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Economic policy.

The cyclical cyclical

Of or relating to a variable, such as housing starts, car sales, or the price of a certain stock, that is subject to regular or irregular up-and-down movements.
 downturn will be prolonged pro·long  
tr.v. pro·longed, pro·long·ing, pro·longs
1. To lengthen in duration; protract.

2. To lengthen in extent.
 in Sweden because of the troublesome state of government finances in many OECD OECD: see Organization for Economic Cooperation and Development.  countries, with a resultant This article is about the resultant of polynomials. For the result of adding two or more vectors, see Parallelogram rule. For the technique in organ building, see Resultant (organ).

In mathematics, the resultant of two monic polynomials
 tightening of credit, primarily in the euro area. Export growth will be modest in 2012-2013, and in view of the uncertain situation, some consumption and investment will be postponed. Monetary policy will consequently be highly expansionary ex·pan·sion·ar·y  
Tending toward or causing expansion: the empire's expansionary policies in Asia. 
 in the next few years but will not be capable of bringing the economy into cyclical balance before 2016. In Sweden, on the other hand, there will be no active use of fiscal policy to soften the impact of the downturn. General government net lending will reach 1 percent of GDP GDP (guanosine diphosphate): see guanine.  in 2016.

This chapter first presents the NIER's forecast for 2012-2016, with special focus on the period 2014-2016. (2) This is followed by a detailed analysis of the forecast development of monetary and fiscal policy in 2012-2016.

Two special analyses are presented at the end of the chapter. In one, "Disorganized dis·or·gan·ize  
tr.v. dis·or·gan·ized, dis·or·gan·iz·ing, dis·or·gan·iz·es
To destroy the organization, systematic arrangement, or unity of.
 Resolution of the Euro Area Debt Crisis Far Too Costly," there is a discussion on how serious developments can get if the debt crisis, contrary to the assumption in the forecast, is not resolved in an orderly orderly /or·der·ly/ (or´der-le) an attendant in a hospital who works under the direction of a nurse.

An attendant in a hospital.
 manner. The other special analysis, "How to Compare the Macro Forecasts of the National Institute of Economic Research, the Government and the Swedish National Financial Management Authority (ESV ESV end-systolic volume. )," provides a comparison of forecasts under the assumption that fiscal policy develops according to according to
1. As stated or indicated by; on the authority of: according to historians.

2. In keeping with: according to instructions.

 so-called "unchanged rules," that is, in a situation where no new fiscal policy decisions are taken.

The chapter begins with a brief summary.

UNEMPLOYMENT TO REMAIN OVER 7 PERCENT IN 2015 DESPITE A HIGHLY EXPANSIONARY MONETARY POLICY Expansionary monetary policy is monetary policy that seeks to increase the size of the money supply. In most nations, monetary policy is controlled by either a central bank or a finance ministry.  

The recession is severe in the US, the euro area and the United Kingdom, and all are major trading partners of Sweden. The financial crisis of 2008-2009 has been followed by a crisis in the government finances of many OECD countries. In the euro area the crisis in government finances has escalated further during the autumn and has thus been a factor in the severe deterioration de·te·ri·o·ra·tion
The process or condition of becoming worse.
 of the economic outlook.

In addition, the European Council has decided to recommend higher capital coverage requirements for European banks in order to improve the preparedness pre·par·ed·ness  
The state of being prepared, especially military readiness for combat.

Noun 1. preparedness - the state of having been made ready or prepared for use or action (especially military action); "putting them
 of the banking system for future crises. The substantial tightening of credit discernible dis·cern·i·ble  
Perceptible, as by the faculty of vision or the intellect. See Synonyms at perceptible.

dis·cerni·bly adv.
 in the euro area will contribute to an even deeper and more prolonged contraction contraction, in physics
contraction, in physics: see expansion.
contraction, in grammar
contraction, in writing: see abbreviation.

contraction - reduction
 than previously feared (see Diagram diagram /di·a·gram/ (di´ah-gram) a graphic representation, in simplest form, of an object or concept, made up of lines and lacking pictorial elements.  14). All aspects considered, the lacklustre lacklustre or US lackluster

lacking brilliance, force, or vitality

Adj. 1. lacklustre - lacking brilliance or vitality; "a dull lackluster life"; "a lusterless performance"
 development of the international economy will mean abnormally weak growth of the market for Swedish exports in 2012-2013. As a result of this development, together with the postponement of consumption and investment decisions, GDP growth will not be high enough for the labour market to improve (see Diagram 15). As described in the chapter "Development of the International Economy," it is assumed that the acute crisis in government finances within the euro area will subside sub·side  
intr.v. sub·sid·ed, sub·sid·ing, sub·sides
1. To sink to a lower or normal level.

2. To sink or settle down, as into a sofa.

3. To sink to the bottom, as a sediment.

 in the first half of 2012. As confidence gradually returns both to our trading partners and in Sweden, pent-up needs for consumption and investment will result in gradually higher growth in 2013-2016.





The deterioration of the economic outlook, together with wider interest margins, particularly for households, calls for powerful monetary policy measures. Monetary policy will therefore shift in an even more expansionary direction in Sweden. The repo rate repo rate

The rate of interest (annualized) on a repurchase agreement.
 will be lowered to 0.75 percent in the first half of 2012 and will not be raised before the second half of 2013 (see Diagram 16). Nevertheless, unemployment will continue to rise and will still exceed 7 percent in 2015 (see Diagram 15).

On the other hand, the Government is not expected to pursue an even more active fiscal policy for the purpose of speeding up the recovery of the Swedish economy. As measured by the change in cyclically adjusted net lending, fiscal policy on average will be somewhat contractionary in 2012-2016, and the net lending of the general government sector will rise to slightly above 1 percent of GDP in 2016 (see Diagram 17).

