would the economic downturn take on the shape of a U? Or would the USA simply experience a recession in the backwater of the burst IT bubble? At the Riksbank we were discussing a “banana-shaped” development from an early state, which could best be interpreted as a very long drawn out U. And even in the USA, the assessments had already changed from V to U even before the catastrophe and there was talk here and there of the possibility of a recession. The positive figures expected with regard to consumption and investment had largely failed to materialise, despite interest rate reductions and tax relief, while unemployment had increased and consumers found it more difficult to pay their debts. Nor had the stock exchange shown the upturn expected by many. Of course, the tragic events in the USA will have a severe dampening effect on the business cycle, at least in the short term. A number of central banks, headed by the Federal Reserve, have therefore lowered their steering interest rates. The Executive Board of the Riksbank also decided last week to lower the repo rate by 0.5 percentage points from 4.25 per cent to 3.75 per cent. Subdued inflationary pressure as a result of lower resource utilisation both in Sweden and abroad was judged to overshadow any price increases caused by the continuing weak krona. We stated in the press release that “the uncertainty occasioned by last week’s act of terrorism creates the risk of a further dampening of global demand.
We have chosen to use fundamental analysis as a basis but to also weigh in as far as possible the effects of other factors. This means that our assessments assume that the krona will appreciate in the long term, which it has so far stubbornly refused to do. Nevertheless, the consequences of these “misforecasts” have not been so great. During the period we have had a floating exchange rate, fluctuations in the krona rate have not had as large an impact on inflation as before, which we have taken into account when making inflation assessment. This means that monetary policy has not been affected to any great extent by the fact that the krona has not developed as expected. What does the future hold in store? The prospects for the US economy played a decisive role in the assessment of Swedish growth and inflation even before the terrorist attack a couple of weeks ago. One important factor was whether there was actually grounds for the optimistic expectations of future growth that characterised the economy and that had previously pushed up investment and share prices. Was the economic downturn in the shape of a V, i.e. would it soon be over? There can scarcely be any doubt that developments in information technology had created and are still creating growth potential that is far from exhausted. Or would it take longer time to grow into the overinvestment that occurred when the “new economy” appeared to be a fact, i.e.