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Investment.

7.1 Summary

Gross investment in fixed assets, having risen strongly in the late 1980s, turned downwards in 1990 and fell as much as 7 per cent in volume in 1991 (Table 7.1). The drop occurred mainly in mining and manufacturing and other parts of the business sector, largely as a consequence of weaker industrial activity. The construction of new housing went on rising, however, and residential reconstruction fell less markedly. Investment by public authorities rose appreciably as a result of a sharp increase in the local government sector.

[TABULAR DATA OMITTED]

In 1992 business investment is still falling sharply. The May survey by Statistics Sweden reports a rising tendency only for the electricity, gas and heating sector and for distributive trades, while the fall appears to be continuing in other parts of the business sector, above all in financial and real-estate administration. Industrial investment, however, is declining much less markedly than before.

New housing investment is turning downwards this year, having more than doubled from 1986 to 1991. This is accompanied by a strong increase for residential reconstruction. Investment by public authorities is calculated to go on rising because the efforts for infrastructural investment are contributing to an expansion on the central government side.

The total volume of investment is calculated to fall this year by almost 7 per cent, mainly because investment in machinery is dropping steeply, while the decline of construction investment is more limited.

For 1993 the May survey indicates a roughly unchanged total level of business investment. An upturn is expected for industrial investment, partly due to an expansion of capacity in mining. Increased investment is also foreseen for the central government enterprises, the National Rail Administration in particular, but a further fall in financial and real-estate administration, for instance.

Investment by public authorities should still be rising next year as a result of a further increase on the central government side, in particular the National Road Administration. A sharp fall is calculated, on the other hand, for residential investment as regards new construction as well as reconstruction. The large number of vacant flats and the high dwelling costs for new units will cause the number of housing starts to go on falling sharply. Moreover, the interest subsidies for reconstruction that the National Housing Board approved in the spring of 1992 represented a smaller volume of reconstruction than in 1991 and much the same volume is assumed to be approved in 1993. In 1992 and the beginning of 1993, however, reconstruction investment is being sustained by the very large volume for which interest subsidies were approved at the end of 1991.

For 1994 the absence of information in the form of investment surveys and other material renders the forecasts highly uncertain even for the business sector.

Industrial activity is expected to turn upwards in 1993 and become stronger in 1994 and this should lead to an appreciable increase in industrial investment. The central government enterprises are expected to go on expanding their investment, partly in connection with efforts for infrastructure. The economic recovery that is foreseen in 1994 may also check the contraction of investment in other parts of the business sector, followed by some growth. The total volume of business investment is estimated to rise almost 4 per cent in 1994.

Investment by public authorities may tend to fall as the central government component drops back after two years of major efforts for road construction, etc. The steep drop for residential investment is expected to continue for new construction as well as reconstruction, thereby more than halving the total level since the beginning of the 1990s. The drop is expected to be most marked for new construction, bringing the level in 1994 below the previous record low in the mid 1980s.

7.2 Business sector

Mining and manufacturing

Industrial investment went on failing in 1991, by as much as 18 per cent for machinery and 6 per cent for construction (Table 7.2). The drop was particularly marked in basic industries and above all in pulp and paper manufacturing, where the level of investment was almost halved. In engineering the change in investment was particularly negative in the manufacture of transport equipment, while a continued increase is reported for the manufacture of electrical machinery, as it is in the chemical industry.

In 1992 industrial investment is still falling; the May survey by Statistics Sweden points to an overall drop in the region of 7 per cent, with construction falling 12 per cent and machinery 6 per cent. The total level will then have declined by one-quarter since the high in 1989. In basic industries the drop is appreciably greater, halving the volume in the course of only two years and making the slump in 1991-92 as steep as in 1977-78. The level in 1992 will be even lower than in 1978. In the past decade basic industries have accounted for a diminishing share of total industrial investment. In the 1970s the share was roughly the same as in engineering, whereas in 1992 basic industries are calculated to invest less than half as much as in engineering and account for less than one-sixth of total industrial investment (Diagram 7. 1). Investment in engineering is also falling this year but appreciably more slowly than in basic industries. Investment in the manufacture of transport equipment is even calculated to rise, having fallen sharply last year. Increased investment in the food industry, printing and other components contribute to some growth of investment in the miscellaneous branches this year.

