Prospects for both the euro area and the Japanese economy seem to have worsened, if anything, at least for the coming year. In the euro area it is manufacturing which has weakened in particular, while consumption still seems to be following a relatively favourable path. Developments in the United States are still fairly strong but some slowdown is still foreseen. The situation in Brazil in recent days has created some renewed unrest in international financial markets, with a limited flight to safe assets. This, too, may affect future international activity, though the turbulence in the wake of the falling real seems, if anything, to have been less than expected. The economic statistics for Sweden suggest that industrial activity may go on weakening. The picture of total resource utilisation is still difficult to assess but there is much to suggest that the proportion of unutilised resources is still comparatively large. Forward indicators, such as incoming orders, also point to a further deterioration. At the same time, households’ expectations of their own economic situation indicate that the development of private consumption will remain relatively good. Household optimism is supported by increased employment and a favourable development of disposable income. However, the sustainability of this development is uncertain, as it was last autumn, partly because households and firms differ in their assessments of the future. Negative news from the business community may make households more pessimistic, and so may renewed unrest in financial markets.
The exchange rate The exchange rate is an important but elusive item in assessments of inflation. Last autumn, the main assessment was that the krona would become successively stronger as the financial turbulence subsided and relatively more importance was attached to the favourable economic fundamentals, which include low inflation and a growing surplus on public finances. Recently, moreover, it seems that such a process has begun. Signals of a move by Sweden towards the monetary union may perhaps have acted as a catalyst here. The new political signals about the handling of the EMU issue have brought the question of the krona’s equilibrium level to the fore. Participation in the euro area means that at some stage the krona’s exchange rate with the euro will have to be locked. In the discussion that will then be held with colleagues in Europe, the actual decision will be a matter for the Government. The Riksbank, however, is responsible for choosing the conversion rate we find reasonable on Sweden’s behalf. Meanwhile, we must bear in mind that we are dealing with negotiations between Sweden and the other EU member states, so it may be inadvisable to get tied down in matters of detail at an early stage. The Riksbank has made it clear on numerous occasions that it considers the krona to be undervalued. Much of the debate on this issue has stemmed from an article on the krona’s equilibrium exchange rate that was published early in 1996 in our Quarterly Review.