Research indicates that a fall on the stock market affects household confidence relatively quickly, that is already after two to four weeks.5 The indicator of Swedish consumer confidence in the economy published by the National Institute for Economic Research tends to fall when the Stockholm stock exchange falls (see Figure 6). There may therefore be good reasons for believing that the recent falls on the stock markets of the world are one of the reasons why the Swedish households have become more cautious and are expected to increasing their saving. Financial turbulence has also led the companies to lower their expectations regarding the period ahead and to begin to postpone investments. All in all this has a dampening effect on economic activity in Sweden. High sovereign debts abroad affect Sweden As we have noted, the level of debt is high in the euro area and the United States. Following many years of budget deficit, what were in many cases already weak public finances were further undermined in connection with the financial crisis of 2008–2009. In 2009, the average budget deficit in the euro area amounted to 6.4 per cent of GDP. This figure fell to 6 per cent  5  See for example Jansen and Nahuis, 2003; Kremer and Westerman, 2004; and Beckmann, Belke and Kuhl, 2011. BIS central bankers’ speeches  7  in 2010 and is expected to be 4.4 per cent in 2011.
We can expect the tightening measures to have a restraining effect on growth over the next few years.1 In a situation where it seems that growth is anyway slowing down this is of course unfortunate. Nevertheless, tightening measures are necessary to reduce concern and increase confidence on the financial markets. However, not everything is gloomy in the global economy. It is expected that growth in Asia and Latin America will remain high, even though it may be dampened by the slowdown in the United States and Europe. It is difficult to assess exactly how much the emerging economies in Asia and Latin America will be affected by the slowdown in the western world. This depends in part on to what extent they manage to reduce their dependence on exports to maintain a high rate of growth. A major challenge for many of these countries is to move from primarily export-driven growth to growth driven more by domestic consumption. How does this affect the Swedish economy? How do these economic developments affect resource utilisation and inflation in a small open economy like Sweden? Their impact will be through two main channels: through trade links with the rest of the world, that is via imports and exports of goods and services, and through the globally-integrated financial markets. Let me begin by discussing the role of the trade channel. 1  According to the theory of expansionary fiscal contractions, an extensive budget consolidation programme can have a positive effect on growth.