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7.1 Summary of fixed investment

Gross investment in fixed assets, having risen continuously by a total of more than 40 per cent since 1982, turned downwards in 1990 and fell more than 1 1/2 per cent (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. Investment by central government enterprises, on the other hand, went on rising and an increase was also noted for total residential investment--reconstruction went on falling but the construction of new housing continued to expand. Although investment by central government authorities rose strongly, a fall in the local government sector meant that total investment by public authorities decreased.

In 1991 the total volume of investment is falling much more markedly than last year, primarily due to the sharp industrial recession. Investment in mining and manufacturing is calculated to fall as much as 17 per cent. Decreased investment is also foreseen in the rest of the business sector, accompanied by a further increase for central government enterprises. Some increase is calculated for both the components of residential investment, though new construction is expected to turn downwards in the second half-year, while reconstruction picks up in that the government intends to grant state reconstruction loans to a greater extent at lower interest costs. Total investment by public authorities is expected to go on falling.

Since our spring forecasts for 1991, investment has been revised downwards mainly for the business sector. The new assessment allows for the plans reported by firms and public enterprises in the May survey by Statistics Sweden; these are consistently lower than the plans reported in February. Moreover, the drop in activity and the loss of industrial profitability are now judged to be more marked. The preliminary outcome for the first quarter that Statistics Sweden published in June also shows very sharp cuts in branches that are not covered by the surveys, for instance real estate and business services.

The estimates for 1991 imply that machinery investment, which began to decline in the second half of last year, is still falling steeply in the first and second halves of this year. Construction investment, which turned downwards and tended to fall in the first half of this year, is expected to drop more appreciably in the second half.

In 1992 the forecasts indicate some further fall in total investment activity. The main reason for this is that total residential investment is calculated to decline as a consequence of a steep fall for new construction. Business investment, on the other hand, should tend to rise because a further decline for industrial investment in particular is offset by a sharp upswing for central government enterprises. An appreciable increase is also foreseen for investment by public authorities.

The upswing for central government enterprises and authorities (roads) is a consequence of the vigorous efforts for infrastructure in the coming decade that Parliament approved last spring. Moreover, Government programmes in August and September envisage that some of the infrastructural investments in the road and rail networks are brought forward in the context of labour market policy and this is also the reason for bringing forward the government grants that are to be available for local authority investment in the work environment of schools.

7.2 Business sector

Mining and manufacturing

For the first time since 1982 industrial investment fell in 1990, by 4 1/2 per cent (Table 7.2). Construction investment had already begun to decline in the first half-year, while machinery investment was still rising in the second half. The branch where investment fell most sharply was engineering in general and the manufacture of transport equipment in particular. Investment also fell substantially in the manufacture of machinery, iron and steel basic industries, printing and the food industry. Investment rose, on the other hand, in the chemical industry and electrical machinery, for instance.

The plans of firms for the current year, presented in the May survey from Statistics Sweden, indicate that investment is still falling. Construction investment is expected to drop 20 per cent and machinery investment 16 per cent, giving a total fall of 17 per cent in 1991 to somewhat below the volume of investment in 1987. The investment ratio, with a drop from 21 to 19 per cent, also goes back to the level four years ago.

Decreased investment is planned by virtually every branch except the chemical industry. The level in forest industries is calculated to fall by more than one-third and in other basic industries by 20 per cent. With investment in the manufacture of transport equipment still falling, the level in engineering is also expected to drop about 15 per cent. The fall in other manufacturing comes mainly from investment in the production of construction materials.

In 1992 the decline of investment is expected to slacken to 5 per cent, with a fall of 12 per cent for construction and 4 per cent for investment in machinery. This represents just a marginal upward adjustment to the plans of firms, which in the May survey normally underestimate outcome. This cautious interpretation is grounded on the weak development of industrial production as well as profitability. At branch level it can be noted that, with a fall in the region of 20 per cent in 1992, investment in basic industries will have been halved in the course of three years. Investment in engineering is also expected to drop next year; plans for the manufacture of machinery point to a decline for the third year in succession, while investment in the manufacture of transport equipment is expected to rise slightly, having fallen markedly for two years. The modest increase for investment in other manufacturing next year reflects plans for greatly increased investment in the printing industry.

Non-industrial business

Investment in agriculture and fisheries fell back again in 1990 after rising for some years in the late 1980s. The drop by as much as 27 per cent came mainly from decreased purchases of tractors and other machinery. The downward tendency is expected to continue this year and in 1992, though at a slower rate than in 1990 (Table 7.3).