In 1993 industrial investment should stop falling but no substantial recovery is foreseen. Production is admittedly expected to decline only slightly, while profits rise, but low capacity utilization and high interest rates should contribute to an unchanged volume of manufacturing investment. A modest increase is expected for total industrial investment, however, due to highly expansive plans in mining, where LKAB is counting on a new plant for pellets and constructing a new main level in the mine. Engineering investment is also expected to pick up next year but the outlook is weaker for the miscellaneous branches that are more dependent on the domestic market. The improvement in profitability that is beginning this year will probably be more marked in 1994, accompanied by increased production. A more pronounced growth of investment should then also be feasible, particularly in engineering and some basic industries.

Non-industrial business

Investment in agriculture and fisheries went on falling markedly in 1991 (Table 7.3); the drop for machinery was almost as great as in 1990, while investment in construction tended to rise. The reorganization of agriculture is leading to fewer but larger machines. Demand for agricultural machinery may even decline more markedly than the cultivated area because the surviving farmers will have larger holdings. The procurement of machinery, which dominates agricultural investment, is expected to go on falling this year and next, followed by an unchanged level in 1994.

Investment in forestry fell 8 per cent last year, when timber prices and profitability both weakened. As forest industries have large timber stocks and low liquidity, the downward pressure on timber prices and profitability is expected to continue. This should contribute to a further fall for investment in forestry this year and next, followed by an upturn in 1994.

Investment in electricity, gas, heating and water tended to fall in 1991. The relatively expansive plans for 1992 in earlier investment surveys have undergone downward revisions. Those plans included new combined power and heating facilities for the State Power Board that then did not materialize. In the absence of any other major new projects in this sector, investment is now expected to rise at an annual rate of only about 2 per cent through 1994.

Investment in trade, restaurants and hotels fell sharply last year, as it had the year before in the case of restaurants and hotels. Investment in machinery dropped most markedly, while construction investment in trade rose appreciably after falling in 1990 as a result of the investment tax. For 1992 the May survey points to a further substantial increase for construction investment in trade, accompanied by little change for machinery. As investment in restaurants and hotels is still tending to fall, investment in the total branch is calculated to be much the same as in 1991. In 1993 the fall for restaurants and hotels should be checked so that the curve levels out but for trade the May survey points to a fall for construction as well as machinery. The total volume of investment is then calculated to decline. Some increase in investment in both sub-branches is expected in 1994.

Investment in transport (excl. the merchant fleet), having risen for a number of years, fell almost 18 per cent in 1991. A renewed increase is foreseen in 1992 but only as regards construction, with a further marked fall for machinery. The largest increases come from Swedish Rail and the National Rail Administration in accordance with the public efforts for infrastructure. The drop for machinery is explained by decreased investment in private transport firms. In 1993 the total level of investment is expected to go on rising. Further increases are planned for Swedish Rail and the National Rail Administration but investment in machinery is expected to go on falling. The investment plans of airline companies are low and SAS is planning to sell part of the former Linjeflyg fleet, which is likely to result in disinvestment in aircraft. The forecast for 1994 points to a ten per cent increase for investment in transport.

Investment in the merchant fleet rose sharply in 1991. The level in this branch tends to fluctuate widely because a single ship can make up a very large percentage of the total. In 1992 the level is expected to fall, followed by another sharp increase in 1993 and a fall again in 1994.

Investment in Swedish Telecom rose in 1991 but fell in Sweden Post. The forecast for 1992 comprises a fall in both cases. But as the investment requirement is judged to be large, investment is expected to rise again in 1993 and 1994.

