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General summary.

1.1 Introduction

Sweden is now going through one of the deepest postwar recessions. Industrial production has been falling for more than a year and there are still no clear signs that an upturn is imminent. The labour market is also greatly affected; considering how industrial production, employment, notices of layoffs and discharges, bankruptcies and so on have been developing, it is surprising that registered unemployment has not risen even faster. Our March forecast for growth in 1991 has been adjusted downwards for the rest of the world as well as for the Swedish economy but the unemployment forecast is still supported by the outcome to date. Efforts of labour market policy have admittedly been stepped up but not so much that the picture is radically affected.

The weaker situation in the labour market has, however, had clear effects on wage and price formation. Settlements in line with the proposals from the Rehnberg Commission have been concluded in most sectors, dispelling the persistent fears that support for the agreement would not be sufficiently widespread. The rate of wage increases is appreciably lower than a year ago. The price rise has also slackened markedly at both producer and retail level.

The external balance has, moreover, been strengthened by development to date. The balance of trade has improved and the surplus considerably exceeds our March forecast, though this is mainly because activity in the Swedish economy has weakened so much more than the average elsewhere.

The present forecasts primarily concern 1991 and 1992, accompanied by more general model estimates for 1993. No allowance has been made for changes in the direction of economic policy.

1991 is definitely a year of recession. Exports are declining, the consumption propensity of households is weak and, above all, investment is falling steeply for fixed capital formation as well as for stockbuilding and particularly in mining and manufacturing. We now estimate that GDP will fall by more than half of one per cent this year. Our forecasts for 1992 suggest that even if production does pick up, the recession will continue. Production will not be sufficiently strong to pull employment up, so unemployment is estimated to go on rising. Capacity utilization will remain low and even with some recovery of profit margins, business profitability will still be depressed.

The recovery we foresee next year is thus very slow but this is probably also a precondition for a sustained reduction of price and wage increases.

It should be noted that our assessments for 1991 and 1992 rest on the condition that activity picks up in the United States and thereby also in the international economy. The new conjunctural information that has become available recently is not clear on this point; a recovery does not seem to have begun in earnest during the summer. There are some signs that, for instance, the British economy is becoming stronger but the uncertainty here is possibly even greater. As regards international activity, however, the uncertainty mainly concerns when the low will be behind us and an upswing on the way. In a more pessimistic scenario that we consider less likely the international upturn may be delayed by up to six months. We find no reason to suppose, however, that when a recovery does come, it will be weaker than expected.

The exchange rates we have adopted for the forecasts are SEK 3.62 per DEM, 6.48 per USD and 7.43 per ECU. These rates are technical assumptions, not forecasts.

1.2 The international background

The Gulf conflict accentuated the decline of international economic activity during the winter of 1990/91. Business and consumer expectations underwent a dramatic change and share prices fell sharply in the latter part of last year. The resolution of the conflict has been followed by an appreciable improvement in business indicators in most countries and share prices have risen.

After some years of very strong growth, production in the OECD area had already begun to slacken in the second half of 1989. By the second half of 1990 growth was very slow and it ceased entirely in the first half of 1991. There was virtually no increase in private consumption, while fixed investment fell. The recession has been most evident in the United States, Canada and the United Kingdom. Production has gone on rising comparatively strongly in Japan as well as in former West Germany. In former East Germany, on the other hand, production has dropped very sharply in the initial phase of the transition to a market economy.

Unemployment in the OECD area has risen from an average low of barely 6 per cent in the spring of 1990 to around 7 per cent this summer, when the rate in the EC area was around 9 per cent. Business sector wage increases in the OECD area are expected to average just over 5 per cent this year, the same as in 1990, with a somewhat higher level in manufacturing. The rate of wage increases is accelerating substantially in former West Germany this year but in most other countries in Western Europe it is slackening.

