Lars Nyberg: Economic slowdown - but how soon and how severe? Speech by Mr Lars Nyberg, Deputy Governor of the Sveriges Riksbank, to Danske Securities, Stockholm, 2 May 2001. *  *  *  I would like to begin by thanking you for the invitation to speak about economic developments in Sweden and the world around us. We economists usually begin and end by covering ourselves and pointing out that the situation is uncertain and that assessments can vary. However, this seems a more relevant approach than normal right now. A lot has happened in recent months and there are some important pieces missing from the economic puzzle. When in December we raised the repo rate by a quarter of a percentage point, to 4 per cent, we saw signs of an incipient overheating in the Swedish economy. We were approaching the production ceiling in a situation where a number of sensitive wage negotiations were under way and we assessed that the krona could remain weak for some time longer, which would give extra stimulation to export demand. Although we saw signs of a slowdown, particularly in the American economy, the likelihood of this slowdown having a serious effect on the Swedish economy over the next few months seemed limited. The overall assessment was that the Swedish economy needed some easing up on the throttle to move down into a lower gear. Today, just over four months later, the picture looks rather different in several important aspects.
This is because a given basket of goods today costs considerably more if bought in Europe or the USA using exchanged euro or dollars than if bought in Sweden. Sometimes they talk about "hamburger parity" as a simple illustration of this concept, i.e. compare what a certain well-known hamburger costs in different countries. And this brings us to the fact that the krona should be valued approximately ten per cent higher in order to buy the same hamburger here as in the USA. More complicated calculations of the balanced real exchange rate provide similar results, perhaps even slightly more than ten per cent. The Riksbank's forecast of the path of the krona shows a similar development. Now we in Sweden are not alone in having seen our currency weaken; other industrial nations with a floating exchange rate are seeing the same thing, e.g. Canada, Australia and New Zealand. This is probably due to the unease on the financial markets during the spring, as times of trouble often entail capital moving away from the less liquid currencies and fleeing to those perceived as more stable and liquid, primarily the US dollar. On top of this comes the development on the Swedish stock exchange, which appears to have played a major role recently. The foreign exchange market and the stock exchanges have been strongly correlated for a period of time, particularly since the stock exchange fell. Since mid-2000, 85 per cent of the variations in the -SEK/EUR exchange rate can be explained by variations in share prices.