International Development

SAVING A DRAG ON Verb 1. drag on - last unnecessarily long
drag out

last, endure - persist for a specified period of time; "The bad weather lasted for three days"


It is assumed in the NIER's forecast that financial turbulence turbulence, state of violent or agitated behavior in a fluid. Turbulent behavior is characteristic of systems of large numbers of particles, and its unpredictability and randomness has long thwarted attempts to fully understand it, even with such powerful tools as  will decrease during 2012 and that the confidence of households and firms in the OECD area will gradually be restored. This requires that the problems with government debt be resolved in an orderly fashion (see the chapter "Development of the International Economy"). (3) However, households in many OECD countries where real estate prices have fallen will also be forced in 2013 to maintain a high level of saving in order to reduce their indebtedness INDEBTEDNESS. The state, of being in debt, without regard to the ability or inability of the party to pay the same. See 1 Story, Eq. 343; 2 Hill. Ab. 421.
. Moreover, the need for contractionary fiscal policy measures will remain substantial and contribute to further slackening of growth in 2013. In the euro area and the US, the fiscal policy measures are expected to total about I percent of GDP in 2013. All factors considered, growth will rise somewhat in the OECD countries but will not be high enough to bring any significant decrease in unemployment. Thus, resource utilization will still be low at the end of 2013 (see Diagram 18).

Recovery will be stronger in 2014-2015, with consumption and investment as the principal driving forces. In the OECD countries, GDP will grow by an annual average of 2.5 percent (see Table 2), which is somewhat higher than the potential growth rate. Resource allocation resource allocation Managed care The constellation of activities and decisions which form the basis for prioritizing health care needs  will thus increase and will approach balance toward the end of the period (see Diagram 18).

In 2012 austerity Austerity
See also Asceticism, Discipline.


conservative Christian group in North America noted for its simple, orderly life and nonconformist dress. [Am. Hist.
 measures to relieve the strain on resource utilization in several emerging economies will mean that GDP in these markets will grow more slowly in 2012. During the period 2013-2016, GDP will increase in the growth economies by about 7 percent per year (see Table 2), a rate compatible with a balanced development of the economy.


With the lacklustre development of the economy in the OECD countries and more limited increases in prices of primary products, inflation will be decreasing in most countries in 2012 (see the chapter "Development of the International Economy"). The slack 1. (operating system) slack - Internal fragmentation. Space allocated to a disk file but not actually used to store useful information.
2. (jargon) slack
 economy will limit the rate of price increases in 2013-2016 as well (see Table 2). Not until 2015 will CPI (1) (Characters Per Inch) The measurement of the density of characters per inch on tape or paper. A printer's CPI button switches character pitch.

(2) (Counts Per I
 inflation reach the inflation targets of the respective central banks This is a list of central banks.

Contents A B C D E F G H I J K L M N O P Q R S T U V W Y Z
 in most OECD countries. Low inflation and a continued low level of resource utilization in the next few years will also require maintaining an expansionary monetary policy in the major economies of the OECD. Since resource utilization will still be below normal in 2016, monetary policy will be expansionary even though inflation is on target. Not until 2016 will policy interest rates in the euro area and the US approach levels indicative of a neutral monetary policy (see Diagram 19).






Macroeconomic mac·ro·ec·o·nom·ics  
n. (used with a sing. verb)
The study of the overall aspects and workings of a national economy, such as income, output, and the interrelationship among diverse economic sectors.
 Development in Sweden


The gloomy gloom·y  
adj. gloom·i·er, gloom·i·est
1. Partially or totally dark, especially dismal and dreary: a damp, gloomy day.

 outlook in other countries is now leaving a clear imprint im·print  
tr.v. im·print·ed, im·print·ing, im·prints
1. To produce (a mark or pattern) on a surface by pressure.

2. To produce a mark on (a surface) by pressure.

 on the Swedish economy. The NIER's economic tendency indicator, which is an overall measure of sentiment in the economy, is now dropping just about as rapidly as during the initial phase of the financial crisis of 2008 (see Diagram 20). The NIER's present assessment is that GDP will decrease in the final quarter of this year and then remain largely unchanged during the first half of 2012.

Domestic conditions for growth in the Swedish economy, however, are relatively favourable. In contrast to many other countries, public finances are strong and household saving is high. Furthermore, the business sector is competitive by international standards, as is reflected in sizable siz·a·ble also size·a·ble  
Of considerable size; fairly large.

siza·ble·ness n.
 foreign trade surpluses.

Foreign trade being of such importance, the Swedish economy is heavily dependent on developments in other countries. It is assumed in the forecast that the acute problems associated with government debt in the euro area will subside during the first half of 2012 and that confidence will gradually return to financial markets (see the special analysis "Disorganized Resolution of the Euro Area Debt Crisis Far Too Costly"). Nevertheless, large-scale commitments to save will result in very slack development of the economy in the OECD countries, and particularly the euro area, for the next few years. The downturn in the OECD will therefore be prolonged (see Diagram 18).

tr. & intr.v. deep·ened, deep·en·ing, deep·ens
To make or become deep or deeper.

Noun 1. deepening - a process of becoming deeper and more profound

The low growth in the OECD countries will curtail cur·tail  
tr.v. cur·tailed, cur·tail·ing, cur·tails
To cut short or reduce. See Synonyms at shorten.

[Middle English curtailen, to restrict
 market growth for Swedish exporting companies in 2012 (see Diagram 21). Particularly hard-hit by the weakness in international demand will be input and investment goods In economics, investment goods are the plant, machinery, and equipment that enable production, and are the main input into new installed capital. External sources
, which are especially important for Swedish exporting industries. Therefore, Swedish exports will virtually stagnate stag·nate  
intr.v. stag·nat·ed, stag·nat·ing, stag·nates
To be or become stagnant.

[Latin st
 in 2012 and contribute to the sharp slowdown in GDP growth. This means that resource utilization in the Swedish economy as a whole will decrease rapidly in the next few quarters, and that unemployment will begin rising. For the full year 2012, the so-called output gap will be nearly -3 percent (see Diagram 22). The recession is also evident on the labour market, where unemployment will be about 8 percent in 2012.


