This process can probably be most easily understood in the light of the economic policy conducted during the decades prior to the crisis so let me therefore begin with a brief look back. The economic policy conducted during the 1970s and 1980s meant that nominal wages and prices rose more rapidly in Sweden than in other countries. At the same time, our aim was to maintain a fixed exchange rate, which assumed that inflation in Sweden had developed at roughly the same rate as in the countries that were our most important trading partners. Price and wage trends led time and time again to cost crises that finally forced Sweden to make devaluations of the krona and undermined the credibility of the fixed exchange rate regime. The exchange rate adjustments were also one of the reasons behind a failure to implement necessary rationalisations and streamlining. Although the devaluations strengthened our competitiveness temporarily, they provided the economy with new inflation impulses and by the time the price and wage spiral had turned around a few times, a new cost crisis had arisen. The fact that developments did not favour real growth in Sweden or real wages becomes clear in comparisons with both other time periods and other countries, such as the Nordic countries, Germany and Austria (Figure 1).
Our forecast is that economic activity will strengthen in the near future, a development which is supported by the fact that economic policy remains expansionary. There are some causes for concern; primarily the high oil price and global imbalances, which contribute to the uncertainty over international economic developments. Our assessment in the October Inflation Report was that the risks for inflation were balanced, that is, the risks of weaker price development were balanced by the risks of higher inflation. As before, there is also reason to take into account the fact that household borrowing and house prices are continuing to rise at a rapid rate. I agree with the analysis in the Inflation Report and with the decision to hold the repo rate unchanged. At the same time, in my opinion there is reason for some concern with regard to the sustainability of the current economic trend. There are already signs of a slowdown in the United States, which are probably linked to the severe storms the country has suffered, as well as to the fact that inflation appears to be accelerating and to the Federal Reserve’s interest rate increases. It has long been clear that a slowdown in domestic demand is necessary in the United States in order to correct global imbalances. However, there is a risk that the adjustment of the imbalances will occur too rapidly and will be combined with a rapid fall in property prices. This type of development could in turn lead to a rapid braking of consumption.