Investment in financing and real-estate administration includes banking and insurance, business services and the management of secondary dwellings and real estate. Investment in this group rose very rapidly from the mid 1980s up to 1990. In 1991 there was a marked swing in the wake of the financing and real-estate crisis and investment fell almost 25 per cent. A further steep drop of almost 30 per cent is foreseen this year and the forecast for 1993 points to a continued but considerably slower decline. In 1994 the level of investment is assumed to stabilize.

7.3 Housing and public investment

Housing

Total residential investment expanded rapidly in the second half of the 1980s and the early |90s, rising almost 40 per cent from 1986 to 1991. The increase came entirely from the production of new housing, while the level of reconstruction fell almost one-third. This shift from reconstruction to new housing was a result of deliberate political controls: access to reconstruction loans was restricted and the guaranteed rate of interest for such loans was doubled, accompanied by stimuli for the production of new housing.

In 1991 total residential investment rose 4 per cent, with increases of 5 per cent for new construction and almost 2 per cent for reconstruction (Table 7.4). Reconstruction investment in blocks of flats did fall but this was offset by a sharp increase in 1 and 2-family houses. The number of dwelling units started swung downwards, falling 25 per cent to 56,000 (Table 7.5). This was a consequence of diminishing demand, as indicated by a sharp increase in the number of vacant units. The swing should also be seen in relation to high housing costs, the crisis in the real-estate market and great uncertainty about the new financing system.
Table 7.4 Residential investment
 Billion SEK, Annual change, per cent,
 Current constant (1985) prices
 prices
 1991 1991 1992 1993 1994
New construction 66.3 5.2 -14.1 -38.5 -32.3
 Blocks of flats 37.8 9.4 -2.7 -38.3 -35.5
 1 and 2-family houses 28.5 0.0 29.5 -38.8 -26.3
Reconstruction 22.4 1.6 28.2 -25.7 -26.7
 Blocks of flats 15.9 11.9 53.3 -29.8 -32.5
 1 and 2-family houses 6.5 62.0 -33.4 -2.9 -3.1
Total 88.7 4.1 -2.0 -33.7 -30.0
Sources: Statistics Sweden and the Institute.
Table 7.5 Number of dwelling units started and completed
 1991 1992 1993 1994
Started(1)
Blocks of flats 34 016 29 460 17 000 12 600
1 and 2-family houses 21 811 13 540 10 000 7 400
Total 55 827 43 000 27 000 20 000
Completed(2)
Blocks of flats 38 201 35 700 31 600 17 700
1 and 2-family houses 28 685 19 400 12 800 8 900
Total 66 886 55 100 44 400 26 600
(1) A project is registered as started when the groundwork as
been inspected and/or
construction has actually begun.
(2) A project is registered as completed when at least 75 per
cent of the dwelling units are
habitable.
Source: Statistics Sweden and the Institute.


New rules for housing finance(1) apply as of 1992. Moreover, the investment subsidy(2) was lowered for projects started after the end of April, which explains why the number of units started in April was exceptionally high, particularly in blocks of flats. In the first half of 1992 the level of starts was little more than one per cent lower than a year earlier, while the annual level is expected to drop 23 per cent to 43,000 units. Besides fewer starts, there is a tendency for new units to be smaller than before, which also holds back the volume of investment. The forecast suggests that investment in new housing will fall 14 per cent this year.

The new system has also tightened terms for reconstruction loans. As a result, applications for state support for reconstruction in blocks of flats shot up at the end of 1991; in December decisions on such applications numbered roughly as many as are normally made in the course of two years and they also concerned sizeable projects - the average level of loans in December was historically high. In the first half of 1992 the average size of projects granted state support was markedly smaller and this tendency is expected to continue, leading to a decreased volume of investment. But as the December projects are likely to dominate starts this year, reconstruction investment in blocks of flats is calculated to rise about 50 per cent. In the case of 1 and 2-family houses, state support for reconstruction has been approved for fewer projects and it has also become more difficult to obtain private loans, so this category of investment is estimated to fan more than 30 per cent this year. The combined result, however, is a sharp increase in reconstruction investment in 1992. As new construction is the larger component, total residential investment is forecast to fall slightly.