In 2013-2016 potential GDP will increase by an average of about 2.3 percent per year (see Table 3). This growth will be driven primarily by rising productivity in the business sector as a consequence of technological development and investment in productive capital. At the same time, the labour force will be expanding somewhat as a consequence of both demographic developments and the Government's reforms in the area of labour market policy (see the special analysis "Long-Term Effects of Economic Policy Reforms on the Labour Market").

With the combination of substantial unutilized resources at the end of 2012 and a potential growth rate in 2013-2016 averaging 2.3 percent per year, there will be a considerable margin for the Swedish economy to expand in 2013-2016 without any tendency toward overheating Overheating

An economy that is growing very quickly, with the risk of high inflation.


The rate of growth for both the Swedish export market and for Swedish exports will average only about 2 percent per year in 2008-2012, far below the historical trend (see Diagram 21). Although the Swedish export market will recover and grow by more than 7 percent per year in 2013-2016, demand for Swedish exports of goods will be lower than it would have been according to the trend prior to the financial crisis. Growth in domestic demand will thus become increasingly important if the Swedish economy is to recover during 2013-2016.

Demand from the general government sector, however, is expected to show little growth in 2013-2016, when fiscal policy is anticipated to shift in a somewhat contractionary direction (see the section "Fiscal Policy" below). This means that demand, particularly from households and firms, must increase if growth is to pick up in Sweden. Concern on financial markets, however, has contributed to substantial decreases in asset prices in Sweden as well. Partly as a consequence of this development, together with a gloomier labour market outlook, households will be cautious about increasing their consumption in the first half of 2012 despite low interest rates. Only later will households begin to increase their consumption more substantially, when the concern on financial markets subsides and the labour market stabilizes.




For the full year 2012, household consumption will increase by a modest 1 percent. This will be the second consecutive year of extremely low growth in consumption. This will also mean that household saving will rise to historically high levels (see Diagram 23). The combination of low interest rates, a brightening outlook on the labour market and pent-up needs for consumption will mean that household consumption picks up in 2013. Households will thereafter increase their consumption by some 3.5 percent per year in 2014-2016 (see Table 4). By historical standards, this is a high growth rate, and it reflects initially higher than normal saving. Thus, household consumption will increase somewhat as a share of GDP after the previous decrease in 2010-2012 (see Diagram 24).

A prerequisite pre·req·ui·site  
Required or necessary as a prior condition: Competence is prerequisite to promotion.

 for such a development is that employment goes up and that the stance of stabilization Stabilization

The action undertakes a country when it buys and sells its own currency to protect its exchange value.
Actions registered competitive traders undertake by on the NYSE to meet the exchange requirement that 75% of their traded be stabilizing, meaning that sell orders
 policy remains expansionary. The Riksbank is therefore expected to lower its policy interest rate during the first half of 2012 to 0.75 percent (see the section "Monetary Policy, Interest Rates and Exchange Rates", below). This level of the interest rate will be maintained until the end of the first half of 2013, when recovery will be more robust and a cycle of interest rate hikes begins.

Gross fixed capital formation Gross fixed capital formation (GFCF) is a macroeconomic concept used in official national accounts since the 1930s. Concept and data
The statistical aggregate of GFCF is a measure of the net new investment by enterprises in the domestic economy in fixed capital
 dropped sharply in connection with the financial crisis of 2008/2009. As a share of GDP, investment fell from 20 percent in 2008 to 18 percent in 2009 (see Diagram 24). Investment has subsequently remained at this relatively low level in proportion to GDP. The proportion will rise only slightly in 2012 since some companies will postpone post·pone  
tr.v. post·poned, post·pon·ing, post·pones
1. To delay until a future time; put off. See Synonyms at defer1.

2. To place after in importance; subordinate.
 their investments in view of the high uncertainty about future developments. Housing investment will also decrease in 2012. When demand picks up in 2013 and uncertainty diminishes, firms will have a rapidly rising need to increase their production capacity, a normal development in an economic upturn. Investment will therefore go up by 6-7 percent per year in 2013-2015; thereafter, the rate of increase will fall off to about 5 percent in 2016 (see Diagram 25 and Table 4). Investment will then equal about 20 percent of GDP, a level that in the NIER's opinion may be considered normal in the long run.

IMPORTS TO INCREASE MORE RAPIDLY AS THE SWEDISH KRONA Noun 1. Swedish krona - the basic unit of money in Sweden

Swedish monetary unit - monetary unit in Sweden

ore - a monetary subunit in Denmark and Norway and Sweden; 100 ore equal 1 krona

At the same time, the recovery means that imports will increase more rapidly. During 2012 imports will virtually stagnate, but as demand picks up during 2013, imports will rise by 6 percent (see Table 4). The increase in net exports in recent years will thus be interrupted in·ter·rupt  
v. in·ter·rupt·ed, in·ter·rupt·ing, in·ter·rupts
1. To break the continuity or uniformity of: Rain interrupted our baseball game.

 (see Diagram 24). In 2014-2016 imports will continue to grow at a relatively fast pace. The principal explanation is rising demand, but in addition the upswing Upswing

An upward turn in a security's price after a period of falling prices.
 will be fuelled by a krona kro·na 1  
n. pl. kro·nur
See Table at currency.

[Icelandic króna, from Old Norse kr
 that has strengthened by more than 5 percent during the period 2013-2016 (see Diagram 26). Net exports will gradually drop just below 6 percent of GDP in 2016. Sweden will thus maintain a high, though gradually diminishing di·min·ish  
v. di·min·ished, di·min·ish·ing, di·min·ish·es
a. To make smaller or less or to cause to appear so.

, level of net saving in relation to other countries.


On an overall basis, GDP growth will rise to 3 percent in 2013 after the temporary slump Slump

A temporary fall in performance, often describing consistently falling security prices for several weeks or months.
 in 2012 (see Diagram 27 and Table 4). Growth will remain high in 2014-2016, and resource utilization in the economy will therefore gradually rise. In 2016 the economy will be virtually in cyclical balance, as will be reflected in an output gap close to zero (see Diagram 22).


