As yet, there are few signs of a turnaround in the labour market and business tendency surveys indicate that the upturn in the private sector will be relatively weak this year. However, some improvement may be on the way, although it is difficult to determine exactly when the trend will turn. Recently, the number of new job vacancies registered has increased somewhat and the number of redundancy notices has declined. At the same time, the strained local government finances indicate a weak upturn in employment in this sector in the near future. The situation in the labour market has caused us to revise down our assessments of future wage cost increases. This was also included in the picture in February. The central wage agreements signed in the manufacturing and retail trade sectors have confirmed this development. Our new forecasts indicate wage cost increases of 3.5 per cent over the coming two years, which is slightly lower than in December. Last year there were increasing signs of more rapid productivity growth. While employment, measured as the number of hours worked in the business sector, developed weaker than anticipated, growth was largely as expected. This is reflected in more rapid productivity growth. We drew attention to this picture already in December. Since then, these developments have become clearer and been reinforced.
There was also a risk to the stability of the financial system. The economic slowdown that had begun could thus become more profound and prolonged than was previously anticipated. The easing of economic policy after the terrorist acts contributed to some recovery in international and domestic economic activity. In spring 2002 we made the assessment that inflation one to two years ahead would exceed the target level. A gradual upturn in the underlying inflation rate, combined with unexpectedly high wage increases in the services sectors in particular, indicated that resource utilisation could be higher than we had assumed. The repo rate was raised in two stages. Steering interest rates in several other small countries were also raised at this time. However, during the summer and autumn we saw more and more signs that the recovery had come to a halt. Industrial activity weakened and geopolitical unease increased, as did the concern that the heavy stock market fall that began in 2000 would affect households and firms more than expected. The Riksbank, like the  4  BIS Review 20/2004  ECB and the Federal Reserve, began to reappraise the prospects for economic activity and inflation. Towards the end of the year, we made a downward adjustment in the inflation forecasts and the repo rate was cut by as much as it had been raised during the spring. With hindsight, it could perhaps be claimed that raising the interest rate in spring 2001 and 2002 was unnecessary. However, this would not lead to a fruitful discussion.