Investment in forestry fell more than 5 per cent in 1990. As the volume of felling and timber prices are both falling this year, the contraction of investment is expected to continue at a rate of about 14 per cent, followed by little change in volume in 1992.

Investment in electricity, gas, heating and water rose very strongly in the early 1980s, partly in connection with the completion of new nuclear power facilities. After that, investment in this sector has tended to fall, last year by 9 per cent. The plans for 1991 and 1992 point, however, to an upturn, partly because new combined power and heating facilities are being brought into use and the State Power Board is undertaking relatively extensive environmental investment. The total volume is therefore expected to rise 4 and 16 per cent, respectively, in 1991 and 1992.

Total investment in trade, restaurants and hotels fell last year because investment in trade turned into a steep drop, accompanied by some further increase for restaurants and hotels. The drop for trade was most marked for construction, partly because the investment tax on non-priority construction was increased from 10 to 30 per cent in February. This high levy, together with the increase in VAT to the full rate for restaurant and hotel services as of 1990, with the attendant loss of profitability, no doubt explains why investment activity is also weak in restaurants and hotels.

In 1991 total investment seems to be falling in both parts of this branch. The drop appears to be most marked for construction in hotels and restaurants, with some recovery in trade in that the investment tax was removed at mid-year. Some increase is therefore estimated for total construction investment, while machinery investment falls appreciably in both sub-branches. A further drop in foreseen in 1992, mainly for machinery.

Investment in transport fell more than 7 per cent in 1990, entirely due to decreased investment in machinery, while building and construction rose almost 20 per cent. This year total investment here is expected to rise more than 10 per cent, with the strongest increases for Swedish Rail and the National Rail Administration in accordance with the infrastructural efforts that Parliament approved last spring. The projects include a railway line to Arlanda airport and improvements to the tracks up the west coast and round Lake Malar. In 1992 investment is forecast to go on rising; it can be mentioned that, besides further infrastructural efforts, the planned construction of a third runway at Arlanda will boost investment by the Board of Civil Aviation.

Investment in the merchant fleet fell more than 30 per cent in 1990, partly due to increased exports (these are booked as disinvestment and deducted from the total). An increase of as much as 120 per cent is forecast for 1991, followed by more moderate expansion in 1992.

Investment in the post office and telecommunications administrations rose in 1990, mainly for machinery. For 1991 the survey points to a temporary fall. As the Post Office faces growing competition and demand for telecommunication services and products is rising, there is a large investment requirement here and the level is accordingly expected to rise again in 1992.

Investment in financing and real-estate administration includes banking and insurance, business services and the administration of secondary dwellings and real estate. Investment in this group has risen continuously over the last five years and the increase in 1990 reached almost 7 per cent. An exception to this positive trend is banking and insurance, where investment in construction fell from an unusually high level in 1989. This year, however, total investment here is expected to fall more than 15 per cent. The forecasts for 1992 point to a further decline, mainly for banking and insurance.

7.3 Housing and public investment


From 1986 to 1990 total residential investment rose almost 40 per cent. A very marked increase in the production of new housing was accompanied by an appreciable contraction of reconstruction. Reconstruction projects became less extensive and the number of starts also fell. This shift from reconstruction to new construction is explained by a decision by Parliament in the autumn of 1988 to restrict access to reconstruction loans and largely double the state-guaranteed rate of interest here to 5.25 per cent, the reason being that overheating in the construction market was pushing up construction costs, for instance.

In 1990 total residential investment rose just over 4 per cent, with an increase of 13 per cent for new construction, which makes up more than 70 per cent of the total, and a contraction of reconstruction at much the same rate.

New housing starts rose by about 8,700 dwelling units to over 67,500, which is more than twice the level in 1986 (Table 7.5). The number of units completed also rose in 1990 by more than 8,000 as a direct result of the high level of starts in recent years. It is mainly investment in blocks of flats that has risen, with 90 per cent of the total increase in the number of starts.
 1990 1991 1992
Blocks of flats 40472 31700 29000
1 and 2-family houses 27107 23300 19000
Total 67579 55000 48000
Blocks of flats 33746 36700 34400
1 and 2-family houses 24680 27900 22900
Total 58426 64600 57300
(1)A project is registered as started when the groundwork has been inspected and
construction has actually begun.
(2)A project is registered as completed when at least 75 per cent of the dwellin
g units
are habitable.
Sources: Statistics Sweden and the Institute.