The higher growth of GDP in 2013 will not be fully reflected on the labour market. The reason is that firms will not have reduced staff to any major extent, despite lacklustre growth in demand during 2012. Thus, there will be a relative abundance of unused resources at firms when demand begins to accelerate in the latter months of 2012 and in 2013. Employment will therefore increase by only 0.3 percent for the full year 2013 (see Diagram 28 and Table 5).






Thus, there will be no clear turning point on the labour market until 2014, when employment will increase by 0.7 percent. At the same time, unemployment will begin to recede re·cede 1  
intr.v. re·ced·ed, re·ced·ing, re·cedes
1. To move back or away from a limit, point, or mark: waited for the floodwaters to recede.

 somewhat after peaking at around 8 percent in 2013. In 2015-2016 employment will increase by an annual average of about 1 percent. The labour force will be growing at an average rate of only 0.3 percent during these years; this means that unemployment will drop back relatively quickly to 6.5 percent in 2016. This level is roughly equivalent to the NIER's estimate of equilibrium unemployment for that year (see the special analysis "The NIER's Assessment of Structural Unemployment"). The labour market gap will thus be virtually zero in 2016 (see Diagram 22 above).


The weakening labour market is expected to be one reason why the current pay negotiations will result in increases of more than 3 percent next year (according to the Short-Term Wage and Salary Statistics). As a consequence of the soft labour market in 2012-2013, the rate of pay increases in 2013 will be less than the 3.5 percent that the NIER NIER National Institute of Environmental Research (South Korea)
NIER National Institute of Economic Research
NIER Nakamae International Economic Research
NIER National Institute for Environmental Renewal
 considers compatible with the inflation target in the longer term (see Diagram 29 and Table 6). In 2014-2016 earnings will gradually accelerate as the labour market improves, and in 2016 earnings will rise by 3.7 percent.

A temporary slump in the development of productivity- during 2012, when firms to a large extent are expected to retain their staff despite a lacklustre demand tendency, will mean that unit labour costs in the business sector rise more rapidly than usual (see Diagram 29). In 2013-2015 there will be a cyclical recovery of productivity when resource utilization rises at firms. Productivity. will then increase by an average of more than 2.5 percent per year. Together with pay increases of more than 3.5 percent, this will mean that unit labour costs increase more slowly in these years than in years of cyclical balance. Moreover, prices of imports will be very slack during the forecast period. This soft tendency will be due largely to an appreciating krona (see Diagram 26 above).

All factors considered, the costs of firms will increase more slowly than normal during the forecast period as a whole. In 2013-2015 inflation in terms of the CPI with a fixed interest rate (CPIF CPIF Cost Plus Incentive-Fee (Contract)
CPIF California Poultry Industry Federation
CPIF Contract Cost-Plus-Incentive-Fee
CPIF Calculated Planning Impairment Factor
) will be about 1.5 percent (see Diagram 30 and Table 6). In 2016 inflation in terms of the CPIF will rise to nearly 2 percent when unit labour costs and prices of imports are rising more rapidly and the economy is approaching cyclical balance. In terms of the CPI, inflation will be rising much faster during 2014-2016. The reason is that the Riksbank will be raising the repo rate during this period, so that rising home mortgage interest rates will be fuelling CPI inflation.

Monetary Policy, Interest Rates and Exchange Rates

Resource utilization in the Swedish economy is low, as is reflected in a high rate of unemployment that will rise further in the future, as well as decreasing capacity utilization Capacity Utilization measures the rate at which a firm makes use of their capital productive capacities, such as factories and machinery. Capacity Utilization generally rises when the economy is healthy and falls when demand softens. . The severe recession in the wake of the financial crisis will now also be followed by a new downturn in demand. At the same time, underlying inflation (CPIF) will be low. To stimulate the economy further, the repo rate will therefore be cut during the spring of 2012 to 0.75 percent. Moreover, monetary policy will remain expansionary for several years in order to support economic recovery and in time to bring inflation in line with its target. The NIER's assessment is that resource utilization in the Swedish economy will not be in balance until 2016, when unemployment will be about 6.5 percent. Monetary policy will gradually become less expansionary and is expected to be neutral at the end of the period.


It is assumed in the forecast that the Riksbank lowered the repo rate by 0.25 percentage point at its monetary policy meeting in December 2011. (4) The repo rate will be lowered by an additional 1.0 percentage point during the spring of 2012. Thereafter it will remain at 0.75 percent for over a year. To judge by the pricing of forward contracts, the market as of mid-December was also expecting the repo rate to decline, though at a somewhat slower rate (see Diagram 31).




The reductions in the repo rate will come in anticipation of deteriorating de·te·ri·o·rate  
v. de·te·ri·o·rat·ed, de·te·ri·o·rat·ing, de·te·ri·o·rates
To diminish or impair in quality, character, or value:
 demand in the Swedish economy for the next few quarters. Moreover, short-term fixed interest rates on home mortgage loans have continued to rise even though the repo rate has remained unchanged since July (see Diagram 32). Home mortgage interest rates have risen primarily in relation to the interbank interest rate. Since the interbank rate is a measure of the financing costs of banks, this indicates that the banks' margins on home mortgage loans have increased. The interbank rate is also somewhat higher than it normally would be in comparison to the repo rate. One explanation is that the financial turbulence has led to higher risk premiums for financial institutions in general. This has also entailed higher borrowing costs for Swedish banks.

The NIER is assuming that the differential between the interest rate on home mortgage loans and the repo rate will remain somewhat larger than normal in the coming period, but that as the financial turbulence subsides during 2012, it will begin to drop back to more normal levels. With the higher home mortgage interest rates, monetary policy in the immediate future, all else being equal, will be somewhat more contractionary than would be the case with a more normal situation on the home mortgage loan market. Thus, the need for reducing the repo rate in order to make monetary policy sufficiently expansionary will be greater than normal. Alternatively, the Riksbank can take other steps to provide greater liquidity that would lead to lower home mortgage interest rates.