The rise of consumer prices in the OECD area climbed up to a 12-month rate of almost 6 per cent at the end of 1990 under the influence of higher oil prices. In July 1991 the rate had fallen back to just over 4 per cent, while the average for the EC countries was around 5 1/2 per cent. The annual rate of inflation for 1991 looks like being lowest, around 3 per cent, in France, the Netherlands, Belgium and Denmark, accompanied by 6 to 6 1/2 per cent in the United Kingdom, Italy and Spain. Consumer prices in former West Germany are expected to rise 3 1/2 per cent, with a higher rate in the second half-year because indirect taxes were increased as of July.

The oil market appears to be comparatively stable at present. Disregarding the price movements in conjunction with the attempted coup in the Soviet Union, the price of oil has been very quiet in the autumn, fluctuating between USD 19 1/2 and 20 1/2. Our forecasts assume that the barrel price of Brent oil in 1991 averages USD 19.75. The supply of oil is assumed to remain relatively good in the forecast period, with a slight increase in the average barrel price to USD 20 for 1992 and USD 20.75 for 1993.

The economic recovery is not expected to be sufficiently strong to generate an inflationary spiral. The rise of wages and consumer prices is likely to be marginally lower next year. In Japan, for instance, we count on an appreciable reduction of inflation next year, accompanied by negligibly lower wage and price increases in the United States. In former West Germany a marginal retardation of wage increases will probably not be sufficient fully to offset the inflationary effect of approved increases to taxes and charges; the rate of inflation will stay around 4 per cent from the second half of this year onwards, which is high by West German standards. A clear lowering of wage and price increases is foreseen, on the other hand, in the United Kingdom, Italy and Spain.

The chances of activity improving in the near future seem greatest at present in the United States, where extensive cuts have been made to interest rates. Housing starts turned upwards last spring, the leading indicators have pointed upwards for several months and the inflow of orders for durable goods became stronger in the summer. We envisage that total production in the United States starts rising again in the second half of this year and that the rate becomes stronger during 1992. GDP would still fall by 1/2 per cent this year, while growth in 1992 amounts to 2 1/2 per cent. In Japan, on the other hand, we foresee a slower increase in production in the second half-year, mainly because growth is slackening for exports and investment. Next year the growth of production should pick up, partly because rising demand in North America would lead to a renewed increase in export growth. GDP growth in both 1991 and 1992 is expected to be almost 4 per cent.

In Western Europe the overall development of activity is expected to improve only marginally in the second half of this year, followed by successively stronger growth in 1992. In the United Kingdom, where several interest rate cuts have been feasible since the ERM entry last autumn, the economy is expected to pass a low in the second half of this year, followed by an upturn in 1992. We also foresee some improvement in the growth of production next year in France and Italy. In former West Germany, however, the tighter fiscal and monetary stance is likely to lower the growth of production from 3 per cent this year to 2 per cent in 1992. This assumes that there are no further interest rate increases in Germany in the forecast period. According to German observers, production in the new federal states should rise next year.

In the total OECD area we count on the growth of production accelerating from only 1 per cent in 1991 to more than 2 1/2 per cent in 1992. In Western Europe the growth of GDP picks up from just over 1 1/2 per cent this year to more than 2 per cent next year.

1.3 The Swedish economy in 1991 and 1992

Statistical uncertainties

The description and analysis of economic development in the current year calls for an interpretation of the preliminary outcome statistics and the construction of forecasts for the latter part of the year. The difficulties involved have been discussed earlier, for instance in a paper in our report from May 1988.

The statistics that are now available for development to date this year consist of:

-- preliminary national accounts (NA) for the first quarter -- some preliminary NA data for the second quarter, and -- monthly statistics for some economic variables (e.g. foreign trade in

goods and retail turnover).

The difficulties in interpreting this material are unusually great on this occasion and a brief account is given here before presenting our economic assessments and forecasts.

