Continued recovery in the world economy To summarise the international economic situation one can say that the new information published during the summer largely supports the picture painted by the Riksbank of a continuing recovery in the world economy. But there are some signs of weakness in the United States and Asia, while Europe looks slightly stronger than expected. Large deterioration in public finances in many countries There were concerns at the monetary policy meeting in June over the possible consequences of the public finance problems in several countries. During the spring these problems had led to increased risk premiums in the financial markets and caused difficulties for many banks. In a worst case scenario, this could lead to a much weaker development abroad, which would also affect Sweden. I said at the monetary policy meeting that in this case we must be prepared to reconsider the direction for our monetary policy. Given this, I shall now specifically discuss public finance problems and developments in the financial markets. Deficits in public finances and national debts have increased rapidly in many countries during the economic crisis. (Figure: Public finances in the OECD area). Developments have been dramatic for some countries, and especially so for Greece. The poorer public finances have pushed up government bond rates and are making it difficult or almost impossible to fund the large deficits. Many other countries are also experiencing serious problems.
Nevertheless, the United States could be doing better. The U.S. fiscal policy program, for example, does not appear well-calibrated to the current set of economic circumstances. We have too much fiscal restraint in the short term, and too little consolidation in the long term. The degree of fiscal restraint this year (about 1¾ percent of gross domestic product [GDP] in 2013) is quite large relative to the forward momentum of the economy. Thus, we have a tugof-war between the improving economy and the current large negative fiscal impulse. How this tug-of-war gets resolved – which force dominates – won’t be known for some time. In other words, the level of uncertainty about the near-term outlook in the United States remains quite high. Meanwhile, the long-term fiscal outlook for the United States is still troubling. So far, partisan divisions in Washington have limited progress in reaching the type of “grand bargain” needed to put the United States on a sustainable long-term fiscal path, though of late we have at least seen some renewed talk about this. Nor have we yet deployed a comprehensive set of policies to support the rebalancing of the U.S. economy toward a growth path based more on business investment, trade and broad-based income gains than the type of asset price gains and credit-fuelled consumption, which dominated the last business cycle. For Europe, the near term macroeconomic outlook seems less bright. The good news is that the peripheral countries have made substantial efforts to bring down their structural budget deficits.