The repo rate cuts will contribute to a declining repo rate in real terms in 2012 and 2013 (see Diagram 33); thus, monetary policy, if judged solely by the repo rate, will be more expansionary. A narrowing differential between home mortgage interest rates and the repo rate will also contribute to a more expansionary monetary policy.

The expansionary monetary policy should also be viewed in light of the state of the economy, which is now entering a down-turn in a situation where unemployment is already high and has been so since 2009. It is therefore very important to avert a sizable increase in unemployment during the next few years; otherwise there could be lasting negative effects on both labour force participation and unemployment.


The expansionary monetary policy will support the recovery of the economy beginning in the second half of 2012 (see Diagram 33). Higher resource utilization will help in the longer term to stabilize stabilize

See peg.
 inflation around the inflation target. CPIF inflation will rise from 1.4 percent to just under 2.0 percent in 2016. As a consequence of the rising nominal repo rate, the real repo rate will also increase during the period 2014-2016, and monetary policy will gradually become less expansionary (see Diagram 33).


After the reductions in the first half of 2012, the repo rate is expected to be just under the ECB's policy interest rate until 2013 (see Diagram 34). The overnight lending rate on the interbank market in the euro area, however, was slightly above 0.5 percent in mid-December, which was less than the policy interest rate. The overnight rate is expected to remain at that level until the ECB See electronic code book.  raises interest rates again at the outset of 2014. At the same time, interest rates for households and firms in the euro area have risen during the autumn because of the high degree of uncertainty on financial markets and higher capital coverage requirements for banks (see the section "The Euro Area" in the chapter "Development of the International Economy"). The uncertainty on financial markets is expected to diminish during 2012.

The repo rate will be higher than the US policy interest rate (federal funds rate Federal Funds Rate

The interest rate at which a depository institution lends immediately available funds (balances at the Federal Reserve) to another depository institution overnight.
) through the first half of 2014. The relatively high level of the repo rate during this period is explained by the fact that resource utilization in the Swedish economy, despite deteriorating in 2012, will be higher than in the euro area and the US.

During the period 2014-2016 policy interest rates will be raised again in the US, the euro area and Sweden, and will rise toward more normal levels (see Diagram 34) as the recovery of their respective economies proceeds.


The rate of interest on Swedish government bonds has decreased to exceptionally low levels during the autumn (see Diagram 35). The interest rate on 10-year government bonds has not been so low at any other time in the entire postwar post·war  
Belonging to the period after a war: postwar resettlement; a postwar house.


occurring or existing after a war

Adj. 1.
 period. A more pessimistic pes·si·mism  
1. A tendency to stress the negative or unfavorable or to take the gloomiest possible view: "We have seen too much defeatism, too much pessimism, too much of a negative approach" 
 outlook for growth, particularly in OECD countries, and concern over the future course of the debt crisis in the euro have contributed to the decrease in Swedish long-term rates. The reason is that investors consider a Swedish government bond to be a relatively safe investment. The increased demand for Swedish government bonds has pushed up their price, resulting in a lower interest rate. With growing confidence on financial markets, interest rates on Swedish government bonds will be rising in the period ahead (see Diagram 35 and Table 7).






The krona strengthened rapidly through February 2011, but since then it has weakened to roughly), the same level as at the end of 2010, as measured by the KIX, the nominal effective index for the krona (see Diagram 36). (5) Worry on financial markets caused by the debt crisis in the euro area has contributed to the weakening of the krona. The krona depreciated Depreciated may refer to:
  • Depreciation, in finance, a reference to the fact that assets with finite lives lose value over time
  • Depreciated is often confused or used as a stand-in for "deprecated"; see deprecation for the use of depreciation in computer software
 during the same period by 5 percent against the dollar and by 4 percent against the euro (see Diagram 37). The assessment is that the weakening observed in 2011 is temporary and that the krona will resume strengthening during the forecast period.

In the longer term, the fundamental determining factors for the krona, and particularly an increasingly strong net foreign position, indicate that the krona will appreciate in real terms. In 2016 the krona will have strengthened in real terms by 2 percent compared to 2010. Since inflation is expected to be higher abroad than in Sweden, this will entail entail, in law, restriction of inheritance to a limited class of descendants for at least several generations. The object of entail is to preserve large estates in land from the disintegration that is caused by equal inheritance by all the heirs and by the ordinary  a nominal appreciation of the krona by 5 percent for the same period (see Table 8) (6).

Fiscal Policy

In the Budget Bill for 2012, the Government proposes new unfunded measures totalling SEK SEK

In currencies, this is the abbreviation for the Swedish Krona.

The currency market, also known as the Foreign Exchange market, is the largest financial market in the world, with a daily average volume of over US $1 trillion.
 15 billion, to be implemented in 2012. The NIER's forecast is that in addition to these steps further measures totalling SEK 50 billion will be taken in 2013-2016. With these additional measures, cyclically adjusted net lending will be 1.5 percent of potential GDP in 2016, which means that actual net lending is expected to be in line with the surplus target. In a fact box at the end of this section, the principles for the NIER's fiscal policy forecasts are presented.


According to the surplus target, the net lending of the general government sector is to average 1 percent of GDP over an economic cycle. The NIER uses cyclically adjusted net lending to determine whether fiscal policy is consistent with the surplus target.

The surplus target should primarily be given a forward-looking interpretation to determine the margin for unfunded measures or, in the alternative, the need for cutting expenditure. It may be important, however, to analyze goal achievement in retrospect in order to identify any systematic deviations from the surplus target. If there are any systematic deviations, there may be a need for changes in the fiscal policy framework for the purpose of improving goal achievement.

The surplus target was introduced in 2000. During 2000-2010 actual net lending was equivalent to an average of 1.1 percent of actual GDP, and cyclically adjusted net lending was equivalent to the same percentage of potential GDP (see Table 9).

