 118 Profit Shares – Service
Diagram 114).) 11 .                                                                    Industries excl. Finance and Real Estate
                                                                                       Percent
    In manufacturing the profit share will continue increasing                         35                                                          35
this year, but it will decrease in 2007 and 2008 as prices of
                                                                                       30                                                          30
minerals and metals recede. The strong tendency in domestic
demand will create a margin for service firms to raise their prices                    25                                                          25

somewhat more than the increase in their costs. For this reason,                       20                                                          20

the profit share in service industries will be rising in 2006–2007.                    15                                                          15
    In view of the rather low and stable relative unit labour costs
                                                                                       10                                                          10
and the stable profit share, the international competitive position
of Sweden’s business sector is expected to remain balanced in                           5                                                          5

the next few years.                                                                     0
                                                                                            80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
                                                                                                                                                   0

                                                                                                Service industries
                                                                                                Wholesale and retail trade
                                                                                                Business services

Inflation                                                                              Sources: Statistics Sweden and NIER.


UND1X inflation has been below the Riksbank’s inflation target
of 2 percent since October 2003. This principal reason is that
high productivity growth and relatively modest wage increases                       Figure 1 Measures of Inflation
have combined to keep the unit labour costs of the business
sector nearly unchanged in the past four years. Prices of
                                                                                                                 CPI
imported goods have shown comparatively little increase, one                                                   (100,0)
reason being higher imports from China and other low-wage
countries (see Diagram 120). On the other hand, the price of oil
has soared in recent years. The conclusion is that the low rate of                      Changes in                                  Mortgage
                                                                                       indirect taxes                             interest costs
inflation is due mainly to Swedish conditions. This conclusion is                      and subsidies                                   (4,9)
supported by the fact that in both the euro zone and the OECD
area, inflation has averaged more than 2 percent since October
2003.                                                                                                           UND1X
                                                                                                                 (95.1)
    Early in 2006, however, the inflation rate increased
somewhat, one reason being higher energy prices. The inflation
rate was 1.6 in May 2006 according to both the Consumer Price
Index (CPI) and the UND1X. UND1X inflation differs from                               Goods             Services             Housing         Energy
CPI inflation in that mortgage interest cost on one’s own home                        (42.4)             (24.8)               (18.8)          (9.1)

and the direct effect of changes in indirect taxes and subsidies
are excluded from the UND1X (see Figure 1). The UND1X is
normally used as a guide for the Riksbank’s decisions on
                                                                                     Imported        Domestically        Electricity         Fuel and
monetary policy, even though the inflation target applies to the                       goods          produced            and gas           Geating oil
                                                                                                       goods               (4.5)               (4.7)
CPI. Inflation will remain below the target in 2006-2008, but to                       (18.4)
                                                                                                       (24.0)
a lesser degree than before.
                                                                                    Note: Figures in parentheses indicate the weighting
                                                                                    percentage for the item in the CPI. Changes in indirect taxes
                                                                                    and subsidies have no explicit weight. Housing refer to
                                                                                    housing excluded interest mortagage costs and costs for
Inflation Rising Toward Its Target                                                  energy.
                                                                                    Source: Statistics Sweden.

One reason for the rising inflation rate in the period ahead will
be an improving labour market, which will result in rising
resource utilization and thus in higher rate of wage increases.

11 In the second half of the 1990’s, there was a sharp decrease in the overall

profit share of the business sector. The decline was accentuated by an increase
in the real-estate tax together with termination of the interest-rate subsidy for
housing loans.
68 Wages, Profits and Prices




Diagram 119 Consumer Prices                                Moreover, there will be a cyclical slackening of the increase in
Annual percentage change, quarterly values
                                                           productivity. As a combined effect of these factors, unit labour
3.5                                                 3.5
                                                           costs in the business sector will accelerate, contributing to rising
3.0                                                 3.0    inflation. The increase in unit labour costs will be curtailed this
2.5                                                 2.5    year by an exemption from payment of premiums, which
                                                           however will terminate in 2007. As a consequence, unit labour
2.0                                                 2.0
                                                           costs will increase correspondingly faster in 2007 (see the section
1.5                                                 1.5    “Wages”). This temporary effect is not expected to impact
1.0                                                 1.0    inflation.
                                                               Inflationary tendencies will be countered by an appreciating
0.5                                                 0.5
                                                           krona. A decreasing price of oil will also dampen the inflation
0.0
      00           02       04      06        08
                                                    0.0    rate. Measured by the UND1X, inflation will reach 1.9 percent
           UND1X                                           in December 2008, whereas with the UND1X excluding energy,
           UND1X excl. energy
                                                           inflation will be 2.1 percent then (see Table 26 and Diagram
Note: The shaded area represents the Riksbank’s
inflation target of 2 percent, with a tolerance interval   119). The last time that resource utilization was somewhat
of plus/minus 1 percentage point.                          strained was in 2001, when inflation was rising at a relatively
Sources: Statistics Sweden and NIER.
                                                           high rate. The main reasons were rapidly increasing unit labour
                                                           costs and a substantially weakened krona. Since unit labour costs
                                                           will be rising much more slowly in 2006-2008 and the krona will
                                                           be strengthening, inflation will approach its target rate rather
                                                           slowly.

                                                           Table 26 Consumer Prices
                                                           Annual percentage change
                                                                                             Weight                               Dec.
                                                                                             in CPI     2006    2007     2008     2008
                                                           Goods                                42.4      0.1      0.4      0.6      0.7
                                                           Services                             24.8      1.0      2.6      2.8      3.4
                                                           Housing excl. Interest and
                                                           energy                               18.8      1.6      2.1     3.3      3.5
                                                           Energy                                9.1      7.0      1.1    –0.6     –0.7
                                                           UND1X                                95.1      1.3      1.4      1.6      1.9
                                                                                         1
                                                               Mortage interest costs            4.9      0.1      0.7      1.0      1.0
                                                                                     1
                                                               Taxes and subsidies                        0.1      0.1      0.1      0.1
                                                           CPI                                100.0       1.4      2.1      2.7      2.9

                                                           UNDINHX                              64.1      1.7      2.1      2.5      2.8
Diagram 120 Prices of Goods
Annual percentage change, quarterly values                 UNDIMPX                              30.9      0.4    –0.2     –0.2     –0.1
5                                                    5
                                                           HICP                                           1.6      1.5      1.7      1.9
4                                                    4

3                                                    3
                                                           1Contribution to CPI inflation.
                                                           Note: All prices except in the CPI and HICP are calculated with the indirect
2                                                    2     effects of taxes and subsidies excluded.
1                                                    1
                                                           Sources: Statistics Sweden and NIER.
0                                                    0

-1                                                   -1

-2                                                   -2
                                                           Prices of Goods to Increase Somewhat Faster
-3
      00          02        04       06        08
                                                     -3
                                                           Prices of goods will accelerate, with both cost and demand
           Goods                                           pressure rising as an effect of economic recovery. Prices of
           Domestic goods
           Imported goods                                  goods normally increase more slowly than prices of services. The
Sources: Statistics Sweden and NIER.                       reason is that productivity increases are considerably larger in
                                                           goods industries and in trade in goods than in service industries
                                                                                                          Wages, Profits and Prices 69




in general. The modest inflation of recent years in prices of                       Diagram 121 Prices of Services
                                                                                    Annual percentage change, quarterly values
goods has picked up, in part because of a weakening krona in
                                                                                    8                                                           8
2005. The rate of increase in unit labour costs in goods
manufacturing and goods trade will be rising in the period                          6                                                           6

ahead, contributing to higher inflation in prices of goods. Prices                  4                                                           4

of imported goods will show a relatively weak tendency in 2007                      2                                                           2

and 2008, in part because of an appreciating krona. The rate of                     0                                                           0

inflation for goods will be 0.6 percent in 2008 (see Diagram 120                    -2                                                          -2

and Table 26).                                                                      -4                                                          -4

