Gov. Ingves PP June 0611

The Swedish economy

Governor Stefan Ingves

How have we succeeded in terms of low inflation?

CPI inflation and historical mean, annual percentage change 16

16

CPI Historical mean

14

14

12

12

10

10 1993-2011 Mean 1.5 STD 1.4

8

8

6

6

4

4 1971-1992 Mean 8.3 STD 3.0

2

2

0

0

-2

-2 71

74

77

80

83

86

89

92

95

98

01

04

07

10

Source: Statistics Sweden

GDP Annual percentage change 8

8 GDP Historical mean

6

6

4

4

2

2

0

0

-2 1970-1994 M ean 1.9 STD 2.0

-4

-2

1995-2010 M ean 2.7 STD 2.6

-4

-6

-6 70

75

80

85

90

95

00

05

10

15

Source: Statistics Sweden

Credibility of the inflation target Per cent 5

5

Inflation expectations CPI

4

4

3

3

2

2

1

1

0

0

-1

-1

-2

-2 94

96

98

00

02

04

06

Note. Inflation expectations refer to money market participants.

08

10

12

14

16

Sources: TNS SIFO Prospera and Statistics Sweden

Comparison with Finland in the EMU For the first time since World War II Finland and Sweden have different stabilisation-policy regimes, but…  …economic development has been strikingly similar!  Independent central banks with inflation targets and frameworks for central-government finances  Economic balance is crucial irrespective of the target chosen for monetary policy! 

Sound central-government finances General government net lending, per cent of GDP 8

8

Finland

6

6

Sweden

4

4

2

2

0

0

-2

-2

-4

-4

-6

-6

-8

-8

-10

-10

-12

-12

-14

-14 90

92

94

96

98

00

02

04

06

08

10

Source: IMF

Strong growth Annual percentage change 10

10

8

8

6

6

4

4

2

2

0

0

-2

-2

-4

-4

-6

-6 Sweden

-8

-8

Finland Mean Sweden 1990-2011

-10

-10

Mean Finland 1990-2011

-12

-12 90

94

98

02

06

10

14

Source: OECD

Exchange rates Index, 1992-11-18 = 100 and SEK per euro 180

12 TCW SEK/EUR (right scale)

160

10

140

8

120

6

100

4

80

2

60

0 93

95

97

99

01

03

05

07

09

11

Source: The Riksbank

Low inflation Annual percentage change 16

16 Sweden Finland

12

12

8

8

4

4

0

0

-4

-4 90

92

94

96

98

00

02

04

06

08

10

Sources: OECD and Statistics Sweden

Shape of the crisis in Sweden    

The recent crisis strongly affected Sweden Sweden is a small, open economy The decline and rise of global trade were key factors in shaping the Swedish crisis Relatively strong Swedish recovery was also helped by solid public finances

World GDP Annual percentage change, seasonally-adjusted data 6

6

4

4

2

2

0

0

-2

-2

-4

-4 Sweden The world

-6

-6 80

85

90

95

00

05

10

Sources: IMF, Statistics Sweden and the Riksbank

World trade volumes, export market and Swedish exports Index, 2000 = 100, seasonally-adjusted data

180

180 World trade Export markets

160

160

Total Swedish exports

140

140

120

120

100

100

80

80

60

60

40

40 94

96

98

00

02

04

06

08

10

Sources: Netherlands Bureau of Economic Analysis, Statistics Sweden and the Riksbank

What have we learnt?   

Swedish banks heavily reliant on international funding And major Swedish banks were exposed to losses through international activities Financial inter-linkages lead to unexpectedly large negative externalities

The market funding of the major Swedish banks via Swedish parent and subsidiary companies per SEK and foreign currencies SEK billion 3000

3000 SEK Foreign currency

2500

2500

2000

2000

1500

1500

1000

1000

500

500

0

0

98

99

00

01

02

03

04

05

06

07

08

09

10

11

Sources: Statistics Sweden and the Riksbank

Central banks' balance sheets Percentage of GDP 400

400 The Riksbank

350

ECB

350

Federal reserve BOE

300

300

250

250

200

200

150

150

100

100

50 Jan 07

50 Jul 07

Jan 08

Jul 08

Jan 09

Jul 09

Jan 10

Jul 10

Jan 11

Jul 11

Sources: Respective central bank

What have we learnt?

Global financial crisis Revealed different vulnerabilities

Iceland

Expansive financial sector both domestically and abroad Dependence on market funding Intransparent ownership cross-lending Fragile banking system

Baltics

Sweden

Catch up High credit growth FX loans Dependence on international market funding Credit losses Liquidity problems

The way forward   

Authorities engaged in debates and work on national & international reforms Introduction of new capital and liquidity requirements Financial Crisis Committee review of Swedish regulatory framework and handling of recent crisis

Concluding remarks ď Ž 1.

2.

3.

Three factors are key: Stable fiscal policy Stable prices Sound financial stability policies