This implies that sooner or later, if nothing were done, the rapid growth at present would lead to overheating and an acceleration of inflation. One factor behind the current trend has been monetary policy’s stimulatory direction ever since the repo rate cuts that were initiated in 1998. This illustrates that over a complete business cycle, the repo rate of 2.90% that applied up to last November is too low. GDP growth at the current rate of 3.5-4% implies an expansion of demand that clearly exceeds the rate of 2-2.5% that the economy can cope with in the longer run. It is only feasible in a limited, transitional period, that is, for as long as there is a supply of labour for the available jobs. The repo rate hike may not suffice; inflation prospects set the pace As monetary policy works rather like the helm of an oil tanker - it takes rather a long time to shift the economy onto a new course - it was necessary to make the adjustment to a more neutral monetary stance. Thus, GDP growth will continue at a higher rate for some time to come and then, after perhaps one to two years, successively slacken towards the economy’s long-term potential. The task the Riksbank is endeavouring to perform is to achieve an economic transition from a fairly normal upward phase to a growth trend that is more sustainable. This task, which is not simple, follows implicitly from our statutory function of “maintaining price stability”.
It is admittedly true that as the economy has been in an upward phase since the summer of 1993, it is hardly surprising that productivity growth is above the trend; but a comparison with the corresponding upward phase in the 1980s leads to the same conclusion: the rate of increase in labour productivity appears to be approximately half of a percentage point higher than before. This accordingly means that the Swedish economy’s potential annual growth rate is between 2 and 2.5%. It may be asked, however, whether one can simply project productivity’s historical path. This is where the discussion of what is known as the New Economy comes in. Productivity growth in the United States has risen appreciably in recent years. The investment boom in the 1990s has been one factor here; corporate investment has almost doubled since 1990 and a very large share has gone into new information technology. This has led to what the economic jargon refers to as capital deepening, which amounts to a higher capital input per employee. A notable feature of the picture is thus that the new information technology seems to be having knock-on effects in the form of enhanced productivity in other segments of the US economy. Many observers therefore consider that the American economy is now capable of expanding at a rate of 3-3.5% without encountering shortages and an acceleration of inflation. A similar change could well occur in other countries that reap the new information technology’s potential benefits.