The purchasing managers index for manufacturing and the National Institute of Economic Research’s quarterly business tendency survey indicate, for instance, that manufacturing activity improved from the middle of 2005 and that this development continued during the first quarter of this year. Developments in the labour market have also been positive in recent months. Employment has developed in line with our forecast, while the labour force has increased more than expected. Business tendency data also indicate that the upturn in employment will continue during the second quarter. All in all, I believe that this indicates that the slowdown at the end of last year was temporary, and that economic activity in Sweden this year has developed largely in line with the assessment in the February Inflation Report. There has been turbulence in the financial markets recently, with a relatively large fall in share prices. Asset price changes can affect inflation indirectly in that they affect households’ wealth and thereby aggregate demand. Share prices can rise sharply over a long period of time and then recoil, without this being a sign of a more lasting decline. At present, it is not possible to draw any far-reaching conclusions from the recent stock market developments. As usual, the Riksbank is monitoring  2  BIS Review 44/2006  developments in asset prices and what they may mean for inflation and other macroeconomic developments. With regard to inflation, the outcome for both March and April was higher than we had estimated in the Inflation Report.
The forecasts indicated that household consumption would rise and investment would continue to increase, but at a slightly slower rate than last year. We also envisaged continuing strong exports as a result of the good international activity. With regard to the labour market, we could observe an apparent upturn in demand for labour and that there were many indications that employment in terms of both persons in employment and of hours worked would increase further. Economic resources were expected to become increasingly strained and the rate of wage increase to become gradually higher. However, we assumed nonetheless that the increase in cost pressures would be relatively moderate as a result of continuing good productivity growth over the coming years. All in all, inflation was expected to rise, although at a modest rate, as a result of dampening effects from the developments in productivity and import prices. Our forecast was that underlying inflation would rise gradually and approach the 2 per cent target a couple of years ahead. This was the picture of developments painted in the February Inflation Report. What has happened since February? The world economy appears to have developed slightly more strongly than we foresaw then. New and revised national accounts figures have been published for the United States, parts of Asia and the euro zone. With regard to the United States, the statistics show that the end of 2005 and the beginning of 2006 were slightly stronger than we had assessed. For Asia the picture of a stronger development is even more evident.