                                                                                    -6                                                          -6

                                                                                    -8                                                          -8
                                                                                          95         97      99      01     03       05   07
Somewhat Faster Rise in Prices of Services                                                      Services
                                                                                                Hourly earning, service industries
                                                                                                Labour market gap
The rising rate of wage increases will contribute to accelerating
in prices of services as well. The reason for the relatively slow                   Note: Consumer prices are calculated excluding
                                                                                    changes in indirect taxes and subsidies. Hourly
increase in prices of services in recent years has been the slack                   earnings in service industries excluding real estate
                                                                                    and finance.
tendency of unit labour costs in service industries.                                Sources: Statistics Sweden and NIER.
    When resource utilization goes up, the rate of wage increases
                                                                                    Diagram 122 Prices of Energy
accelerates since there is greater competition for labour. As a                     Index 2000=100, quarterly values
consequence of this factor, together with the cyclical slowdown                     180                                                        180
in productivity growth, unit labour costs rise more rapidly. The
labour market situation and wage increases affect prices of                         160                                                        160

services with a certain time lag; for this reason, prices of services
                                                                                    140                                                        140
will be rising faster towards the end of the forecast period (see
Diagram 121). The rate of inflation in prices of services will                      120                                                        120
increase to 2.8 percent in 2008
    The dental care reform proposed by the Government will                          100                                                        100
reduce inflation in prices of services by about 0.6 percentage
point from October 2007 to September 2008. As a result, both                         80
                                                                                               00           02         04        06       08
                                                                                                                                               80

CPI and UND1X inflation will be more than 0.1 percentage                                            Energy, total
                                                                                                    Electricity and gas
point lower. 12                                                                                     Heating oil and fuel

                                                                                    Sources: Statistics Sweden and NIER.


Energy and Rents

Price increases in petroleum products and electricity have been                     Diagram 123 Rents
boosting inflation in the past year. The price of crude oil,                        Annual percentage change

however, is expected to recede from 70 dollars a barrel in May                      4                                                           4

to 54 dollars at the end of 2008. Prices of electricity are expected
                                                                                    3                                                           3
in the slightly longer run to increase by 2 percent per year,
excluding changes in taxes on specific products (see Diagram
                                                                                    2                                                           2
122). Increases in rents are expected to be less than normal in
2006 and 2007. In 2008, on the other hand, it is estimated that                     1                                                           1
rents will rise by about 3 percent because of rising interest rates
                                                                                    0                                                           0


12In the forecast it is assumed that the dental care reform will be considered in   -1
                                                                                          95         97      99      01     03       05   07
                                                                                                                                                -1
the inflation calculations by Statistics Sweden in the same manner as previous                  Rent
changes in the systems of health and dental care. See the decisions of the                      CPI
Board for the Consumer Price Index (Nämden för konsumentprisindex) from
                                                                                    Sources: Statistics Sweden and NIER.
2002 on.
70 Wages, Profits and Prices




                               and increasing costs in real estate management for the past
                               couple of years (see Diagram 123).
                                                                                                                                71




Public Finances                                                            Diagram 124 Revenue and Expenditure –
                                                                           General Government Sector
                                                                           Percent of GDP
General government net lending will be 2.8 percent of GDP in               70                                                    70
2006 (see Table 27). The high net lending will be due to
continued high tax revenue, but also to relatively low general
                                                                           65                                                    65
government expenditure (see Diagram 124). For example, a
more rigorous sick-listing process has helped to reduce
expenditure related to sickness by 0.3 percent of GDP                      60                                                    60

compared to 2004 (see Diagram 125).
   In the period ahead, net lending will decrease to 2.3 percent           55                                                    55
of GDP in 2008 (see Diagram 126). The main reason for the
decline will be that capital and business taxes will recede toward
                                                                           50                                                    50
more normal levels. The improved labour market and a further                     80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
                                                                                       Revenue
decrease in sickness will help to keep net lending strong in 2008.                     Expenditure
   It is estimated that net lending will average 2.1 percent of            Sources: Statistics Sweden and NIER.
GDP in 2000–2008, a period considered roughly equivalent to a
business cycle. The conclusion from the present forecast is that
the Government’s and Parliament’s target of a 2-percent average
                                                                           Diagram 125 Expenditure Related to Labour
surplus over a business cycle will be met. It is assumed in the            Market and to Sickness
forecast that there will be no new unfinanced increases in                 Percent of GDP
                                                                           4.0                                                   4.0
expenditure or reductions in taxes, and thus that substantial
budgeting margins will remain in both 2007 and 2008.                       3.5                                                   3.5

                                                                           3.0                                                   3.0

Table 27 Finances of the General Government Sector                         2.5                                                   2.5
Billions of SEK and percent of GDP
                                                                           2.0                                                   2.0
                                       2004    2005   2006   2007   2008
          1                                                                1.5                                                   1.5
Revenue                                1 426 1 505 1 564 1 629 1 689
Percent of GDP                          55.4  56.3  55.4  54.7  54.1       1.0                                                   1.0
Expenditure                            1 385 1 430 1 486 1 553 1 616
                                                                           0.5                                                   0.5
Percent of GDP                          53.8   53.5   52.6   52.1   51.7          93     95    97      99   01   03   05   07
Net lending                               41     74     78     76     73               Labour market
                                                                                       Sickness
Percent of GDP                           1.6    2.8    2.8    2.5    2.3
                                                                           Sources: Statistics Sweden and NIER.
1Including tax to EU.
Sources: Statistics Sweden and NIER.

                                                                           Diagram 126 Net Lending – General
Resource utilization is rising rapidly and is expected to be               Government Sector
somewhat strained after 2007. In this situation, as far as can             Percent of GDP

presently be seen, it will be inappropriate from an economic                5                                                    5

policy stand point to implement additional unfinanced
expenditure increases or tax cuts in 2006–2008. With net lending            0                                                    0
calculated to be somewhat higher than the target of 2 percent,
Sweden will be better prepared not only for the next economic
downturn, but also for the coming demographic trend where an                -5                                                   -5

increasing number of older persons will receive pensions as well
as health services and other forms of care. If fiscal policy is
more expansionary, the Riksbank will be expected to raise the              -10                                                   -10

repo rate faster than otherwise, dampening – and in the longer
run eliminating – the effects on growth and employment.                    -15                                                   -15
                                                                                 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
                                                                           Sources: Statistics Sweden and NIER.
72 Public Finances




Diagram 127 Difference Between Actual and                       Targets and Stance of Economic Policy
Cyclically Adjusted Net Lending
Percent of GDP
0.5                                                      0.5

                                                                General Government Net Lending in Line With the
0.0                                                      0.0    Two-Percent Target

-0.5                                                     -0.5   Target for the net lending of the general government sector: Net
                                                                lending is to average 2 percent of GDP over a business cycle.
-1.0                                                     -1.0

                                                                The period 2000–2008 is considered equivalent to a business
-1.5                                                     -1.5
                                                                cycle. For this period the net lending of the general government
                                                                sector is forecast to average 2.1 percent of GDP, thus meeting
-2.0                                                     -2.0
        00            02         04           06   08           the target for general government net lending. But this
             Composition effect
             Resource utilization                               assessment is sensitive to the choice of period covered. The
Source: NIER.
                                                                reason is that net lending was exceptionally high in 2000 but is
                                                                not expected to be equally high at any time in the next few years.
                                                                For the period 2001–2009, it is estimated that net lending will
                                                                average 1.8 percent of GDP.
Diagram 128 Actual and Cyclically Adjusted
Net Lending                                                        In addition to actual net lending, the NIER also calculates
Percent of GDP and percent of potential GDP                     cyclically adjusted net lending, or the net lending that would
5                                                         5
                                                                have resulted with balanced resource utilization and a normal
4                                                         4
                                                                composition of GDP.
                                                                   Cyclically adjusted net lending was 3.5 percent in 2005,
3                                                         3     considerably higher than actual net lending because of low
2                                                         2
                                                                resource utilization (see Table 28 and Diagram 127). Cyclically
                                                                adjusted net lending will be on a level with actual net lending this
1                                                         1     year, then lower than actual net lending in 2007 and 2008, after
                                                                the GDP and labour market gaps have turned positive (see
0                                                         0
                                                                Diagram 128). For these two years, cyclically adjusted net
-1
       00            02          04           06    08
                                                          -1    lending will average close to the 2-percent target.
            Actual net lending
            Cyclically adjusted net lending