To obtain a better evaluation of whether the surplus target has been met, the analysis should be performed with the economic cycle as the starting point Noun 1. starting point - earliest limiting point
terminus a quo

commencement, get-go, offset, outset, showtime, starting time, beginning, start, kickoff, first - the time at which something is supposed to begin; "they got an early start"; "she knew from the
. (7) During the eight-year economic cycle of 2000-2007, net lending averaged 1.3 percent of GDP. Cyclically adjusted net lending averaged 0.7 percent of potential GDP, for the output gap was slightly positive, on average, in these years (see Diagram 38).

During the five-year economic cycle of 2005-2009, both actual and cyclically adjusted net lending were almost 2 percent, and the output gap averaged -0.6 percent. Net lending appears to be on the high side in relation to the surplus target during this period.



Referring to the government debt crisis in Europe and the uncertainty in other countries, the Government has decided to postpone some reforms. One reform that has been postponed is an additional tax credit on earned income. In the Budget Bill for 2012, the Government proposes new unfunded measures totalling about SEK 15 billion for that year (see the special analysis "The Budget Bill for 2012"). In addition, the average local government tax rate will be raised in 2012. (8) The increase in local government taxes will generate about SEK 1 billion in additional tax revenue in 2012.

With the measures mentioned above, cyclically adjusted net lending will decrease as a share of potential GDP from 1.2 to 0.9 percent between 2011 and 2012. The stance of fiscal policy in 2012 will thus be somewhat expansionary (see the explanation in the margin).


The starting point for the NIER's fiscal policy forecast is the surplus target in the Government's fiscal policy framework. It is assumed in the fiscal policy forecast that cyclically adjusted net lending will be 1.5 percent of potential GDP over an economic cycle so as to increase the probability that actual net lending will average 1 percent of GDP. In view of the low level of resource utilization in the economy, it is justfiable to let cyclically adjusted net lending temporarily drop below 1.5 percent. The opposite applies if resource utilization is high.

In the NIER's opinion, for public finances to be in line with the surplus target, further unfunded measures totalling SEK 50 billion will need to be taken in the period 2013-2016. The Government is not expected to follow an even more expansionary fiscal policy during the next few years for the purpose of speeding up the recover), of the Swedish economy. The forecast is therefore that there will be a gradual increase in cyclically adjusted net lending to 1.5 percent in 2016 (see Diagram 39).

This means that unfunded measures totalling SEK 11 billion are forecast for 2013. With this fiscal policy there will be no appreciable ap·pre·cia·ble  
Possible to estimate, measure, or perceive: appreciable changes in temperature. See Synonyms at perceptible.
 effect on cyclically adjusted net lending in 2013, an indication that the stance of fiscal policy will be neutral. The apportionment The process by which legislative seats are distributed among units entitled to representation; determination of the number of representatives that a state, county, or other subdivision may send to a legislative body. The U.S.  of the remaining margin of SEK 39 billion is shown in Table 10 below.


With unfunded fiscal policy measures totalling SEK 50 billion in 2013-2016, cyclically adjusted net lending will be 1.5 percent of potential GDP in 2016, which is considered to be in line with the surplus target. Actual net lending will then be 1.1 percent of GDP (see Table 11 and Diagram 39). The fact that cyclically adjusted net lending will be less than 1.5 percent of GDP during the period 2013-2015 is justified by the low level of resource utilization (see Diagram 38).

There is no conflict of objectives between the surplus target and unfunded measures totalling SEK 50 billion in 2013-2016. Without any unfunded measures during this period, cyclically adjusted net lending would amount to 2.7 percent in 2016. Resource utilization would then be even lower (see the special analysis "How to Compare the Macro Forecasts of the NIER, the Government and the ESV?")


The SEK 11 billion in unfunded measures forecast for 2013 has been allocated according to the NIER's assessment based on the Government's announcements of future measures and the stance of fiscal policy, as well as the assessment of the Swedish Association of Local Authorities and Regions (SALAR) that the average local government tax rate will increase in 2013 (see Table 12).


The allocation The apportionment or designation of an item for a specific purpose or to a particular place.

In the law of trusts, the allocation of cash dividends earned by a stock that makes up the principal of a trust for a beneficiary usually means that the dividends will be treated as
 of the remaining SEK 39 billion in fiscal policy measures in 2014-2016 follows the principles described in the fact box below: that general government consumption will increase according to demographically determined needs, that general government investment will increase at the same rate as GDP and that funds will be appropriated to prevent any deterioration in real terms of the system of transfer payments. After the appropriation The designation by the government or an individual of the use to which a fund of money is to be applied. The selection and setting apart of privately owned land by the government for public use, such as a military reservation or public building.  to safeguard the value of the system in real terms, SEK 6 billion remain. This amount will be distributed to households in the form of additional transfer payments. This means a total of SEK 39 billion in higher expenditure in 2016 than with unchanged rules in 2014-2016 (see Table 13).


Principles for the NIER's Fiscal Policy Forecasts

The surplus target is the anchor. The starting point for the NIER's fiscal policy forecasts is the Government's fiscal policy Framework. (9) Among the factors on which the fiscal policy forecast is based, the surplus target is the anchor. However, the expenditure ceiling and the balanced budget Balanced budget

A budget in which the income equals expenditure. See: budget.

balanced budget

A budget in which the expenditures incurred during a given period are matched by revenues.
 requirement for local governments are also considered (see the explanation in the margin).

The NIER regards the surplus target as forward-looking; in other words Adv. 1. in other words - otherwise stated; "in other words, we are broke"
put differently
, the forecast development of net lending is to be in line with the target. The NIER uses a measure of cyclically adjusted net lending as an indicator of whether the surplus target has been met.

Principle of Caution in Interpreting the Surplus Target.

The difference between actual and cyclically adjusted net lending depends, among other things, on the output gap. As measured by the NIER, the output gap has historically been negative. If this is the case in the future as well, the mean value of cyclically adjusted net lending will be higher than the mean value of actual net lending. The Government takes this risk into account in determining whether the target has been met. (10) For these reasons, the NIER assumes in its forecast that cyclically adjusted net lending will be 1.5 percent of potential GDP over an economic cycle in order to increase the probability that actual net lending will average 1 percent of GDP.

