As in the rest of the world, the upturn in Sweden in the period ahead will partly be driven by temporary factors such as highly expansionary fiscal and monetary policies and an inventory cycle. The forecast assumes that the world market will grow strongly, that private consumption will increase at a good rate despite the fact that the development of household incomes will be weak, that public consumption will increase and that investments will increase despite a low level of capacity utilisation and weak profitability. Naturally, there also exists the possibility that GDP growth will be stronger than we have estimated. However, even with a higher rate of GDP growth, resource utilisation will be low – and it is resource utilisation that is significant for inflation, not GDP growth. Resource utilisation can be measured in different ways, but I will not address this issue today. I will restrict myself to stating that resource utilisation can be measured by the GDP gap – that is to say, the difference between the GDP level and what can be considered a normal level. Even with a higher rate of GDP growth, the GDP gap will be negative and resource utilisation low for an extended period (Figure 17). The low resource utilisation does not only signify that inflationary pressures are low, but is also a reason in itself to conduct a looser monetary policy.
Since the beginning of the recovery, the number of people employed in the euro area has risen by 9.2 million. Euro area unemployment declined to 8.1% in August, its lowest level in almost ten years. Consumer spending is being driven by steady growth in households’ real disposable income. Strong labour markets – with increasing job creation and rising wages – boost household income and, in turn, consumer spending. The investment outlook remains solid on the back of robust demand, improving profitability and favourable financing conditions. Since the end of 2014, bank lending rates in the euro area have declined significantly, by around 130 basis points for non-financial corporations and by around 110 basis points for households. Lending rates on very small loans, which can be used as a proxy for loans to small and medium-sized enterprises (SMEs), have fallen by more than 210 basis points. This is encouraging, as SMEs provide two-thirds of total private sector employment in the euro area. Overall, the underlying strength of domestic activity in the euro area continues to support a sustained adjustment in inflation. According to the flash estimates, HICP inflation increased to 2.1% in September, from 2.0% in August. On the basis of the latest oil futures prices, headline inflation is expected to hover around the current level for the rest of the year. Our most recent projections foresee annual headline inflation at 1.7% in 2018 and in each of the two subsequent years.