Sources: Statistics Sweden and NIER.
                                                                Table 28 Cyclically Adjusted Net Lending
                                                                Percent of GDP, potential GDP and potential hours worked
                                                                                                       2004   2005   2006   2007   2008
                                                                Cyclically adjusted net lending         2.8    3.5    2.9    2.3    1.8
                                                                Effect of
                                                                 GDP gap                               –0.8   –0.9   –0.2    0.1    0.3
                                                                 Labour market gap                     –0.6   –0.6   –0.3    0.0    0.2
                                                                 Composition of GDP                    –0.2    0.3    0.4    0.1    0.1
                                                                 Nonrecurring effects                   0.5    0.4    0.0    0.0    0.0
                                                                Net lending                             1.6    2.8    2.8    2.5    2.3
                                                                Sources: Statistics Sweden and NIER.


                                                                The calculation of both cyclically adjusted net lending and the
                                                                fiscal policy indicator discussed below excludes the temporary
                                                                tax revenue arising in 2004 and 2005 from the nonrecurring
                                                                dissolution of the fiscal periodization funds of corporations
                                                                when interest was charged on them.
                                                                                                   Public Finances 73




Fiscal Policy Expansionary in 2006                                   Diagram 129 Fiscal Policy Alignment
                                                                     Percent of GDP
The stance of fiscal policy is measured by the so-called policy-     2                                                            2

dependent change in general government net lending (see Table
29 and Diagram 129). Fiscal policy was contractionary in 2004        1                                                            1

and 2005, but is expansionary this year. For 2007 and 2008,
                                                                     0                                                            0
fiscal policy is expected to be neutral under current rules.
                                                                     -1                                                           -1
Table 29 Stance of Fiscal Policy
Percent of GDP                                                       -2                                                           -2

                                  2004   2005   2006   2007   2008
                                                                     -3                                                           -3
Net lending, level                 1.6    2.8    2.8    2.5    2.3        00             02        04         06             08

Change, percentage points          1.8    1.2    0.0   –0.2   –0.2             Policy-dependent change in net lending
                                                                               Output gap
of which:
                                                                     Source: NIER.
 Policy-dependent change           1.5    1.1   –0.6    0.1    0.1
 Economy-dependent change         –0.3    0.2    1.0   –0.3   –0.3
 Change in nonrecurring effects    0.5   –0.1   –0.4    0.0    0.0
Sources: NIER.


In 2005 fiscal policy was contractionary by 1.1 percent of GDP.
One reason is that local government expenditure was curtailed
by continued efforts of local governments to consolidate their
finances in order to meet the balanced budget requirement. In
addition, central government consumption was held back by
limitations on the expenditure of central government authorities.
A third factor is that the more rigorous sick-listing process
curbed central government expenditure related to sickness.
    This year, by contrast, fiscal policy is expansionary. For
instance, the ceiling on compensated income has been raised in
the systems of health and parental insurance. Other
expansionary features are higher child allowances, the
introduction of Plus Jobs in government and lower taxes. Partly
offsetting these expansionary features, continued efforts toward
a stricter sick-listing process will further limit central
government expenditure on sickness.
                                                                     Diagram 130 Central Government Budgeting
                                                                     Margin
                                                                     Billions of SEK
                                                                     30                                                           30
Growing Margin up to the Expenditure Ceiling
                                                                     25                                                           25
Target for central government expenditure: Expenditure subject
to the ceilings on central government expenditure set by
                                                                     20                                                           20
Parliament is not to exceed those ceilings.

                                                                     15                                                           15
Expenditure subject to the ceiling will not exceed it in 2006–
2008 (see Diagram 130). For 2007 and 2008 the margin up to           10                                                           10
the expenditure ceiling will be equivalent to more than 2 percent
of the ceiling and thus satisfactory. The Budget Bill for 2006        5                                                           5

presents only an estimate of the margin in the economy for
central government expenditure and of the expenditure ceiling         0
                                                                          97        99        01     03      05         07
                                                                                                                                  0

for 2008. In the Budget Bill for 2007, the Government is             Sources: National Financial Management Authority
                                                                     and NIER.
expected to propose an expenditure ceiling for 2008.
74 Public Finances




Diagram 131 Expenditure Ceiling                                        Table 30 Ceiling on Central Government Expenditure
Proportion of GDP, percent
                                                                       Billions of SEK
38                                                                38
                                                                                                              2004   2005   2006    2007   2008
37                                                                37   Total expenditure subject to ceiling   856    864     896     930    956
                                                                       Ceiling on central government           858    870    907     949    982
36                                                                36   expenditure
                                                                       Margin up to expenditure ceiling          2      6     11      19     26
35                                                                35
                                                                       Sources: National Financial Management Authority and NIER.
34                                                                34


33                                                                33   Since GDP growth in 2006 and 2007 is now forecast to be
                                                                       higher than when the expenditure ceilings were set for those two
32                                                                32
                                                                       years, the ceilings will decrease in proportion to GDP (see
31                                                                31   Diagram 131).
      97         99        01    03         05         07
Note: For comparability over time, so-called
                                                                           The relatively modest increase in expenditure in the period
technical adjustments have been eliminated.                            2006–2008 will be due to lower expenditure for sickness; at the
Sources: National Financial Management Authority
and NIER.                                                              same time, declining unemployment will result in less
                                                                       expenditure for unemployment. An additional explanation for
Diagram 132 Sick–Listing Days
                                                                       the limited increase in expenditure is that the sharp increase in
Millions of days per year                                              labour market programmes in 2006 and 2007, including Plus
120                                                              120   Jobs and temporary trainee replacements, is reported in the form
110                                                              110   of reduced taxes on the revenue side of the central government
                                                                       budget, rather than as expenditure. In total, the level of
100                                                              100
                                                                       expenditure in the central government budget is lowered by
 90                                                              90    SEK 18, 12 and 8 billion, respectively, for 2006, 2007 and 2008.
 80                                                              80    If these reductions had instead taken the form of expenditure
                                                                       subject to the ceiling, the latter would be exceeded in 2006.
 70                                                              70