Need to Stimulate the Economy or Tighten Economic Policy.

Within the framework for the surplus target, the NIER also considers the need for fiscal policy stimuli or for a tighter fiscal policy based A decision made by any software application that is based on the policy (rules and regulations) of the organization. See policy and COPS.  on whether resource utilization in the economy is lower or higher than normal. For example, a cyclical downturn (upturn) may mean that cyclically adjusted net lending should temporarily be less (greater) than 1.5 percent in order to bring the economy more rapidly into balance.

Difference between a Forecast and a Recommendation.

The NIER's fiscal policy forecast is governed gov·ern  
v. gov·erned, gov·ern·ing, gov·erns
1. To make and administer the public policy and affairs of; exercise sovereign authority in.

 to a large extent by proposals and announcements in the Budget Bill and in the Spring Fiscal Policy Bill. As for future years, for which information is not available in budget bills, the fiscal policy forecast is based on the NIER's assessment of how the fiscal policy framework will be applied. The NIER differentiates between the need for a forecast fiscal policy and for a recommended one. The distinction is applicable if the Government clearly announces that it intends to follow a fiscal policy that in the NIER's opinion deviates plainly from the policy called for by the surplus target and the level of resource utilization in the economy.

Allocation of the Content of Fiscal Policy.

For the years immediately to follow, the fiscal policy forecast is based on the Government's announcements of future measures and the stance of fiscal policy. As for subsequent years, for which information is not available--currently 2014 and thereafter--the basic guiding principle for the revenue forecast is that the implicit tax Implicit tax

Lower or higher before-tax required returns on assets that are subject to lower or higher tax rates.
 rates will be unchanged. In regard to expenditure, the basic principle is that funds will be appropriated so that 1) there is no deterioration in the system of transfer payments in real terms, 2) general government consumption follows demographically determined needs and 3) general government investment follows the development of GDP. If further adjustments are needed in order to meet the surplus target, this will be done through adjustment of transfer payments to households.

Fiscal Policy Concepts

The fiscal policy multiplier refers to the effect of fiscal policy variables on GDP, for example. Thus, if general government consumption increases or taxes are reduced by SEK 10 billion, and GDP as a result increases by SEK 7 billion, the multiplier is 0.7.

The term unfunded measures refers to fiscal policy decisions on increasing expenditure and/or reducing taxes, when such decisions are not funded by equally large decreases in expenditure and/or higher taxes in some other area. Thus, these measures in themselves constitute a deterioration in the net lending of the general government sector and, in addition, normally have a positive effect (multiplier) on GDP.

Cyclically adjusted net lending is a calculation of what the net lending of the general government sector would be with balanced resource utilization (a cyclically neutral state) and a normal composition of major tax bases. It is usually presented as a share of potential GDP.

The stance of fiscal policy in a particular year is derived from the change in cyclically adjusted net lending in relation to potential GDP. If cyclically adjusted net lending is decreasing as a share of potential GDP, this indicates that the stance of fiscal policy is expansionary in regard to resource utilization (potential GDP) in the economy. The reason may be that cyclically adjusted tax revenue (because of reduced tax rates, for example), is not keeping up with the increase in potential GDP, or that cyclically adjusted general government expenditure is rising faster than potential GDP, or a combination of both. Correspondingly, if cyclically adjusted net lending is increasing in proportion to potential GDP, this indicates that the stance of fiscal policy is contractionary. Finally, fiscal policy is neutral when cyclically adjusted net lending is unchanged in relation to potential GDP

In the area of fiscal policy, the term unchanged rules refers to the development of fiscal policy variables when no further fiscal policy decisions are taken by Parliament and the Government. As a practical matter, however, there are significant problems in drawing boundaries.

(2) A detailed description of the short-term forecast, for 2011-2013, can be found in the next five chapters.

(3) See the special analysis "Disorganized Resolution of the Euro Area Debt Crisis Far Too Costly" for a discussion on a disorganized resolution of the crisis. As noted there, such a development would entail great risks; this realization makes it more likely that an orderly resolution will be reached.

(4) The NIER concluded the calculations for this forecast on December 15, 2011. The Riksbank published its monetary policy decision on December 20, 2011.

(5) See Erlandsson, M. and A. Markowski, "The Effective Exchange Rate Index KIX--Theory and Practice," Working Paper no. 95, NIER, 2006.

(6) Inflation abroad here refers to the countries included in KIX. In a number of these countries, e.g., India, Brazil and China, inflation is relatively high.

(7) An economic cycle has been defined here as the period either between two troughs (2005-2009) or between two peaks (2000-2007) of the output gap.

(8) This increase refers to the net increase in the local government tax rate. The average local government tax for municipalities will be lowered in 2012, and the average county council district tax will be raised.

(9) See "Framework for Fiscal Policy", Government Letter 2010/11:79. The fiscal policy framework includes the surplus target, the ceiling on central government expenditure and the balanced budget requirement for local governments, which are also discussed in the chapter "Public Finances". See the brief explanation of these terms in the margin.

(10) See "Framework for Fiscal Policy", Government Letter 2010/11:79, p. 23.
Table 2 Selected International Indicators

Percentage change

                                2012  2013  2014  2015  2016  2017

GDP, OECD (1)                    1.8   1.4   2.2   2.7   2.6   2.2
GDP, emerging economies (1,2)    6.0   5.6   6.2   7.3   7.2   6.9
GDP, worldwide (1)               3.8   3.4   4.1   5.0   4.9   4.6
CPI, OECD                        2.8   1.7   1.6   1.9   2.1   2.1
CPI, worldwide                   4.9   3.8   3.4   3.4   3.4   3.4

(1) Constant prices.

(2) Emerging economies here denote all non-OECD countries.

Sources: IMF, OECD and NIER.