The introduction of a new system for housing finance(1) is to begin as of 1993. Briefly, interest subsidies will be phased out by 1999 and are based in the meantime on a standard procedure without regard to either actual costs or inflation. The investment subsidy is abolished entirely.

In 1993 the number of construction starts is expected to go on falling almost 36 per cent to 27,000 units, of which 63 per cent or 17,000 in blocks of flats. This will presumably have a marked effect on new construction; investment is expected to fall almost 40 per cent in 1 and 2-family houses as well as in blocks of flats. Reconstruction investment in blocks of flats is also calculated to fall markedly, almost 30 per cent, in that, as described above, costs per unit are tending to fall, while a slight decline is foreseen for reconstruction in 1 and 2-family houses.

In 1994 interest subsidies will begin to be phased out. The number of units started is assumed to go on falling to 20,000 and a sharp drop is expected for investment in new housing. The downward tendency for reconstruction investment is also expected to continue, particularly in blocks of flats. The forecast for total residential investment in 1994 points to a drop of 30 per cent.

Public investment

In 1991 public investment rose about 5 per cent, mainly as regards machinery, and the increase is calculated to continue in 1992 and come from construction (Table 7.6). The efforts for investment that are being made to promote growth and combat unemployment should have some effect on public investment this year as well as in 1993. In 1994 the total level of public investment may largely level out.

[TABULAR DATA OMITTED]

7.4 Building and construction

The total volume of building and construction, having expanded very strongly in the late 1980s (by more than 18 per cent from 1985 to 1989), was unchanged in 1990 and turned downwards last year (Table 7.7). The boom had come mainly from housing construction and other building in the real-estate management sector (office buildings and other commercial premises). The latter component began to fan in 1990 and then dropped sharply in 1991. Construction investment for transport rose strongly until 1991, when it tended to fall. Central government construction investment and the construction of secondary dwellings also fell in 1991. The downward tendency for the total volume of building and construction was counteracted by a continued increase for residential construction and a less marked fall for reconstruction investment.

[TABULAR DATA OMITTED]

Preliminary estimates indicate that the total volume went on falling in the first half of 1992. Residential construction dropped appreciably and so did building for other real-estate management. This was offset, however, by a very strong rise in the construction sector as well as in residential reconstruction. The construction sector has been stimulated this year by a number of government decisions to bring forward infrastructural investment for labour market reasons, mainly in road and rail construction. Building investment also rose appreciably in distributive trades and at central government authorities. Much the same pattern is foreseen in the second half-year except that the growth of reconstruction is expected to be definitely weaker than in the first hall For 1992 this adds up to some further fall in the total volume. An increase in the volume of reconstruction and repairs (the ROT sector) is more than offset by the contraction of other activities.

The sharp increase in reconstruction investment in the first half of this year was a consequence of a very large number of applications to and decisions by the National Housing Board at the end of 1991 concerning reconstruction loans and interest subsidies. This had to do with new rules for housing finance as of 1992. Interest subsidies approved after the turn of the year point to a definitely lower level of reconstruction.

The forecasts for 1993 give a marked fall in the total volume. Growth is admittedly expected to continue in the construction sector and the central government authorities but construction is expected to fall in other sectors. The contraction of residential investment is very marked for new housing as well as for reconstruction. With low construction and falling prices, an increase is likely for building repairs. Road maintenance is also expected to expand as a result of greatly increased appropriations to the National Road Administration for the period 1992-93.

The forecasts for most of the business sector start from the investment survey by Statistics Sweden that was published at the end of June. No such foundation is available for residential construction, for which the forecasts start from an assessment of housing starts and building times, together with changes in the quality of new housing (floor space, etc.).