 60                                                              60

 50
      70    75        80    85   90    95        00    05
                                                                 50    Target of Cutting Sick-Listing in Half Will Not Be Met
           Total of waiting-period, sick-pay, sickness-benefit
           Target                                                      Target for sick-listing: The number of sick-listing days, including
Sources: National Social Insurance Board, Ministry                     waiting-period and sick-pay days, is not to exceed 56.5 million in
of Health and Social Affairs and NIER.
                                                                       2008, with the further restriction that the average number of
                                                                       approved new applications for sickness and activity
                                                                       compensation in 2003-2008 is not to exceed the level in 2002.
Diagram 133 New Approvals, Sickness and
Activity Compensations
Thousands                                                              The Government’s target for the number of sick-listing days in
80                                                                80   2008 will not be met, despite the sharp decrease so far.
                                                                          The total number of sick-listing days, or the sum of waiting-
70                                                                70
                                                                       period, sick-pay, and sickness-benefit days, has been going down
                                                                       since 2002 and will continue to do so during the forecast period,
60                                                                60
                                                                       though at a declining rate (see Diagram 132). From 2002 to
                                                                       2008, total sick-listing days will drop by 37 percent to 70 million.
                                                                       Sickness-benefit days, with compensation from the Social
50                                                                50
                                                                       Insurance Agency, will account for most of the decrease. A
                                                                       more rigorous sick-listing process has been contributing to this
40                                                                40
                                                                       trend. But the decline will slow down in 2007 and 2008, one
                                                                       reason being fewer transfers to sickness and activity
30
     71    76         81    86   91     96        01        06
                                                                  30   compensation (disability pensions) than in 2004 and 2005.
Note: Refers to new beneficiaries of sickness and                         A further reason why the target will not be met is that short-
activity compensations beginning in 2003.
Sources: National Social Insurance Board and
                                                                       term sick-listings, i. e. waiting-period days and days with sick-pay
NIER.
                                                                                                              Public Finances 75




from the employer, will not be increasing as much as the longer            Diagram 134 Net Income Excluding
periods of sick-listing, for which benefits are paid by the Social         Nonrecurring Revenues and Costs – Local
                                                                           Government
Insurance Agency. The average number of approved                           Billions of SEK
applications for sickness and activity compensation is estimated           16                                                        16

at 59 000 for 2003–2008, fewer than in 2002 (see Diagram 133).
                                                                           12                                                        12


                                                                            8                                                        8

Balanced Budget Requirement to Be Met by the                                4                                                        4
Local Government Subector
                                                                            0                                                        0
Target for municipalities and county council districts –
                                                                           -4                                                        -4
compliance with the balanced budget requirement: In the budget
for the coming calendar year, revenue is to exceed expenditure.            -8                                                        -8
                                                                                    00            02          04    06      08
Any deficit that nevertheless arises must be offset by an
                                                                                         Municipalities
equivalent surplus in the following three years.                                         County-council districts

                                                                           Sources: Statistics Sweden and NIER.
Results in the local government subsector improved strongly in
2005 from 2004 (see Diagram 134). Only 17 municipalities and 3
                                                                           Diagram 135 Municipalities – Result before
county council districts reported negative results last year (see          Nonrecurring Items, 2005
Diagrams 135 and 136), compared to nearly 100 municipalities               Millions of SEK
and 10 county council districts in 2004. An abnormally large               600                                                   600

increase in central government subsidies in 2005 explains much
of the revenue increase in the local government subsector.                 400                                                   400

    Both municipalities and county council districts are expected
                                                                           200                                                   200
in general to meet the balanced budget requirement in the next
few years. Results have gradually improved since the balanced                   0                                                0
budget requirement was introduced, and the proportion of
municipalities and county council districts reporting positive             -200                                                  -200
results has risen considerably.
                                                                           -400                                                  -400


                                                                           -600                                                  -600
Issues Relating to Taxes and Benefits                                               1 17                                   290
                                                                           Note: 17 out of 290 municipalities had deficits 2005.
                                                                           Source: Statistics Sweden.


Compensation Rate Barely 15 Percent for
                                                                           Diagram 136 County Council Districts – Result
Shifting from Unemployment to Work                                         before Nonrecurring Items, 2005
                                                                           Millions of SEK
The incentives to work can be measured in various ways. One                1200                                                  1200
measure is the so-called marginal compensation rate 13 , which is the
net share of an increase in labour costs received by a person who          1000                                                  1000

increases his/her labour input, after the increase in taxes and             800                                                  800
contributions and the decrease in benefits. The so-called
discretionary compensation rate is defined as the net share of the cost     600                                                  600

of labour received by person who shifts from unemployment to                400                                                  400
work. In both these measures, employer contributions, benefits,
indirect taxes and the like are taken into account.                         200                                                  200


                                                                                0                                                0


                                                                           -200                                               -200
                                                                                    1       3                               20
13In Special Study no. 9, May 2006, ”Marginell utbytesgrad – ett mått på
                                                                           Note: 3 out of 20 county council districts had deficits
drivkrafterna för arbete,” the NIER’s method of calculating the marginal   2005.
compensation rate is presented.                                            Source: The Swedish Association of Local
                                                                           Authorities and Regions.
76 Public Finances




                                                                  Table 31 Compensation Rates, 2006
                                                                  Percent
                                                                                                                                     Mean
                                                                  Marginal compensation rate                                             40.2
                                                                   Excl. employer contributions, indirect taxes                          58.6
                                                                   and changes in benefits
                                                                  Marginal effect (=100–58.6)                                            41.4
                                                                  of which: Income taxes                                                 39.1
                                                                            Benefits                                                      2.3
                                                                  Discretionary compensation rate                                        14.8
                                                                   Excl. employer contributions, indirect taxes                          21.5
                                                                   and changes in benefits
                                                                  Threshold effect (=100–21.5)                                           78.5
                                                                  of which: Income taxes                                                 13.5
                                                                            Benefits                                                     65.0
                                                                  Note: Calculations based on information about household income in 2004
                                                                  projected through 2006.
                                                                  Source: NIER.


Diagram 137 Social Welfare Recipients in                          The mean value of the marginal compensation rate for all
Different Systems, Ages 20–64
Thousands, full-year equivalents                                  working Swedes will be 40.2 percent this year (see Table 31).
500                                                        500    This means that an individual who increases his/her input of
                                                                  labour, generating an additional SEK 10 000 in labour costs, will
400                                                        400
                                                                  receive SEK 4 020 in compensation.
300                                                        300       The discretionary compensation rate for shifting from
                                                                  unemployment to work will be 14.8 percent 14 (see Table 31).
200                                                        200
                                                                  Thus, an unemployed individual who takes a job with an annual
100                                                        100    labour cost of SEK 300 000 will receive SEK 44 400 more per
                                                                  year, net, than if he/she had remained unemployed.
  0                                                        0
      90   92   94    96   98   00    02   04   06    08
           Sickness and rehabilitation allowances
           Disability pensions/sickness & activity compensation
           Unemployment compensation
           Labour-market programmes                               Fewer Supported by Social Welfare Benefits
           Income support payments

Sources: Statistics Sweden and NIER.                              The number of persons supported by social welfare benefits will
                                                                  drop by nearly 100 000 from 2005 to 2008 (see Table 32 and
                                                                  Diagram 137). The decrease is largely cyclical, as recipients of
                                                                  labour market compensation will account for 65 percent of it.
                                                                      The number of persons receiving sickness and rehabilitation
                                                                  allowances will decrease, partly because of stricter interpretation of
                                                                  the regulations for sickness insurance by the Social Insurance
                                                                  Agency. The strong increase in recipients of sickness and activity
                                                                  compensation will slacken, the principal reason being fewer
                                                                  approved applications for such compensation (see Diagram
                                                                  133). At the same time, there will be an increase in the number
                                                                  of reclassifications as old-age pensioners. In total, the number of
                                                                  persons receiving compensation for sickness will decrease by
                                                                  31000 from 2005 to 2008.
                                                                      The labour market brightened in 2005, and unemployment
                                                                  will decrease in 2006–2008. Because of expansion in labour
                                                                  market programmes, including Plus Jobs and temporary trainee

                                                                  14 This measure is the compensation rate weighted by the duration of

                                                                  unemployment.
                                                                                                               Public Finances 77




replacements, the total number receiving labour market benefits will
be down only marginally in 2006. Not until 2007 and 2008 will
the number decrease as the labour market improves.
   Similarly, the number of person living on income support will
increase in 2006 but decrease in 2007 and 2008 with a
brightening labour market.

