One source of concern for both the United States and the world as a whole is the large deficits in the US economy. In the third quarter last year the current account deficit totalled USD 165 billion, or around 6 per cent of GDP. Data for November show that the deficit has continued to grow, reaching a new record high of just over USD 60 billion. This may result in changes in interest rates and exchange rates that could have considerable consequences for world trade. A large share, or about 40 per cent, of Sweden’s exports go to the euro area, and as a result economic developments there are especially important for us. The recovery in the euro area economy is going slowly. Growth in the third quarter was lower than expected. Available indicators for the fourth quarter provide a mixed picture. Germany, which is an important market for Swedish products, is showing some signs of an improvement. After several years of extensive cutbacks there should be a pent-up need among firms to invest. At the same time exports are being dampened by the euro’s rise against mainly the dollar. BIS Review 10/2005  1  The economic situation in Sweden As regards Sweden the Riksbank has been positive in the past year in its outlook on economic developments. International demand has increased faster than anticipated, with above all exports of services proving unexpectedly robust. Economic policy is also contributing to the relatively bright growth prospects.
Fast growth means increasing prosperity, which in turn may result in a stable social and political climate. However, in order for China to switch from export-led to domestic demand at a quicker pace – which has to happen in the future – it will require institutional and other reforms that take time to implement. The financial infrastructure in particular is in great need of change and development. Where will demand come from when the economy is tightened in the US? The weak growth in Europe and the uncertainty surrounding developments in the Japanese economy means that there is no obvious candidate to take the United States’ place as growth engine. While China has recently become the world’s third biggest trading nation it can hardly assume the mantle on its own. Domestic demand in Europe needs to pick up but the current upswing here is sluggish and is being restrained by efforts to tackle public finance deficits in countries such as Germany, Italy and France. So how likely is it that China will abandon its fixed rate with the dollar in the period ahead? Most commentators believe that China will take a gradual, slow and cautious road towards a floating exchange rate. Should the dollar continue to weaken, therefore, the euro will continue to bear a large part of the adjustment in the future as well, thus having an adverse effect on European competitiveness and growth. 2  BIS Review 10/2005  Another important growth factor is how interest rates develop in the period ahead.