The crisis in the housing sector, together with falling employment and weaker growth in real wages meant that I found it hard to believe that the US economy would turn upwards as quickly as assumed in the forecast. Moreover, the forecast for global growth assumed that there would not be any substantial slowdown in economic activity in the emerging economies. However, my assessment was that growth would also weaken there. The rises in energy and food prices entail cost increases and reduce purchasing power in these countries too. I also pointed out the rapid slowdown in the growth rate in the euro area. All in all, I considered there were risks that economic activity abroad would weaken more than was forecast in the September Update. In Sweden, there were clear signs of an economic downturn as early as the monetary policy meeting in July. In September we could see that growth in the second quarter had slowed  6  BIS Review 119/2008  down much sooner than expected. The situation in the Swedish labour market remained strong, but even here there were indicators, such as labour shortages, the number of job vacancies and redundancies, pointing to a cooling down. Productivity and inflation Productivity in Sweden has been weak since the beginning of last year. This means that unit labour costs as measured in the National Accounts are increasing more quickly. There is thus a risk that companies will try to pass on their cost increases to consumers, which would result in higher inflation.
During decades of spectacular growth, total factor productivity or TFP rose only modestly. Overtime, Thailand’s inability to further move up the quality ladder, after it graduated from a low-labor-cost production- base status, gradually led to the erosion of our export competitiveness. In relation to the attitude towards risk, Thailand’s use of leverage, being among the highest in Asia, put the country in a vulnerable position to potential adverse shocks. When the crisis hit in 1997, many companies thus found themselves in desperate straits to service their debt, eventually leading up to a major collapse of the real economy. While these weaknesses have been and are being addressed since the crisis, these measures take time to become fully effective. In the meantime, these shortcomings have been accentuated by the recent change in global competitive landscape brought about by China’s WTO accession. Thailand, like many other countries, will need to reposition itself quickly to meet this new global challenge. Stepping beyond the realm of the real sector, another expensive lesson learnt during the crisis is that the world financial markets have become extremely slippery. As today’s financial world becomes increasingly interconnected, disturbances in one market can quickly spread to others with devastating results. These merciless and indiscriminating financial storms therefore need to be guarded against around the clock, with an early warning system developed to help protect all those involved. Looking back over the past ten years, the Thai financial sector has changed considerably.