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Competitive situation and profitability.

Relative Labour Costs Increasing, but Competitive Strength Maintained

According to the Labour Cost Index (LCI), labour costs rose in 2004 by 3.2 percent in Sweden, compared to 2.2 percent in the euro zone. In the first half of 2005, labour costs were up from the same period a year earlier by 2.9 percent in Sweden and 2.6 percent in the euro zone. (32) Since 1997, labour costs have been rising faster in Sweden than in the euro zone (see Diagram 152). The more rapid increase in costs, however, has been offset by a stronger tendency in productivity. Relative unit labour costs in national currency are therefore roughly the same at present as at the end of the 1990's (see Diagram 153). Measured in a common currency, i. e. when changes in exchange rates are also considered, relative unit labour costs are now lower than at the end of the 1990's because of the weakening of the krona against the euro. Relative unit labour costs measured in a common currency will decrease slightly in 2006 but increase in 2007 as the krona strengthens. Even after that appreciation, however, relative unit labour costs will be low by historical standards.

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The low relative unit labour costs in a common currency, however, should not be taken to mean that Sweden's competitive situation has improved to a corresponding degree, for the terms of trade, or the relationship between prices of exports and prices of imports, have also been weakening since the end of the 1990's (see the section "Terms of Trade, Current Account and Gross National Income"). The reason is that rapid productivity growth in Sweden--above all in the telecommunication products industry--has contributed to a weak tendency in prices of exports for the past ten years. In the profit level treated in the next section, the price trend is taken into account, thus providing additional information on the international competitiveness of Sweden's business sector.

Business Sector Profitability to Strengthen

The profit share (33) in the business sector increased somewhat further in 2005 after recovering significantly from a low point in 2001 (see Table 26) and Diagram 154). In the forecast period 2006-2007, the profit share is expected to continue increasing somewhat.

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Growth in international demand has slackened somewhat this year, but domestic demand has been accelerating. Product prices, and particularly input prices, have gone up considerably with the sharp rise in prices of petroleum and metals (see Diagram 155). As a consequence, there has been rather little increase in value-added prices (see Diagram 156). Nevertheless, with a weaker exchange rate for the krona, fairly good growth in productivity and relatively low increases in labour costs, the profit share of the business sector has risen somewhat further in 2005.

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In manufacturing, the profit share is largely unchanged in 2005 (see Diagram 157). Within manufacturing, some redistribution of profits from the investment goods industry to basic industries is taking place as prices of metals surge. Strong growth in domestic demand has made it possible for the profit share to increase in service industries this year (see Diagram 158).

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In 2006-2007, labour costs will accelerate somewhat in the business sector. Increases in unit labour costs, however, will be offset by a much more modest tendency in prices of imported inputs. A strengthening krona will have a dampening effect on prices of both exports and imports, but in the aggregate it will curtail the tendency in the profit share to some extent. The profit share in the business sector will increase in both 2006 and 2007. In the business sector excluding finance and real estate, the rise will be somewhat more pronounced, as a slack tendency in rents is limiting the increase of prices of housing, and the profit share in 2007 will be on a par with the average for the 1990's (see Diagram 154) (34).

In manufacturing the profit share will be up in 2006. The favourable price tendency in the mining and metals industries is expected to continue. Thereafter, the profit share in manufacturing will decrease, as prices in this segment are anticipated to recede. With the expansion in construction, profit margins there are forecast to be significantly higher. In service industries excluding finance and real estate, it is estimated that the profit share will increase in both 2006 and 2007. The strong tendency in domestic demand is expected to provide a margin for firms to raise prices somewhat more than the increase in costs.

In view of the relatively low unit labour costs noted above and the forecast for the profit share in the business sector, Sweden's competitive position is considered likely to remain favourable in the next few years.

(32) The figures for both the full year 2004 and the first half of 2005 are preliminary.

(33) The gross profit share of value added at factor prices. The profit share normally rises if value-added prices increase faster than unit labour costs.

(34) In the second half of the 1990's, there was a sharp decrease in the profit share of the business sector. The decline was accentuated by an increase in the real-estate tax together with abolition of the interest rate subsidy for housing loans.
Table 28 Prices, Costs of Output and
Profit Shares--Business Sector

Annual percentage change

 2003 2004 2005 2006 2007

 Not calendar-adjusted

Value-added price (1) 0.8 0.6 0.8 1.4 1.9
 Product price 0.9 1.3 2.5 1.9 1.3
 Input price 0.7 2.0 3.9 2.2 0.8
Unit labour cost (ULC) 0.0 -1.7 0.6 0.6 1.7
 Hourly labour costs 4.2 2.5 3.5 4.0 4.5
 Productivity (2) 4.1 4.3 2.9 3.4 2.8
Profit share (3) 0.5 1.4 0.1 0.4 0.1

 Calendar-adjusted

Unit labour cost (ULC) -0.1 -1.2 0.6 0.3 1.6
 Hourly cost of labour 3.9 3.5 3.5 3.5 4.3
 Productivity (2) 4.0 4.8 2.9 3.1 2.6
Profit share (3) 0.6 1.1 0.1 0.6 0.2

(1) The value-added price is calculated by deducting the average
price of inputs consumed (input price) from the average price of
the output produced (product price). (2) The development of
productivity in this table has been calculated only for employees;
in other words, hours worked by business proprietors are not included.
(3) Gross profit is divided by value added at factor prices, with
consideration given to taxes and subsidies on output. The change
is expressed in percentage points.

Source: NIER
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Publication:The Swedish Economy
Date:Dec 1, 2005
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