The demand side analysis is always a major consideration in our GDP forecast. Independent assessments are also made of the sectorwise development of production. The supply and demand sides are then compared in the final phase of the forecast work. Various discrepancies are a normal feature of the NA, for instance between estimates based on supply and demand, and they are included in the calculations as residuals. These residuals are a result of errors and imperfections in the economic statistics. In the semiannual and annual statistics the figures are checked and adjusted with the aid of input-output structures in order to reduce the residuals. We consider, as does Statistics Sweden, that the statistical uncertainty in the production estimates is greater than in the estimates of demand components. GDP from the expenditure side therefore constitutes the official GDP concept and our growth forecasts are constructed from assessments of domestic expenditure and net exports.

In the first-half statistics that are now available the discrepancy between the registered change in production and the registered change in expenditure is unusually great, particularly as regards industrial production. The index for the volume of production shows a fall in industrial production in the first half-year that is considerably greater than is indicated by domestic demand and net exports.

Reconciled NA statistics for GDP in the first half-year were not available for our forecast work. The discrepancies in the basic NA statistics on supply and expenditure are so large that we were not able fully to reconcile the forecasts for 1991 from the production and expenditure sides. We consider that the expenditure side calculations are also more reliable for the first half of this year. It follows, however, that the available statistics cannot fully explain the sharp fall of industrial production that has been registered so far this year.

Domestic demand

Gross fixed investment had already turned downwards last year and is still falling rapidly. An overall fall of 6 per cent is foreseen for 1991 and the steepest drop, 17 per cent, is expected for industrial investment. But the weakening of investment activity is widespread and negative figures are foreseen for most parts of the business sector. Residential investment is being maintained this year by the very high level of starts in the latter part of 1990. Moreover, reconstruction is tending to rise once more. The overall decline of fixed investment is also being contained by bringing forward investment in infrastructure as well as by some central government construction. This results in increased investment by central government enterprises and authorities.

Our business investment forecasts are based on the plans of firms and public enterprises as reported in the May survey by Statistics Sweden. Substantial downward revisions were made compared with the February survey and this largely explains the downward adjustment of our forecasts since March. But the present assessment also allows for a generally weaker demand situation, not least in the domestic market, and a definitely poorer outlook for profitability compared with the situation in March. The future development of fixed investment is also affected by the prospect of a very high real interest rate in the coming years. Moreover, the collapse of real estate prices and the turbulence in financial markets will no doubt contribute to a more restrictive supply of credit in the coming year as well as to a greater reluctance among firms to increase their indebtedness.

We envisage that investment activity will remain weak in 1992 but that the overall decline of fixed investment will stop at just over 1 per cent. Industrial investment will go on falling, though not as sharply as this year. This includes the possibility of a return to increased investment in some branches of manufacturing, for instance transport equipment. Residential construction is slowing down, which helps to explain the overall decline of fixed investment next year. We foresee that construction starts will decrease in the late autumn and in 1992, when the volume of new construction may drop by up to 20 per cent. This is partly offset by an upturn for reconstruction investment in the second half of this year, with the prospect of a further strong increase in 1992. Total residential investment would then decrease by 8 to 9 per cent. If the investments in infrastructure and public construction have their full effect during 1982, strong increases would be noted for central government enteprises and public authorities.

Household saving picked up strongly last year; real disposable income rose more than 4 per cent but private consumption tended to fall. Several factors contributed to this. For one thing, households have no doubt largely completed their adjustment of assets and liabilities to the deregulation of capital markets in the mid 1980s; this would naturally tend to strengthen the savings radio. For another, the revised taxation of capital income in conjunction with the tax reform, making loan financing much more costly, has necessitated a comparatively abrupt adjustment of household liabilities. Thirdly, the uncertainty connected with declining activity was accentuated by the crisis in the Middle East and the exchange rate unrest in the late autumn; this helped to make household consumption very cautious, particularly towards the end of the year.

In the first half of this year the seasonally-adjusted level of consumption tended to recover from the marked low in the final quarter last year. Our forecast envisages a strong reinforcement of household purchasing power both this year and next. There are strong reasons, however, for expecting continued restraint in consumption expenditure and a further increase in saving. Real interest rates are likely to be very high, particularly next year, which may speed up adjustments to the tax reform. The weakening of real estate markets and the problems in financial markets will have a similar effect. Moreover, the very weak labour market, not least for youth, will tend to keep consumption expenditure down.