New housing starts are expected to go on falling sharply, partly because there are many vacant units and the cost of living in new housing is high. Reconstruction projects are also expected to decrease in 1993 and this gives a very sharp fall for reconstruction investment from 1992, when the level was maintained by the numerous, very large projects for which reconstruction loans and interest subsidies were approved at the end of 1991.

The forecasts for 1994 are inherently uncertain in the absence of survey data and similar material. The estimates allow for the provision of 2 1/2bn kronor for infrastructural projects as part of the "crisis" agreements.

Investment in the construction sector is expected to go on rising. With the prospect of an upturn in industrial activity during 1993, industrial investment in construction is also expected to pick up, having fallen since 1989. Building investment for other real-estate management should level out, having fallen more than 60 per cent since 1989. This would limit the continued fall of investment in other buildings. On the other hand, residential investment is likely to go on falling steeply in 1994 for new housing as well as reconstruction. The expansion of building repairs is expected to continue. The total volume of building and construction is then calculated to be approximately 15 per cent lower than in 1990 and roughly the same as the record low in the mid 1980s.

7.5 Stocks

The level of stocks in the Swedish economy was greatly reduced in the 1980s. After a brief period of small replenishments, the downward trend was accentuated in 1991, when the total volume fell 21bn kronor (at 1985 prices) according to the National Accounts (Table 7.8). Industrial stocks of input goods and goods in process were cut by a total of more than llbn kronor, an adequate response to the weakening of demand, but firms did not manage to reduce their stocks of finished goods. Stocks in wholesaling (excl. cars and fuel) were reduced almost 4.8bn kronor and the corresponding stocks in retailing almost 0.7bn. The fall in oil and fuel stocks came almost entirely from industry. In addition to these items, the National Accounts show a negative residual of 3.5bn kronor that is assigned to stocks in retailing. This residual represents the lack of agreement between calculations for the National Accounts based on production and expenditure, respectively. As we do not regard this residual as representing an actual change in stocks, the same figure has also been included in each of the forecast years in order to avoid an effect on the GDP growth rates.

Stocks went on falling, according to the National Accounts, in the first half of 1992 by almost 4.5bn kronor in seasonally adjusted terms. The comparatively small reduction had to do with an unexpected increase for input stocks in industry as well as a substantial and no doubt involuntary accumulation of stocks in retailing.

The seasonally-adjusted increase in industrial input stocks amounted to just over 1bn kronor and occurred mainly in the food industry and the miscellaneous branches, though input stocks also rose in the forest and metal industries. Engineering seems to have managed better, with a reported reduction of more than 0.7bn kronor. In engineering the reduction of goods in process is also continuing on a substantial scale, as it is in the miscellaneous branches. This is probably an indication of ongoing efforts to make industrial production more efficient. Stocks of finished goods have undergone the reduction that was announced earlier. This process has been most successful in the forest industries as a group but finished goods have also been reduced to a varying extent in other branches. Wholesalers reduced their stocks (excl. oil and fuel) by about 0.7bn kronor. Stocks in the car trade, including spare parts, were cut to some extent but are still large in relation to turnover. As mentioned earlier, retail stocks rose sharply according to figures from Statistics Sweden, presumably as a consequence of the unexpectedly weak development of consumption. Persistently slack consumption suggests that the surplus stocks will hardly be fully estiminated this year.