In 1991 new construction and reconstruction investment are both expected to rise just over 1 per cent. The number of starts is expected to fall back to 55,000 units as a consequence of slackening demand; the number of vacant units, for instance, has risen almost threefold since March 1990. Relative housing costs have gone up as a result of the tax reform and the new system for housing finance, due to be introduced as of 1992, has no doubt made household somewhat uncertain about the future real value of owner-occupied houses. Moreover, the average size of new units is tending to fall and this holds back the volume of investment. The expected increase in volume this year is a consequence of the large number of units that were started but not completed in 1990.

The tendency for new production to fall has led the Government, for reasons of labour market policy, to grant exemptions to a greater extent from the restrictions on reconstruction loans and also allow a lower guaranteed interest rate of 3.4 per cent. The number of applications for reconstruction loans did in fact rise in the first half of 1991. The prospect of a continued increase in the second half lies behind the expected increase in reconstruction investment.

The forecasts for 1992 suggest that total residential investment will fall more than 8 per cent, an increase of just over 14 per cent for reconstruction being more than offset by a drop of over 18 per cent for the production of new housing. The total number of units started is expected to fall back to 48,000, with a decrease for blocks of flats as well as for 1 and 2-family houses. As of 1992 the terms for state loans for reconstruction are to be the same in principle as for new housing, which suggests that the expansion of reconstruction investment will continue next year.

Public investment

In 1990 public investment fell almost 1 per cent as a result of decreased construction. A further fall is foreseen this year due to decreased investment in machinery. In 1992 a marked increase is expected for public investment, particularly in construction, in connection with the policies for promoting growth and combatting unemployment.

7.4 Building and construction

Total building and construction went on rising in 1990 (Table 7.7). The strong expansion of new construction for transport and housing management continued; this gave an overall increase for construction investment in the construction branches as well as in housing management despite decreased construction investment for electricity and heating and a sharp fall, for the third year in succession, in housing reconstruction. Industrial building and other building also fell. An appreciable increase was noted, on the other hand, for building investment by central government authorities. Building repairs also appear to have increased appreciably last year. Compared with the level in 1981, the total volume of building and construction last year is calculated to have been approximately 25 per cent higher.

Preliminary estimates suggest that the seasonally-adjusted volume in the first half of 1991 largely remained at this high level. The sectorwise tendencies were much the same as last year, with increases for construction and residential building but cuts in industrial building and other building. The forecasts for the second half point, however, to a clear downturn for the total volume of building and construction. A further increase is expected for construction as a result of the ongoing expansion for transport but the production of new housing is calculated to fall, accompanied by a further decline for industrial building and other building.

The government measures in the spring and summer for stimulating building activity are expected to check the fall in volume in the second half of this year and generate some expansion at total level in 1992. The effect this year is likely to be strongest for residential reconstruction, where investment has fallen more than 30 per cent since 1987 after the interest subsidy had been virtually halved in October 1988. The attendant possibility of obtaining exemptions for reconstruction with state loans at the previously low rate of interest was implemented restrictively until last spring but very generously after that, leading to a sharp increase in reconstruction loan applicaions and approvals. Reconstruction investment is therefore calculated to turn sharply upwards in the second half of this year. As of 1992, moreover, the loan terms for reconstruction are to be the same in principle as for new construction and this should lead to a further expansion of reconstruction. The removal of the 30 per cent investment tax on non-priority construction in the Stockholm region as of July is likely to have a limited effect now that economic activity is generally low and profitability is weak in the branches concerned, for instance distributive trades, other real-estate administration, restaurants and hotels.

The level of housing starts fell in the first half of this year for blocks of flats as well as for 1 and 2-family houses. The decline, from a comparatively high level, is expected to continue in the second half. Demand for new housing is no doubt weakening in part because the tax reform has raised dwelling costs. At the same time, the recession may have made households somewhat more uncertain about their economic situation and more cautious about substantial new commitments. The new financing system, with loans for interest costs, may also have made households somewhat more uncertain about the future real value of own homes.

The total volume of construction in 1991 is calculated to be somewhat lower than the year before. Increases are envisaged for construction and to some extent for total residential investment, offset by a fall for industrial building and other building.

For 1992 the estimates point to some renewed increase in building nd construction to much the same volume as in 1990. Contributory factors here are the policy of stimulating residential reconstruction and the substantial effort for infrastructures, above all in the transport sector, including roads. The construction sector as well as reconstruction and building repairs are thus expected to keep the level up next year, with a weak outlook for residential construction.