Under these circumstances we foresee a cautious increase in consumption this year, followed by a somewhat stronger rise in 1992. The growth of consumption in these two years combined would stop at 2 per cent, giving an increase in the savings ratio of 3 percentage points.
 1989 1990 1991 1992
Savings ratio, per cent of
disposable income -4.6 0.0 2.2 3.2
Change in volume, per cent
Disposable income 1.6 4.2 2.9 2.4
Private consumption 1.1 -0.3 0.6 1.3
Savings ratio, percentage points 0.5 4.6 2.2 1.0

Public consumption is expected to grow at a definitely lower rate than in recent years, above all on the central government side. The increase in volume this year is estimated at just over one per cent, followed by a further slowdown to barely half of one per cent next year.

Industrial and wholesale stocks were markedly reduced in the first half of this year. Industrial stocks of inputs and goods in process fell very sharply but finished goods continued to accumulate even though these stocks were reported as too large in the business tendency surveys in December as well as March. This suggests that firms did not expect demand to slacken so sharply and therefore did not cut back production sufficiently to avoid a further accumulation of stocks. Stocks in wholesaling and the car trade were greatly reduced, whereas retail stocks, having risen sharply last year when demand fell off, were cut back to only a limited extent in the first half of this year.

We envisage that industrial stocks of finished goods will be reduced in earnest in the second half of this year. In 1991 as a whole industrial stocks would then be lowered by more than SEK 4bn at 1985 prices, representing a marked curb on production. The reduction of retail stocks, which should become more substantial in the second half-year, has a similar effect. The overall level of stocks in the economy is expected to fall in 1991 by more than SEK 8bn at 1985 prices. Together with the build up of stocks last year, this represents a negative contribution to domestic demand in the region of one per cent of GDP.

Final demand is unlikely to be sufficiently strong for the stock adjustment to be completed in 1991. Destocking is therefore expected to continue next year, particularly for industrial finished goods and the car trade. But as the reduction is calculated to be appreciably smaller than this year, stockbuilding in 1992 is estimated to make a positive contribution to domestic demand of 0.6 of a percentage point.

Wages and prices

A marked retardation of wage increases has been achieved this year, mainly as a consequence of the much weaker situation in the labour market. The Rehnberg Commission has, however, helped to bring about an earlier and more coordinated change than would have been feasible for the labour market organizations on their own. We estimate that wage increases this year will average 5.9 per cent and the available wage information suggests that even this may be on the high side.

The existing wage settlements apply to 1992 as well and we assume that the rise stops at 5 per cent. Our forecasts for 1991 and 1992 accordingly allow for a somewhat higher wage rise compared with the Rehnberg agreement. The institutional conditions in the Swedish labour market are such that it would not be realistic to suppose that wage drift can be eliminated entirely. Still it is reasonable to count on limited wage drift in the weak labour market that we foresee throughout the period. The industrial wage rise next year would then be even somewhat below the level in the main competitor countries in the OECD area. Even if productivity in the present phase develops unfavourably in Swedish industry compared with the competitor countries, this still means that unit labour costs in Swedish manufacturing may match the rate in the rest of the world next year.

The consumer price rise in Sweden in 1990 and 1991 is markedly affected by the increases to indirect taxes in connection with the tax reform. The price rise during 1990 amounted to 10.7 per cent; the underlying rate of inflation (that is, excluding indirect taxes and subsidies) was 7.3 per cent.

This year the rise of consumer prices is clearly slackening; prices have even fallen in recent months. With weak demand and the downward tendency for inflationary expectations that is evident from various surveys, price increases in the rest of the year are likely to be very small. The rate of inflation during the year is estimated at 7.5 per cent and the underlying rate is expected to stop at 4.5 per cent.

