In my opinion, American analysts who in general have a very optimistic view of a very short downturn underrate these risks. What effect will the American economy have on the Swedish economy? The question is also what effect developments in the American economy will have. If you look just at the effects on trade flows, the effect on Europe and Sweden is not so strong. Exports to the United States only account for a bit more than 2 per cent of our GDP and the American market has about the same importance for the euro area. In addition, we are affected by demand for Swedish goods from other countries reducing when their export to the United States drops. Moreover, some international companies with activities in the United States can affect household wealth in Europe as well through share prices –this applies not least to Sweden. Our “Swedish” companies are very international (Ericsson, Electrolux, Stora-Enso, Volvo, Atlas Copco, Skanska) at the same time as a large part of Swedish households’ shareholding is invested there. What conclusions should we draw then for the Swedish economy? I would like to begin by reminding that the Swedish economy is better equipped than for a very long time as regards the underlying climate for growth. We have sound and stable public finances. We have paid off our foreign debt after a number of years with a current account surplus. Inflation expectations are stable and unemployment has been considerably reduced (see Diagram 2).
High real wage increases despite moderate nominal pay increases are one factor that has undoubtedly increased the support of wage earners for the price stability objective. The fact that the price stability objective has been confirmed by law has also probably contributed to confirming confidence in the inflation target. However, the Riksbank has a pedagogical and practical problem. Monetary policy decisions are based on assessments of inflation a couple of years ahead and are focused on achieving the inflation target during that period. This means that we can often be compelled to increase the interest rate despite the actual rate of inflation at the time being under the target. In December last year, for instance, the Riksbank increased interest by 25 points despite inflation then being at 1.4 per cent. Decisions are then made on the basis of forecasts over a two-year horizon. The most important reason for not waiting until inflation actually exceeds the target is that inflation expectations would then risk accelerating since it takes up to two years before monetary policy has its full effect. And then we may – to rein in inflationary expectations again – be compelled to tighten up the economy more than we would have to have done if we had reacted earlier. The Riksbank’s way of conducting monetary policy obviously plays an important role with regard to maintaining confidence in price stability. However, we should not forget that fiscal policy also has to be conducted in a way compatible with the price stability target.