7.5 Stock investment

In 1990 stock investment at constant (1985) prices is assumed to have totalled almost 1.2bn kronor. In June the National Accounts had estimated an increase of 753m kronor and the present upward adjustment is based on new material which suggests that the reduction of industrial input stocks was less marked than the preliminary statistics indicated: about 350m instead of almost 1bn kronor. Moreover, stocks of goods in process appear to have been over 200m kronor higher than reported earlier. The new figures also justify some downward adjustment of stocks in trade.

The accumulation of stocks last year, estimated here at almost 1.2bn kronor, occurred in mining and manufacturing, with an increase of more than 1.4bn for finished goods excluding petroleum products, as well as in retailing, where preliminary figures indicate that stocks rose 1.2bn. As demand weakened, industrial stocks were increasingly regarded as excessively large and the level of input stocks, excluding the petroleum industry, was reduced by about 350bn kronor. The largest reduction was achieved in engineering, where input stocks were cut back by almost 1bn kronor. The accumulation of finished goods occurred mainly at sawmills and in food manufacturing. The cuts in production were also inadequate in the case of pulp and paper, leading to rising stocks of finished goods in the second half-year. Production in engineering was adjusted more satisfactorily and here the seasonally-adjusted level of stocks was lowered more than 400m kronor in the second half-year. In the Business Tendency Survey, however, virtually all branches of mining and manufacturing considered that stocks of inputs as well as finished goods were too large at the turn of the year. Stocks of goods in process are calculated to have fallen almost 300m kronor.

Retail stocks rose rapidly last year. The seasonally-adjusted increase in the second half was larger than at any time in the 1980s. Car stocks, moreover, were reduced to only a limited extent. In wholesaling, on the other hand, stocks were cut back more than 700m kronor, on a seasonally-adjusted basis entirely in the second half-year. Total stocks of oil and other fuel grew less than 100m kronor in 1990.

In the first half of 1991 preliminary estimates point to very extensive stock reductions; we calculate that the seasonally-adjusted level fell more than 7.5bn kronor. Industrial input stocks and goods in process were reduced to a large extent but finished goods accumulated rapidly. As in 1990, production was adjusted least satisfactorily at sawmills and in food manufacturing but production for stocks also continued in the case of pulp and paper. It seems that firms were relatively successful in cutting stocks on the input side but that this was achieved not only by decreased purchasing but also by maintaining production in excess of current demand. This led to the accumulation of finished goods. In the Business Tendency Survey last June firms reported that input stocks were still too large and further reductions were planned. Dissatisfaction with stocks of finished goods was considerably greater than at the beginning of the year.

Wholesale stocks, excluding fuel, underwent a seasonally -adjusted reduction of more than 1.7bn kronor. The reduction of car stocks was also substantial, around 950m kronor seasonally adjusted. Retailers were less successful, cutting stocks only about 350m kronor. On the other hand, total stocks of oil and other fuel were greatly reduced in the first half of this year but as we count on a renewed build-up in the second half, the annual reduction amounts to less than 0.5bn kronor.

In mining and manufacturing, excluding the petroleum industry, we count on further major stock reductions in the second half-year, above all for finished goods. The annual reduction in 1991 would then total about 3.7bn kronor, of which 2bn for inputs, just over 1.4bn for goods in process and just over 0.2bn for finished goods.

In trade we envisage that stocks will go on falling in the second half-year, mainly in retailing. For 1991 this would give stock reductions of just over 2bn kronor for wholesale trade, around 1.2bn for cars and car components, and about 1bn for retailing.

The total level of stocks would then fall sharply this year, by more than 8.6bn kronor. A large part of the necessary adjustment would then have been achieved by the turn of this year but we forecast that further cuts will still be necessary in 1992, particularly as regards industrial stocks of finished goods.

The destocking of finished goods is foreseen mainly in forest industries and engineering but also in food manufacturing. At constant (1985) prices, total industrial stocks of finished goods are calculated to fall more than 1.8bn kronor. Little change is foreseen in input stocks, while stocks of goods in process would fall just over 0.2bn kronor. Car stocks are also calculated to go on falling, though not as much as the year before. Further cuts are foreseen for wholesale stocks, primarily grain, and we also count on a continued reduction of retail stocks by about two hundred million kronor in the early part of next year. The overall change in stocks in 1992 would then amount to a reduction of more than 3.2bn kronor.

With these forecasts, the contribution of stock investment to the growth of domestic demand will be negative this year at 1.0 per cent of GDP, followed by a positive contribution in 1992 at 0.6 per cent of GDP. [Tabular Data 7.1 to 7.4 and 7.6 to 7.8 Omitted]
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Title Annotation:Sweden
Publication:The Swedish Economy
Date:Sep 22, 1991
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