Table 3 Potential Variables

Percentage change

                           2011   2012   2013   2014   2015   2016

Potential GDP               1.7    2.1    2.3    2.3    2.3    2.2

Potential hours worked      0.6    0.5    0.5    0.5    0.4    0.3

  of which potential
  employment                0.8    0.5    0.3    0.3    0.3    0.2

    of which demographic
    contribution            0.4    0.3    0.2    0.2    0.1    0.1

Potential productivity      1.0    1.6    1.7    1.8    1.9    1.9

Potential productivity,
business sector             1.7    1.9    2.0    2.1    2.3    2.3

Note: The calculations are calendar-adjusted. NIER's assessment
of the potential productivity development is based, among other
things, on the development of the capital stock and the total
factor productivity (TFP) trend in the business sector.

Sources: Statistics Sweden and NIER.

Table 4 Supply and Demand

Percentage change, constant prices, calendar-adjusted values

                            2011   2012   2013   2014   2015   2016
Household consumption
  expenditure                1.4    1.1    3.7    3.6    3.6    3.3
General government
  consumption expenditure    1.7    0.6    0.7    0.7    0.7    0.7
Gross fixed-capital          6.1    3.0    6.2    7.3    6.4    5.2
Final domestic demand        2.4    1.4    3.3    3.5    3.4    3.1
Stock building (1)           0.7   -0.7    0.0    0.0    0.0    0.0
Total domestic demand        3.1    0.5    3.3    3.6    3.4    3.0
Exports                      8.2    1.0    5.0    6.7    6.7    5.9
Total demand                 4.9    0.7    3.9    4.7    4.6    4.1
Imports                      5.7    0.2    6.0    8.1    8.1    7.1
Net exports (1)              1.6    0.5   -0.1   -0.1   -0.2   -0.2
GDP                          4.5    1.0    3.0    3.2    3.0    2.6

(1) Change in percent of previous year's GDP.

Sources: Statistics Sweden and NIER.

Table 5 Labour Market

Percentage change

                             2011   2012   2013   2014   2015   2016

Number of hours worked (1)    1.3    0.0    0.8    1.1    1.0    0.9
Labour force                  1.1    0.4    0.5    0.5    0.4    0.2
Number of employed            2.1    0.1    0.3    0.7    0.9    0.9
Unemployment (2)              7.5    7.8    7.9    7.7    7.2    6.5

(1) Calendar-adjusted. (2) Percent of labour force.

Sources: Statistics Sweden and NIER.

Table 6 Wages and Prices
Percentage change

                        2011   2012   2013   2014   2015   2016

Hourly earnings (1)      2.6    3.2    3.0    3.2    3.4    3.7

Hourly earnings,
business sector (1)      2.8    3.3    2.9    3.2    3.4    3.7

CPI                      3.0    1.1    1.5    1.9    2.3    2.4

CPIF                     1.4    1.2    1.5    1.4    1.6    1.9

(1) According to Short-Term Wage and Salary Statistics.

Sources: Statistics Sweden and NIER.

Table 7 Interest Rates


                             2011   2012   2013   2014   2015   2016

At year-end
  Repo rate                  1.75   0.75   1.25   1.75   3.00   3.75

Annual average
  Repo rate                   1.7    1.0    0.9    1.5    2.3    3.3
  5-year government bond      2.3    1.7    2.7    3.5    4.0    4.3
  10-year government bond     2.6    2.0    2.7    3.5    4.3    4.5

Sources: The Riksbank and NIER.

Table 8 Exchange Rate Indices for the Swedish Krona
Annual averages

              2011    2012    2013    2014    2015    2016

KIX          107.7   107.9   105.9   103.9   102.8   102.3
TCW index    122.4   123.3   120.5   117.8   116.3   115.6

Sources: The Riksbank and NIER.

Table 9 General Government Net Lending, Backward-Looking

Percent of GDP and percent of potential GDP, respectively

                       2000-2010   2000-2007    2005-2009
                                    Peak-to-   Trough-to-
                                        peak       trough

Net lending                  1.1         1.3          1.8
Cyclically adjusted
net lending                  1.1         0.7          1.9
Output gap                  -0.4         0.8         -0.6

Sources: Statistics Sweden and NIER.

Table 10 Unfunded Measures Forecast for 2013-2016

Billions of SEK, change from previous year

                             2013   2014   2015   2016    2016

Unfunded measures forecast     11     11     13     15      50

Source: NIER.

Table 11 General Government Net Lending and Cyclically
Adjusted Net Lending Given Different Fiscal Policy Forecasts

Percent of potential GDP

                           2011   2012   2013   2014   2015   2016

Net lending                 0.1   -0.4   -0.2    0.1    0.6    1.1

Net lending excluding
additional measures
2013-2016                   0.1   -0.4    0.1    0.5    1.1    1.9

Cyclically adjusted net
lending                     1.2    0.9    1.0    1.0    1.2    1.5

Cyclically adjusted net
lending excluding
additional measures
2013-2016                   1.2    0.9    1.3    1.6    2.1    2.7

Source: NIER.

Table 12 Assumed Allocation of Unfunded Measures Forecast
by NIER for 2013

Billions of SEK, change from previous year

Household direct taxes (1)                           -3

Revenue                                              -3

General government consumption                        3
General government gross fixed-capital formation      3
Transfers to households                               2

Expenditure                                           8

Total                                               -11

(1) Including increased local government taxes.

Note: The table shows the direct effect on net lending of a
measure with no consideration given to the possibility that the
measure may give rise to changes in behaviour, which in turn may
lead to changes in tax revenue and transfer payments.

Source: NIER.

Table 13 Unfunded Measures 2014-2016

Billions of SEK, change from previous year

                                2014   2015   2016   2014-
Total effect on cyclically
adjusted net lending             -11    -13    -15     -39

Of which preserving the real
value of general government
expenditure (1)                    9     12     12      33

Preserving the real value of general government expenditure means
that funds are appropriated so that general government
consumption increases at the same rate as demographically
determined needs, that general government investment increases at
the same rate as GDP and that deterioration of the real value of
transfers is prevented.

Source: NIER.
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Publication:The Swedish Economy
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Date:Dec 1, 2011
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