In this way uncertainty diminishes and therefore also the risk premiums in the fixed income market, thus leading to improved efficiency in the economy. Economists also say that the price mechanism works better when inflation is low. This means that changes in relative prices become more evident the more stable the general price level is. There has also been a marked stiffening of competition as many markets in a large number of countries have been deregulated or re-regulated with the express purpose of lowering barriers to entry and increasing price competition. Another contributory factor is the rise in productivity that increasingly appears to be a reverse in the trend. In the US and a number of European countries, including Sweden, labour productivity has increased considerably faster since the middle of the 1990s. In Sweden productivity growth in the business sector averaged 2.7 per cent during the period 1995-2001. It has risen further since then, although cyclical effects have presumably something to do with this. We will have better information regarding the durability of the rise in productivity when the business cycle matures and employment picks up. It is worth noting that low inflation in the world economy has not come at the cost of higher volatility in the real economy. Instead GDP growth has also stabilised during the 1990s and current decade, as indicated by the recent, mild downturn.
Prices of commercial property are following the economic cycle Lower inflation and lower volatility in the inflation level has not led, however, to lower volatility in the prices in asset markets. As we all know, developments in the equity market have been unusually dramatic since 1995, with a steep rise up until spring 2000 and then three years of price declines. In the property market price developments have been somewhat more orderly, and less dramatic than they were at the end of the 1980s and beginning of the 1990s. When the Riksbank discusses developments in the property market, which is mainly done in the Bank’s Financial Stability Reports that are published twice a year, we usually divide it into two parts: the commercial property market and the housing market. Commercial property is defined as such property that is leased for commercial purposes, e.g. office premises, shops and industrial premises. Developments in the prices of commercial property, especially those of office premises, have tracked the economic cycle relatively well in recent years. Developments in the prices of commercial property  1  2  See, for instance, OECD working paper No 353: Macroeconomic policy and economic performance, 2003. BIS Review 28/2004  are largely determined by rent developments, which in turn depend on the demand situation. The weak economic situation in recent years has contributed to dampening demand for mainly office premises. This is evident partly in the number of vacancies, which continue to rise, with the exception of the Stockholm region.