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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: email@example.com 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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