In 1992 the slower price rise will show up in the 12-month change figures because these will no longer be affected by the tax reform. Moreover, VAT is to be lowered again by one percentage point in January 1992, which will slow the consumer price rise still further. (Our forecast assumes a general cut; if VAT is lowered only for food, the effect on the CPI will be somewhat stronger than envisaged here.) The rise of the CPI during 1992 is estimated at 3.5 per cent, which would be lower than in the rest of the world. The underlying rate of inflation works out at 5 per cent; the lower increase in the CPI is explained by the reduction of VAT.

Foreign trade and external balance

Both the volume and the value of exports and imports weakened sharply in the first half of this year. With markedly subdued domestic demand, imports fell considerably more than exports.

In 1991 exports of goods are forecast to fall 2 per cent. In the case of raw materials, weak international activity is leading mainly to falling prices, with some increase in volume. Activity in wood products has deteriorated markedly, however, and exports are falling in both volume and price. International demand for pulp is still relatively weak and pulp prices have dropped dramatically but we count on an increase in the volume of exports. A slight increase in exports of iron ore and petroleum products also helps to stabilize the volume of raw materials exports this year.

The growth of markets for Swedish manufactured exports is becoming notably weaker this year, particularly in the OECD area. The growth of the 14 largest export markets in the OECD area in the first half-year stopped at less than 1 per cent. In the second half we count on a somewhat stronger rise, mainly because demand is picking up in the United States and the United Kingdom, which were the countries where the recession began. For all export markets combined we count on a growth rate of just over 2 1/2 per cent in 1991.

The price rise for Swedish manufactured exports fell back sharply last year; relative prices fell for the first time since 1983, when the fall had to do with the large devaluations. In 1991 Swedish export prices are estimated to rise at the same rate as prices elsewhere. Even so, the loss of market share is continuing at an accelerating rate (Diagram 1.1). In the first half-year the volume of exports to the 14 OECD countries fell more than 5 per cent, implying that the share diminished almost 6 per cent. As noted in earlier reports, this is partly because the commodity mix is unfavourable for Swedish exports; it is mainly demand for investment and for vehicles that has weakened sharply internationally and these items are heavy components of Swedish exports. But this can hardly be the sole explanation for the present very weak demand for Swedish export goods. The relative level of prices and costs in Swedish manufacturing is still excessively high.

The devaluations of the Swedish krona in 1981 and 1982 gave Swedish manufacturers an exceptionally strong improvement in competitiveness. As they were immediately followed by an international economic upswing, Swedish exports were able to expand rapidly even though price increases were appreciably higher than in the rest of the world year after year. There was therefore little incentive to make production more rational and efficient. Capacity utilization rose and wage increases accelerated. When international demand then slackened, the lack of cost adjustment in Swedish production took its full toll. Several years of adjustment and cautious pricing will now be needed before Swedish producers can benefit in full from market growth abroad. This year we estimate that the loss of shares in all export markets will stop at 5 per cent, which gives a fall in the volume of manufactured exports by 2 1/2 per cent.

In 1992 it is conceivable, in view of the marked retardation of wage increases, that Swedish export prices will fall relative to the rest of the world. Even so, we foresee that the loss of market share for Swedish manufactured exports will continue, though at a diminishing rate. Overall market growth is expected to lie between 5 1/2 and 6 per cent, in which case Swedish manufactured exports are expected to rise 2 1/2 per cent. Forest products should again help to sustain the volume of exports next year. Little change is foreseen for total exports of raw materials, accompanied by some increase in prices. The volume of total exports could then grow by just over 2 per cent.