Table 32 Persons Supported by Social Welfare Benefits
Full-year equivalents,1 persons aged 20–64, thousands
                                      2003 2004 2005 2006 2007 2008
Sickness                               668     660    652     635    625     621
of which: Sickness benefits            260     227    195     172    161     154
        and rehabilitation
        allowances
        Sickness and activity          408     433    457     463    464     467
        compensation (disability
        pensions)
Labour market benefits                 280     319    333     331    301     268
of which: Unemployment                 191     217    218     189    167     158
          compensation
          Labour market                  89    102    115     142    135     111
          programmes
Income support                          85    88    87    89    87            86
Total                                1 033 1 067 1 072 1 054 1 013           975
Change from preceding year               –3     34       5    –17    –41     –38
Percentage change                      –0.3    3.3     0.4   –1.6   –3.9    –3.7
1 A full-year equivalent equals one person who is supported with full benefits
for one full year. If two persons have been unemployed for a half-year each,
together they constitute one full-year equivalent. A full-year equivalent is thus a
statistical construction, and the number of full-year equivalents is calculated to
permit measuring the unutilized labour force in a way that is comparable over
time.
Sources: Statistics Sweden and NIER.




Revenue and Expenditure of the General
Government Sector
                                                                                      Diagram 138 Tax Ratio
                                                                                      Percent of GDP
Tax Ratio to Continue Decreasing                                                      54                                           54


The tax ratio, or taxes and contributions as a share of GDP, has                      53                                           53
diminished substantially since peaking in 2000 (see Diagram
138). The tax ratio will be 50.1 percent in 2006 and will continue                    52                                           52

dropping in the years ahead (see Table 33). The main reason for
the coming decline will be a decrease in capital and business                         51                                           51

taxes in proportion to GDP.
                                                                                      50                                           50


                                                                                      49                                           49


                                                                                      48                                           48
                                                                                           93   95   97   99   01   03   05   07
                                                                                      Sources: Statistics Sweden and NIER.
78 Public Finances




Diagram 139 Corporate Taxes                                          Table 33 Taxes and Contributions
Percent of GDP
                                                                     Percent of GDP
4.0                                                            4.0
                                                                                                                2004 2005 2006 2007 2008

3.5                                                            3.5
                                                                     Tax ratio                                  50.5   51.1    50.1   49.4   49.0
                                                                     of which:
                                                                                                            1
                                                                      Household taxes and contributions         16.5   16.5    16.1   15.7   15.6
3.0                                                            3.0
                                                                                              1
                                                                      Direct business taxes                      3.0     3.4    3.4    3.2    3.0
                                                                      Employer contributions                    13.8   13.8    13.1   13.1   13.1
2.5                                                            2.5
                                                                      Value added tax (VAT)                      9.3     9.5    9.4    9.4    9.4
                                                                      Other indirect taxes                       7.9     7.8    8.2    8.0    8.0
2.0                                                            2.0
                                                                     of which:
                                                                      EU taxes                                   0.3     0.3    0.2    0.3    0.2
1.5                                                            1.5
       93       95    97     99    01     03    05      07            Taxes of general government sector        50.2   50.8    49.8   49.1   48.8
             Corporate taxes                                            Central government                      28.2   29.0    28.1   27.5   27.2
             Corporate taxes excl. nonrecurring effects
                                                                        Local government                        16.3   16.2    16.1   16.0   16.0
Sources: Statistics Sweden and NIER.                                    Old-age pension system                   5.7     5.6    5.6    5.6    5.6
                                                                     1 Preliminary outcome in 2005 as calculated in the National Accounts.
                                                                     Sources: Statistics Sweden and NIER.

Diagram 140 Household Capital Gains and
Taxes                                                                Sharply rising business taxes contributed to a slightly higher tax
Percent of GDP
                                                                     ratio in 2004 and 2005. The increase was due both to changes in
6                                                               6
                                                                     rules and to greater business profits. Beginning in 2005, interest
5                                                               5    is charged on profits allocated by firms to periodization funds.
                                                                     As a result, allocations of previous years have been restored to
4                                                               4
                                                                     taxable income prematurely, and new allocations have decreased.
3                                                               3    For this reason, there was a very strong increase in business
                                                                     income taxes in 2004. Disregarding the effects of charging
2                                                               2
                                                                     interest on periodization funds, business taxes will be highest in
1                                                               1
                                                                     proportion to GDP in 2006 (see Diagram 139). In 2007 and
                                                                     2008, the proportion will decrease somewhat, partly as an effect
0
      93      95     97     99     01     03      05      07
                                                                0    of rising unit labour costs. Even so, business taxes will remain
            Net capital gains/capital losses                         above their historical average.
            Taxes on net capital gains/capital losses
                                                                         The stock market tendency in recent years has resulted in
Source: NIER.
                                                                     substantially higher tax revenue from capital gains (see Diagram
                                                                     140). This year these taxes will be equivalent to 1.2 percent of
                                                                     GDP, twice their level in 2002, a very weak year. In coming
Diagram 141 Expenditure – General                                    years, capital gains taxes are expected to drop back to their
Government Sector
Percent of GDP                                                       historical average of barely 1 percent of GDP.
70                                                             70


65                                                             65
                                                                     Expenditure Ratio Continuing to Decrease
60                                                             60    In 2005 the expenditure ratio, i. e. total general government
                                                                     expenditure in proportion to GDP, was the lowest in more than
55                                                             55
                                                                     25 years (see Table 34 and Diagram 141). The principal
                                                                     explanation for the decrease from 2004 to 2005 was lower
50                                                             50
                                                                     transfers to households in proportion to GDP. This year and
45                                                             45
                                                                     next year, the expenditure ratio will continue to go down.
      80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
             General government expenditure
             General government expenditure excl interest expend.

Sources: Statistics Sweden and NIER.
                                                                                                       Public Finances 79




Table 34 Expenditure of the General Government Sector
Percent of GDP
                                       2004   2005   2006   2007   2008
Expenditure                            53.8   53.5   52.6   52.1   51.7
General government consumption         27.4   27.2   26.9   26.8   26.7
General government investment           3.0    3.0    3.0    3.0    3.0
Transfers to households                18.7   18.3   17.8   17.2   16.8
Transfers to firms                      1.6    1.8    1.6    1.6    1.5
Transfers abroad                        1.4    1.5    1.6    1.6    1.6
Interest expenditure                    1.9    1.9    1.9    2.0    2.1
Sources: Statistics Sweden and NIER.


General government consumption accounts for more than half of
total general government expenditure (see Diagram 142). For
the last ten years, expenditure on general government
consumption as a share of GDP has averaged between 27 and
28 percent of GDP. Despite a relatively strong consumption
tendency in 2006–2008, the proportion will dip slightly below
                                                                          Diagram 142 Expenditure – General
27 percent with the faster growth in GDP.                                 Government Sector
    Transfers to firms increased in proportion to GDP in 2005,            Percent of GDP

primarily through payment of SEK 4.1 billion by the central               70                                                    70

government to compensate the Swedish State Power                          60                                                    60

Corporation (Vattenfall) for revocation of the operating permit           50                                                    50

of Reactor 2 at the Barsebäck nuclear power plant. This year the          40                                                    40
proportion will drop back to its level in 2004 and will decrease          30                                                    30
somewhat further in 2008.
                                                                          20                                                    20
    Transfers abroad will increase in relation to GDP in 2006.
The reason will be a higher contribution to the EU and                    10                                                    10

increasing expenditure on international assistance.                        0
                                                                               93     95    97    99    01    03      05   07
                                                                                                                                0

    Transfers to households account for over a third of general                     Transfer payments to households
                                                                                    General government consumption
government expenditure. Since 1993 transfers to households                          Other expenditure
have steadily decreased in proportion to GDP except for a                           Interest expenditure

minor increase in 2003 and 2004. In 2005 these transfers were             Sources: Statistics Sweden and NIER.