In the National Accounts for the first half of 1992, stocks in retailing again include a residual, on this occasion -3bn kronor, for the same reasons as for 1991. We have therefore also included the same amount in the first halves of 1993 and 1994 so as not to affect the GDP growth rate. This means that for each of the three years from 1992 to 1994 the tables show a change in stocks that is as much as 6.5bn kronor more negative than we estimate the actual change to be. The annual reduction of stocks in 1992 is calculated to total about 14.5bn kronor, which implies that the reduction in the second half, including the residual, will amount to about 10bn. Industrial input goods are expected to fall so that the annual change is a small reduction. This tendency is likely to be strongest in the food industry and the miscellaneous branches but input stocks are also assumed to shrink in other branches. With continuing rationalization of the industrial produktion process and persistently low production, stocks of goods in process should continue to fall. A further reduction of finished goods is also foreseen, in accordance with the intentions reported in the Business Tendency Survey. Retail stocks excluding cars are expected to fall in the second half-year but an increase is foreseen in the annual level. Wholesalers will presumably continue to reduce their stocks of goods excluding cars and fuel. Some increase is estimated for non-industrial stocks of oil and fuel. Stocks of cars and spare parts are estimated to fall almost 0.6bn kronor.

In 1993 stock reductions, including the residuals, are calculated to total more than 11bn kronor. Industrial stocks are expected to fall about 2.6bn kronor, of which two-thirds concerns finished goods and one-third inputs. At the end of 1992 input stocks will be only somewhat smaller than a year earlier, when firms reported them as too large; this points to a further reduction next year. The continued reduction of finished goods is expected mainly in engineering. Goods in process, on the other hand, are likely to fall less rapidly as rationalization slackens and production begins to recover. Wholesale and, in particular, retail stocks are calculated to go on falling in general as well as for cars.

In 1994 total stocks are expected to fall, excluding the residuals, by just some hundred million kronor. The cuts come from wholesale and retail stocks. We assume that industrial stocks will have been adjusted so that inputs tend to rise as activity recovers. Increased production should also lead to larger stocks of goods in process. Some further reduction of finished goods is foreseen as a result of minor cuts in forest industries and engineering.

Our forecasts imply that stock investment makes a positive contribution to the growth of domestic demand this year, equivalent to 0.7 per cent of GDP. In 1993 there would be a smaller but still positive contribution at 0.3 per cent of GDP, followed by 0.5 per cent in 1994.

(1) Instead of regulating housing loans, the central government provides credit guarantees on simplified terms. The interests subsidy is now available when construction is completed, whereas previously it began later when the loan was paid out. The subsidy is no longer related to the financial arrangement and restricted to interest costs up to 95 per cent of the base, which is computed without reference to the initial value of the object. (2) Introduced as of 1991 to compensate for levying VAT at the full instead of a reduced rate on residential investment. In 1991 and for projects started before May 1992 the subsidy was 9.3 per cent, after which it was lowered to 3.1 per cent and then terminated as of 1993.

(1) The base for new housing is a two-tier standard, the same for all dwellings, types of building and regions: 13,000 kronor/[m.sub.2] for a floor space of [0-35m.sup.2] and 6,000 kronor/[m.sub.2] for [35-120m.sup.2]. The standard is not connected to actual production costs, neither is it indexed to costs. Reconstruction is now defined as projects with a life of 30 years and the base is 80 per cent of the figure for new construction, that is, 10,400 and 4,800 kronor, respectively, but not in excess of actual costs. The proposed subsidy is initially 57 and 42 2/3 per cent, for blocks of flats and 1 and 2-family houses, respectively, of interest costs up to the base; the subsidy is then lowered annually by 4 percentage points. This initial level applies to projects in 1993; for projects begun in each subsequent year the initial level is to be lowered 5 percentage points. In 1996 the system is to be reviewed to determine whether the phasing out of subsidies is to proceed according to plan.

Other changes include a doubling of the down payment from 5 to 10 per cent of construction costs (to the houseowner); the remainder may be borrowed in the market. Up to 30 per cent of the subsidy base can be covered with state credit guarantees provided the sum of the first-mortgage loan and the credit guarantees does not exceed the subsidy base. An additional state credit guarantee, called a redistribution loan, corresponding to 10 per cent of the subsidy base, can be obtained, implying that the houseowner is able to borrow as much as the down payment in order to make interest payments in the early years.
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Publication:The Swedish Economy
Date:Sep 22, 1992
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