Import market growth has also been appreciably weaker than suggested by the increase in domestic demand weighted for imports. Manufactured imports in the first half of 1991 were almost 10 per cent lower than a year earlier, a remarkably sharp drop considering that import-weighted demand fell less than 6 per cent. A mechanical explanation would be that Swedish producers gained shares in the domestic market but this appears less likely when one considers that import prices for manufactured products have continued to rise considerably more slowly than domestic market prices. An alternative explanation could be that the change in demand has been unusually unfavourable for imports; it includes, for instance, a sharp negative swing for stocks of industrial inputs, decreased investment in machinery and greatly reduced car sales. It follows that when demand picks up next year, the volume of manufactured imports may swing all the more strongly. The drop in demand for inputs and cars is coming to an end and in the second half-year we therefore envisage that manufactured imports are in line with import-weighted demand, in which case the annual volume of imports would fall 6 1/2 per cent. Next year our demand forecast points to an increase in the volume of imports by 3 per cent.

Raw material imports are also falling this year in price as well as volume. Imports of crude oil and petroleum products are contributing to this and imports of other raw materials are also weak.

The balance of trade showed a marked improvement in the first half of this year, mainly because imports fell appreciably more than exports in volume. Terms of trade also made a slight contribution. For 1991 we count on an annual improvement of SEK 12bn to a trade surplus of 27bn (Table 1.2). This level should then be maintained in 1992; a lower volume increase in exports compared with imports is largely offset by the prospect of a somewhat faster price rise for exports.
 1989 1990 1991 1992
Exports of goods, f.o.b. 332.1 339.9 335.2 352.3
Imports of goods, c.i.f. 316.2 323.6 307.1 324.1
Balance of trade 15.9 16.3 28.1 28.2
Correction to trade statistics -1.3 -1.3 -1.3 -1.3
Balance of trade, corrected 14.6 15.0 26.8 26.9
Travel -15.6 -18.8 -20.0 21.8
Shipping 9.0 8.5 9.4 10.0
Other services -2.0 -2.1 -0.5 -0.6
Balance of services -8.7 -12.4 -11.2 -12.3
Investment income -14.3 -23.6 -32.3 -33.1
 Interest, net -27.8 -41.2 -51.2 -53.8
 Reinvested earnings 11.4 11.8 11.4 11.7
Other transfers -13.2 -13.5 -13.9 -14.6
Balance of transfers -27.5 -37.1 -46.2 -47.6
Balance on current account -21.5 -34.5 -30.6 -33.0
 In per cent of GDP -1.8 -2.6 -2.1 -2.2
Note: Central Bank definitions.
Sources: Central Bank, Statistics Sweden and the Institute.

The balance of services is also tending to improve from last year instead of weakening as we forecast in March. The outcome has been better than expected mainly for shipping and the balance of other services, including transportation and freight. In 1992 the services deficit will tend to grow again.

The interest deficit is still rising rapidly this year, partly offsetting the improvement in the balance of trade and services. The overall deficit on current account is therefore reduced by only SEK 4bn to just over 30bn, which is equivalent to 2.1 per cent of GDP. This deficit is still considerably smaller than we forecast in March.

In 1992 the deficit on current account is expected to weaken again by SEK 2.5bn, giving a virtually unchanged level relative to GDP. The investment income deficit should then stop rising so rapidly, partly due to growing dividends on investment abroad but also because of a slower increase in interest payments from Sweden.

Financial saving

Total domestic saving is fairly stable from 1990 to 1992 but the breakdown by sectors is changing markedly this year. The public sector saving surplus is being halved to SEK 27bn, while private sector saving is rising by much the same amount (Table 1.3).
 1988 1989 1990 1991 1992
Public sector 39 67 52 27 23
Central government 17 39 14 -18 -28
Local government -6 -5 -8 2 7
Social security sector 28 33 46 43 44
Private sector -51 -100 -98 -69 -68
Households -31 -31 -3 17 31
Business -20 -69 -95 -86 -99
Total domestic saving -12 -33 -46 -42 -45
Reinvested earnings 8 11 12 11 12
Balance on current account -4 -22 -34 -31 -33
Note: Current-account balance as defined by the Central Bank.
Sources: Statistics Sweden and the Institute.