down by nearly one half of a percentage point in relation to
GDP (see table ). One reason for the decrease was that
expenditure related to old age, the labour market and sickness is
rising more slowly than GDP. In the period 2006–2008 the
proportion will drop further. Expenditure related to old age will
go down primarily because the guaranteed pension and the
survivor’s pension will be decreasing in proportion to GDP.
Expenditure related to the labour market will drop as
employment improves. Effective July 1, the income ceiling in the
health insurance system will be raised from SEK 24 800 to SEK
33 100 per month, at an estimated annual cost of almost a half
billion SEK in 2006 and 1 billion from 2007 on. Despite the
higher income ceiling, however, expenditure for sickness will
decrease in proportion to GDP because of fewer sick-listing
days (see the section ”Targets and Stance of Economic Policy”).
By contrast, transfer payments related to children and study will
increase this year in proportion to GDP. Part of the explanation
is that the child allowance was raised by SEK 100 per child and
80 Public Finances




                     month in October last year, increasing the cost of the child
                     allowance by SEK 2.4 billion in 2006. Also contributing to the
                     higher cost will be the increase in the minimum compensation in
                     the parental insurance system from SEK 60 to 180 per day, as
                     well as in the maximum monthly income compensated from
                     SEK 24 800 to 33 100. These changed provisions will increase
                     parental insurance expenditure by one half billion SEK in 2006
                     and by an additional one half billion in 2007. Although transfers
                     related to children and study will be higher in 2007 and 2008 as
                     well, they will decrease in proportion to GDP, which will be
                     growing faster.

                     Table 35 General Government Transfer Payments to
                     Households
                     Percent of GDP
                                                            2004    2005    2006     2007    2008
                     Transfers to households                 18.7    18.3    17.8     17.2    16.8
                     Old age                                  8.9     8.7      8.4     8.3     8.3
                     Labour market                            1.7     1.6      1.5     1.3     1.1
                     Sickness                                 3.6     3.5      3.3     3.1     3.0
                     Handicap                                 0.9     0.9      0.9     0.9     0.9
                     Children/study                           2.3     2.3      2.4     2.3     2.3
                     Income support                           0.4     0.4      0.4     0.4     0.3
                     Other                                    0.9     0.9      0.9     0.9     0.9
                     Note: Old age = persons receiving old-age pensions, guaranteed pensions,
                     negotiated pensions and housing allowances to pensioners. Labour market =
                     unemployment compensation, benefits from labour-market programmes and
                     the wage guarantee. Sickness = sickness and rehabilitation allowances, sickness
                     and activity compensation and as from January 1, 2005, housing supplements
                     to persons receiving such compensation. Handicap = occupational-injury,
                     assistance allowances etc. Children/study = child allowances, parental
                     insurance, maintenance support and study allowances.
                     Sources: Statistics Sweden and NIER.




                     Finances in Subsectors of General
                     Government


                     High Net Lending in All Subsectors Except Central
                     Government

                     The net lending of the general government sector continued to
                     strengthen in 2005 (see Table 36). There was improvement in
                     central government as well as municipal and county council
                     finances, while the surplus in the old-age pension system
                     remained at a high level.
                         From in 2006 on, means will be transferred from the central
                     government to the Premium Pension Authority (PPM) after one
                     year rather than two as before. The change will result in an
                     additional transfer in 2006 that will bring central government net
                     lending down to –0.7 percent of GDP in 2006, while raising the
                     net lending of the old-age pension system to 2.7 percent of
                                                                                                             Public Finances 81




GDP. Thereafter, net lending in the two sectors will return to                  Diagram 143 Central Government Budget
normal levels as the transfer will again take place once a year.                Balance and Net Lending
                                                                                Billions of SEK
                                                                                200                                           200


                                                                                150                                           150
Table 36 Net Lending in Subsectors
Percent of GDP                                                                  100                                           100

                                        2004    2005    2006    2007     2008
                                                                                 50                                           50
General government sector                 1.6     2.8     2.8     2.5     2.3
 Central government                      –0.5     0.4    –0.7     0.0     0.0      0                                          0

 Old-age pension system                   1.9     1.9     2.7     1.8     1.7
                                                                                 -50                                          -50
 Municipalities                           0.0     0.2     0.4     0.3     0.2
 County council districts                 0.1     0.3     0.3     0.4     0.4
                                                                                -100                                          -100
                                                                                       97      99      01    03   05    07
Source: NIER.
                                                                                            Budget balance
                                                                                            Net lending

                                                                                Sources: National Debt Office, Statistics Sweden
                                                                                and NIER.
Central Government Finances to Weaken

The underlying net lending of the central government was
relatively high in 2005 and will be in 2006 because of high
revenue from capital and business taxes, and in 2006 also
because of high dividends on shares in government-owned
companies. However, both actual net lending and the budget
balance 15 will temporarily deteriorate in 2006 with the extra
disbursement of SEK 25 billion from the central government to
the PPM (see Table 37 and Diagram 143).




15 The budget balance is equal to borrowing requirements, but with the

opposite sign.
82 Public Finances




                                                            Table 37 Central Government Net Lending and Budget
                                                            Balance
                                                            Billions of SEK, percent of GDP
                                                                                                 2004     2005    2006      2007    2008
                                                            Net lending                            –12      10     –19         1       0
                                                            Percent of GDP                        –0.5      0.4    –0.7       0.0     0.0
                                                            Adjustments
                                                             Privatization of corporations           0        6       0        0       0
                                                             Transfer from National                  4        2       0        0       0
                                                             Pension Fund
                                                             Lending, repayment, net               –10      –5      –3        –4      –5
                                                             Foreign-exchange and debt-            –19        3    –12        –4       0
                                                             service losses/gains
                                                             Interperiod adjustments               –22     –12      17       –12     –13
                                                             Other adjustments                       8      10        9        9      11
                                                            Budget balance                         –51      14      –8       –11      –7
                                                            Percent of GDP                        –2.0      0.5    –0.3      –0.4    –0.2
                                                            Change in value, other                 23      –64      24          5       0
                                                            Central government debt, change         28      49     –16         6       7
Diagram 144 Government Debt                                 Central government debt              1 213   1 262    1 246     1 252   1 259
Percent of GDP and billions of SEK                          (consolidated)
100                                                  1500   Percent of GDP                        47.1    47.2     44.1      42.0    40.3
                                                            Maastricht debt                      1 301   1 346    1 252     1 249   1 245
 80                                                  1200   Percent of GDP                        50.6    50.3     44.3      41.9    39.8
                                                            Note: New definition of central-government debt as from 2003.
 60                                                  900    Sources: Statistics Sweden, National Debt Office and NIER.

 40                                                  600
                                                            For 2007 underlying net lending will deteriorate as expenditure
                                                            will rise more than revenue. In 2008 the increases in revenue and
 20                                                  300
                                                            expenditure will be roughly equal, and net lending will be
  0                                                  0
                                                            unchanged.
      80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
          Percent of GDP
                                                                Central government debt will be marginally higher in 2007–
          Billions of SEK (right)                           2008 but will continue to diminish in relation to GDP. In 2008
Sources: Statistics Sweden and NIER.                        the proportion will be 40.3 percent, the lowest since 1980 (see
                                                            Diagram 144).


                                                            Net Lending of the Old-Age Pension System to
                                                            Decrease in the Period Ahead

                                                            In recent years, the net lending of the old-age pension system
                                                            has remained relatively stable at just below 2 percent of GDP.
                                                                This year an additional payment will be received by the PPM,
                                                            resulting in temporarily high net lending. In 2007 and 2008 net
                                                            lending will go down as pension disbursements increase more
                                                            strongly with the rising number of pensioners.
                                                                                                                     Public Finances 83




Table 38 Net Lending, Old Age Pension System Including
the PPM
Billions of SEK, percent of GDP
                                          2004    2005    2006    2007     2008
Revenue                                    217     223     258      245       257
Percent of GDP                              8.4     8.3     9.1      8.3       8.2
 Social security contributions             174     178     184      192       200
     Premium pension moneys                 22       23      49      27        28
     Return on capital                      21       22      23      26        29
Expenditure                                169     173     180      191       203
Percent of GDP                              6.5     6.5     6.4      6.4       6.5
 Pensions                                  163     169     176      186       198
     Other                                    5       4       4       4         4
Net lending                                 49       50      77      55        54
Percent of GDP                              1.9     1.9     2.7     1.8       1.7
 National Pension Funds                     0.9     0.9     0.9     0.8       0.7
     PPM                                    1.0     1.0     1.8     1.0       1.0
Sources: Statistics Sweden and NIER.