Financial saving in the domestic sectors is equivalent to the balance on current account as presented in the National Accounts. Our picture of the current-account balance is based instead on the definitions used by the Central Bank, which differ at present from those for the National Account (see the note to Table 10.4).

The weakening of public sector financial saving comes entirely from the central government, accompanied by an improvement for local governments. The social security sector shows little change in financial saving from 1990 to 1992. The deterioration for the central government comes from a combination of weak revenue and persistently rising expenditure and is partly a consequence of the situation in the labour market. Expenditure is rising, for instance, for disbursements from the wage guarantee fund and for labour market training, while revenue from direct taxes slows down as the rate of wage increases and employment both fall.

The improvement in private sector financial saving in 1991 comes from firms as well as households. Financial saving in the household sector is swinging from a deficit to a surplus this year and the improvement is expected to continue in 1992. This must be seen in part as an adjustment to the tax reform, with its altered rules for the taxation of capital. It also reflects decreased residential construction, that is, real saving.

The reduction of the business saving deficit in 1991 is likely to be temporary and mainly has to do with decreased investment in fixed assets as well as in stocks. Our estimates point to a renewed increase in the deficit in 1992.

Production and employment

GDP is falling this year by just over half of one per cent. A slight increase in production by the public authorities partly offsets the fall elsewhere. Production in the business sector, measured from the expenditure side, is declining 1 1/2 per cent. As mentioned earlier, information obtained from the production side gives a picture for the business sector that is considerably more negative.

The development of production, employment and productivity from 1990 to 1992 is summarized here:
Percentage change 1990 1991 1992
Business sector
 Production 0.3 -1.4 1.1
 Employment 0.4 -2.6 -0.9
 Labour productivity -0.2 1.3 2.0
Public authorities
 Production 1.4 0.7 0.3
 Employment 0.9 0.5 0.2
 Labour productivity 0.5 0.2 0.2

Total business sector employment in hours is falling sharply this year and labour productivity is improving after falling slightly last year. Public sector employment and production are rising slightly; productivity in this sector is assumed to be unchanged.

In 1992 GDP is expected to rise again. Export growth and some acceleration of private consumption are accompanied by a slower fall in investment activity. A marked swing in stockbuilding makes another important contribution to GDP growth. Business production is expected to rise but not sufficiently to reverse the decline of employment.

With the weak situation in the labour market, the hourly supply of labour is falling 0.5 per cent this year; participation in the labour force, particularly by youth, is declining and so are average working hours. As the volume of hours actually worked is dropping 1.7 per cent, this implies an increase of 1.2 percentage points in the unemployment rate to 2.7 per cent for 1991.

In 1992 we count on a renewed increase of 0.2 per cent in the hourly supply, while labour demand falls 0.6 per cent even though production rises. Registered unemployment would then go on increasing by an average of 0.8 percentage points to 3.5 per cent or almost 160,000 persons. Our estimates suggest that unemployment will rise continuously during the year, which implies that at the turn of 1992 the rate will be between 3 1/2 and 4 per cent.

1.4 Model estimates for 1993

The production of goods and services in Sweden is expected to reach a low at the beginning of next year. The growth of production during the year will no doubt be too weak to generate an improvement in the labour market. Even with extensive efforts of labour market policy, the annual level of unemployment is estimated at 3.5 per cent. Together with low capacity utilization in the business sector, this will help to keep the rate of price and wage increases very low.

Subsequent development depends essentially on whether the low rate of inflation is maintained. This in turn will depend, for instance, on how soon capacity restrictions and bottlenecks arise in markets for labour and goods when activity in the Swedish economy picks up again. The pricing policy of firms is also highly important for the possibility of maintaining and expanding market shares at home as well as abroad. The conditions for a successful adjustment of costs seem to be comparatively good. Structural reforms of the tax system and agriculture, for instance, promote greater flexibility and competition. The link with the ecu has created a firmer norm for exchange rate policy. The high level of industrial investment over the last four years should have established a good foundation for future increases in production. In some respects, however, high profits during much of the 1980s may have tended to postpone essential structural adjustments, for instance among subcontractors of the major firms.

The assessments for 1993 are largely founded on estimates with our macro model. They assume that international economic activity picks up at an accelerating rate. GDP in the OECD countries is expected to rise 3.5 per cent and their manufactured imports by 8 per cent. World market prices for manufactures are assumed to rise 4 per cent. An increase of 6 per cent is envisaged for the price of Swedish raw materials exports. Crude oil prices rise somewhat more slowly, to a level of USD 20.75 a barrel.

With a persistently weak labour market, wage increases in Sweden should remain moderate in 1993. The hourly wage is assumed to rise 4 per cent, representing a further deceleration from 1991 and 1992.

The results of the model estimates for 1993 are summarized here:
Supply and demand 1993
Change, per cent
Private consumption 1.2
Public consumption 0.7
Gross fixed investment 1.1
 Mining and manufacturing 1.9
 Non-industrial business 3.1
 Housing -4.5
 Public sector 2.9
Stockbuilding(1) 0.4
 total 5.8
 goods 6.3
 services 3.5
 total 4.5
 goods 4.5
 services 4.5
GDP 1.9
Total domestic demand 2.6
Real foreign balance(1) 0.6
(1)Change as a percentage of GDP in 1992.

Real household income is expected to rise 1 per cent. The forecasts for 1991 and 1992 imply that household saving picks up very sharply from the low in 1988 and no further increase in the savings ratio is foreseen in 1993.

Industrial investment in 1992 is estimated to be 25 per cent below the peak level in 1989. Even with the marked fall in the period 1990 -- 92, the level of investment is not unduly low. The assessment of industrial investment is complicated by the problem of the extent to which the production capacity that was built up in the late 1980s can still be utilized. Industrial production is falling steeply in 1991 and a relatively moderate recovery is foreseen next year. There should therefore be room for a further increase without reaching the capacity ceiling. Profits are expected to rise in 1992 and 1993 from the low in 1991 but will not reach the high levels from the late 1980s. Under these circumstances, industrial investment is likely to rise fairly moderately in 1993.

Residential investment is assumed to be low and to go on falling for new construction in particular.

Investment activity should be most lively in the rest of the business sector in connection with improvements to the infrastructure for transport and public communications. A high level of investment is also foreseen for the public authorities. It should be noted that the estimates presuppose that road construction and other projects are brought forward for reasons of labour market policy in 1993 as well.

Manufactured exports accelerate in 1993 to an increase of more than 7 per cent in connection with improved competitiveness and strong market growth. Imports also rise faster than in 1992 but the net effect of foreign trade is still a positive contribution to the growth of production. The balance of trade improves from 1992 to 1993 by almost SEK 6bn.

The stronger growth does not yield any appreciable reduction of unemployment in 1993; large productivity gains hold back labour demand in the short run. Labour supply is difficult to assess. The forecasts for 1991 and 1992 imply, for instance, that labour force participation declines on account of weak demand. The estimates for 1993 assume an unchanged participation rate from 1992. The tendency for the tax reform to stimulate labour supply can hardly materialize when labour demand is as weak as envisaged here. Such effects must be seen as a potential when the situation in the labour market is more favourable.

The low wage increases help to keep inflation down. Consumer prices rise at much the same rate as in 1992. With low wage increases and good productivity gains, margins are created for a further improvement in profits as well as a lowering of relative prices. This appreciably improves industrial competitiveness.
Selected key figures 1993
Balance of trade, billion SEK 32.6
Hourly wage rise, per cent 4.0
CPI rise year-on-year, per cent 3.6
Change in employment: 1 000s of persons 0
 hours, per cent 0.3
Unemployment, per cent of labour force 3.6

[Diagram 1.1 Omitted] [Tabular Data 1.1 Omitted]
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Title Annotation:Swedish economy
Publication:The Swedish Economy
Date:Sep 22, 1991
Next Article:Foreign trade.

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