The EU’s bureau of statistics, Eurostat, has made a policy
decision that funded defined-contribution pension systems with
a substantial element of individual choice are not to be classified
in the National Accounts as part of the general government
sector. Beginning in 2007 16 the net lending of the PPM will
therefore be included in the saving/net lending of the household
sector, and the accounts will be adjusted for the period after
2004. With this change, the reported net lending of the general
government sector, aside from nonrecurring effects, will be
revised downward by about 1 percentage point (see Table 38).


Healthy Municipal Finances

The positive net lending of municipalities last year is explainable
by higher revenue from taxes and central government subsidies,
together with relatively cautious increases in expenditure.
    The net lending of municipalities will remain high in the                        Diagram 145 Net Lending – Local Government
                                                                                     Percent of GDP
period ahead (see Diagram 145). Particularly in 2006, central
                                                                                     0.6                                                   0.6
government subsidies will be unusually large, and expenditure
will decrease in proportion to GDP. Net lending will remain at a                     0.4                                                   0.4
relatively high level in 2007 and 2008 as well. Compared to 2006,
however, net lending will be somewhat less because of a more                         0.2                                                   0.2
modest increase in central government subsidies.
                                                                                     0.0                                                   0.0


                                                                                     -0.2                                                  -0.2
Strong Net Lending in County Council Districts

In 2004, the net lending of county council districts turned                          -0.4
                                                                                            93    95     97     99    01    03   05   07
                                                                                                                                           -0.4

positive for the first time since 1998, and in 2005 it improved                                  Municipalities
                                                                                                 County council districts
further (see Diagram 145). In 2006–2008 the net lending of
                                                                                     Sources: Statistics Sweden and NIER.


16   In this forecast the PPM is included in the general government sector.
84 Public Finances




                     county council districts will continue to increase since revenue
                     will be rising faster than expenditure. Thus, net lending in total
                     will attain a high level in 2007 and 2008.
                85




Comparison of
Forecasts
86 Comparison of Forecast




                            In this chapter, the new forecast is compared with the forecast
                            published by the NIER in March 2006. The purpose is to
                            highlight the principal changes in the forecast and generally to
                            explain the reasons for the revisions made.



                            The International Tendency
                            The view of the international economic tendency presented in
                            the March report remains essentially the same. Global growth is
                            still strong while also broadening geographically. The new
                            information since the March report suggests that the world
                            economy has even been expanding somewhat more vigorously
                            than expected. Most surprising have been the data on countries
                            outside the OECD area. For example, growth in China and
                            elsewhere in Asia continues to be very high. But in central and
                            eastern Europe as well, GDP has been rising at an unexpectedly
                            rapid pace. Russia is benefiting from conditions that include
                            high oil prices. In the next few years, growth in these regions is
                            expected to be higher than was assumed in the March report. All
                            factors considered, global GDP growth has been revised upward
                            by 0.4 percentage point for this year and by 0.2 percentage point
                            for next year (see Table 1). For the OECD area, by contrast,
                            GDP growth has been lowered somewhat for 2007 on account
                            of an upward revision in the price of oil.


                            Higher Oil Prices

                            Oil prices have been higher than expected this spring. The price
                            of oil averaged approximately 70 dollars a barrel in May,
                            considerably above the forecast in the March report. The
                            upsurge in the price of oil has been due in part to political unrest
                            in Iran and Nigeria, both major oil-producing countries. But as
                            in the March forecast, oil prices are expected to recede during
                            the forecast period. The price of oil is anticipated to drop to 60
                            dollars a barrel by the end of 2007, an upward revision of the
                            previous estimate by 10 dollars a barrel (see Table 1). The main
                            reason for the upward adjustment is intensified political unrest
                            in major producer countries, which is expected to continue for
                            the next few years.


                            Continued Healthy Growth in the United States

                            The US economy strengthened further in the first quarter of this
                            year. The rapid growth was due, among other things, to surging
                            household consumption expenditure and gross fixed capital
                            formation. Indicators for the second quarter, however, suggest
                            that GDP growth will slacken after the very strong first quarter.
                            But after such a positive start, GDP growth for this year has
                                                                                 Comparison of Forecast 87




been revised upward slightly from the March report (see Table
1). Inflationary pressure has mounted as the economy has begun
to show signs of strained resource utilization. In addition, the
unexpectedly high oil and energy prices this spring have
contributed to a higher inflation rate than previously forecast.
To counter these inflationary tendencies, the Fed is expected to
raise interest rates somewhat more than was forecast in the
March report. GDP growth in 2007 has therefore been revised
downward slightly (see Table 1).

Table 1 Current Forecasts for Other Countries Compared
to the Forecast in March 2006
Annual percentage change unless otherwise indicated
                                     2006                    2007
                             June –06   Difference   June –06   Difference
GDP
  United States                3.5          0.1        3.1        –0.1
  Japan                        2.9         –0.1        2.3        –0.1
                         1
  Nordic region                2.9         –0.1        2.5         0.2
  Euro zone                    2.1          0.1        2.0        –0.1
    Germany                    1.7          0.2        1.6        –0.1
    France                     2.0          0.0        2.1        –0.1
  United Kingdom               2.4          0.2        2.7         0.1
  New EU                       5.0          0.4        4.9         0.2
  countries
  OECD                         3.1          0.0        2.8        –0.1
  China                        9.6          0.6        9.0         0.3
  World                        4.9          0.4        4.6         0.2

Federal funds                  5.50        0.25        5.25       0.25
            2
target rate
                     3
ECB’s refi rate                3.00        0.25        3.50       0.25
               2,3
Dollar/Euro                    1.28        0.07        1.30       0.07
           3,4
Price of oil                    66           10         60          10
1 Nordic countries except Sweden. Percent at year-end.
                                       2
3 Levelat year-end. 4 Dollars per barrel.
Note: The difference is between the current forecast and the forecast in March
2006. A positive value denotes an upward revision.
Sources: OECD and NIER.



Sluggish Recovery in the Euro Zone

The short-term outlook for the euro zone is relatively bright.
Consumer confidence has risen, the labour market is still
gradually improving and most indices based on surveys of firms
have gone up during the year. Not least in Germany, firms and
households are optimistic. The March forecast for GDP has
therefore been revised upward somewhat for 2006, but has been
adjusted downward slightly for 2007, primarily because of higher
prices of energy and primary products (see Table 1).
88 Comparison of Forecast




                            The Tendency in Sweden
                            The picture of the Swedish economy is also much the same as in
                            the March report. Information received in recent months
                            corroborates the impression of a continued favourable tendency.
                            Monetary conditions are expansionary, profits of firms are high
                            and both general government revenue and household income
                            are surging. Moreover, international demand is showing robust
                            growth. These conditions are fuelling demand in Sweden, which
                            is expected to rise rapidly in the forecast period. Compared with
                            the March report, GDP growth has been revised marginally
                            upward for 2006 because of somewhat higher exports and
                            investment (see Table 2).


                            Higher Exports Despite a Stronger Krona

                            International demand is still surging, providing favourable
                            conditions for growth in exports despite the somewhat
                            inhibiting effect of an appreciating krona. Moreover, investment
                            will continue to lead the development of the international
                            economy, benefiting Swedish exports. In the first quarter of this
                            year, exports were up by a full 2.3 percent, more than was
                            estimated in the March report. This buoyancy is confirmed by
                            various indicators. In the latest Business Tendency Survey, for
                            instance, a majority of manufacturing firms reported a further
                            increase in new orders for exports. Growth in exports has
                            therefore been raised by 0.2 percentage point for this year.
                                Imports have been revised downward rather substantially for
                            2006. The main reasons for the adjustment are an unexpectedly
                            slack tendency in household consumption and depletion of
                            certain inventories with high import content. For 2007,
                            however, imports have been revised upward somewhat because
                            of a stronger krona that will tend to boost imports. As a
                            consequence of these changes, the surplus in the current account
                            will be considerably larger in 2006 and 2007 than was anticipated
                            in the March report (see Table 2).


                            Continued Surge in Investment

                            Gross fixed capital formation was up by 8.5 percent in 2005.
                            This year as well, investment will show a robust increase, driven
                            by rapidly rising demand, high capacity utilization, healthy
                            business profits and low interest rates. However, the growth of
                            investment will be restrained slightly in the period ahead by
                            rising interest rates and further additions to capacity. Compared
                            to the March report, there has been a marginal upward revision
                            in investment, partly because of higher housing investment (see
                            Table 2).
                                                                       Comparison of Forecast 89




Household Consumption Revised Downward

During the first quarter of this year, consumption showed a
much weaker tendency than was anticipated in the March report.
But there is strong evidence that consumption will rise relatively
rapidly in the period ahead. The Consumer Confidence
Indicator is at its highest level since 2000, and incomes are
increasing strongly. Consumption is being encouraged by the
more favourable tendency on the labour market, which is
contributing to consumer optimism about the future. And
increasing retail sales indicate that household consumption is in
fact beginning to pick up. For these reasons, consumption is
expected to accelerate again in the second quarter. But because
of the shaky start, growth in consumption for the year as a
whole will be limited to 2.8 percent, a downward revision by 0.5
percentage point from the March report.
    In summary, the combination of stronger growth in
investment and exports and a weaker tendency in consumption
and imports will result in marginally higher GDP growth in 2006
compared to the forecast in March (see Table 2).


Higher Unemployment Rate with Larger Labour
Force

It is now evident that the labour market has passed a turning
point. Both hours worked and employment began rising in 2005
after several years of decline. This year the number employed
has continued increasing, and according to the Labour Force
Surveys employment was up by 0.4 percent in the first quarter of
this year compared with the fourth quarter last year. The latest
indicators for the labour market are also positive. For example,
the Business Tendency Survey shows that hiring plans remain
optimistic, particularly in the construction and service industries.
In addition, the number of job openings is still surging and is
now as high as in early 2000. The recent tendency thus validates
the assessment in the March forecast that employment would
continue to rise at a healthy rate in the next few years.
Consequently, there is no change from March in the
employment forecast for either 2006 or 2007. Unemployment,
however, has been revised upward by 0.2 percentage point for
both 2006 and 2007 (see Table 2). One reason is that the labour
force has grown more than was expected in March, with a
downward adjustment in the number of students and the
number of sick persons outside the labour force, for example.


Lower Resource Utilization and Inflationary Pressure

Resource utilization on the labour market has been low in recent
years. According to several indicators, however, the labour
market has improved and resource utilization has risen. The
90 Comparison of Forecast




                            Business Tendency Survey reports that labour shortages in the
                            business sector have been increasing recently, although the
                            percentage of firms reporting shortages is still low – a sign of
                            ample spare resources on the labour market as a whole. But with
                            strong growth in employment in the next few years, resource
                            utilization will rise successively during the forecast period. The
                            labour market gap is therefore expected to average 0.1 percent in
                            2007, a downward revision of the March forecast by 0.3
                            percentage point. The reason for this change is that the potential
                            labour force has been raised by 0.3 percent, with a consequent
                            upward revision of 0.3 percent in potential employment and
                            potential hours worked in 2007 (see Table 2). However, the
                            GDP gap has been lowered by only 0.2 percentage point for
                            2007, as productivity and the productivity gap have been
                            adjusted upward by 0.1 percentage point for 2007.
                                The downward revision of the March estimate for the labour
                            market gap means somewhat lower wage and inflation pressure
                            (see Table 2). A stronger krona compared to the assessment in
                            March will also tend to dampen inflation. All factors considered,
                            UND1X inflation is forecast to rise to 1.4 percent in 2007, a
                            downward revision of 0.1 percentage point from the March
                            report.
                                In light of the somewhat smaller labour market gap and
                            lower inflationary pressure than previously forecast, the NIER
                            recommends a slightly more expansionary monetary policy in
                            2007 compared to the March report (see Table 2).


                            General Government Net Lending Higher This Year
                            but Lower in 2007

                            The revenue of the general government sector in the March
                            forecast has been revised upward for 2006. The main reason is
                            higher revenue from capital and business taxes. At the same
                            time, the forecast for general government expenditure is lower
                            than in the March report. Both general government
                            consumption and central government investment, for example,
                            have been revised downward. All factors considered, the
                            combined effect of the higher revenue and the lower
                            expenditure is an upward revision of general government net
                            lending in 2006 by 0.3 percentage point compared to the March
                            report (see Table 2).
                               For 2007, on the other hand, revenue has been revised
                            downward. One reason is a weaker tendency in major tax bases
                            than was forecast in the March report; both household
                            consumption and earnings are somewhat lower, for example. At
                            the same time, general government expenditure will be slightly
                            higher, partly because of higher interest expenditure. Therefore,
                            the March forecast for general government net lending has been
                            revised downward somewhat for 2007 (see Table 2).
                                                                                  Comparison of Forecast 91




Table 2 Current Forecast for Sweden Compared With the
Forecast in March 2006.
Annual percentage change unless otherwise indicated
                                               2006                2007
                                        June –06 Difference June –06 Difference
Key numbers
CPI, annual average                       1.4        0.0       2.1        0.0
UND1X, annual average                     1.3        0.0       1.4       –0.1
Hourly earnings                           3.4       –0.1       3.8       –0.2
            1
Repo rate                                 2.25      0.00      3.50      –0.25
Interest rate on 10-year                  4.2        0.1       4.6        0.0
                    1
government bonds
                2
TCW index                                126.4      –3.4     125.9       –3.1
Employment                                1.7        0.0       1.2        0.0
                                3
Unemployment rate                         5.1        0.2       4.5        0.2
                            4
Current account                           6.6        0.5       6.7        0.4
General government net                    2.8        0.3       2.5       –0.4
        4
lending

Supply and demand
GDP                                       3.8        0.1       3.2        0.0
Household consumption                     2.8       –0.5       3.5        0.0
General government                        1.6        0.0       1.3        0.2
consumption
Gross fixed capital formation             7.3        0.3       4.9        0.2
                    5
Stockbuilding                             0.0       –0.2       0.0        0.0
Exports                                   8.2        0.2       6.7        0.0
Imports                                   7.8       –1.2       7.2        0.3

Resource utilization
                                    6
Potential hours worked                    0.4        0.4       0.2        0.3
                                6
Actual hours worked                       1.7        0.1       1.4        0.0
                                7
Labour market gap                         –1.0       0.0       0.1       –0.3
                        6
Potential GDP                             2.7        0.3       2.6        0.3
                6
Actual GDP                                4.1        0.1       3.3        0.0
          8
GDP gap                                   –0.4       0.1       0.3       –0.2
1 Percent at year end. 2 Level at year end. 3 Percent of labour force.
4 Percent of GDP.5 Change in percent of GDP for the previous year.
6 Calendar-adjusted. 7 Deviation of actual hours worked from potential hours

worked. 8 Deviation of GDP from potential GDP.
Note: the difference is between the current forecast and the forecast in March
2006. A positive value indicates an upward revision.
Source: NIER.

								
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