Macroeconomic development and economic policy 2014-2018.

Sweden's GDP will grow modestly in the first quarter of 2014 after recovery began at the end of 2013. Not until the beginning of 2017, however, will the economy return to full capacity. The protracted recovery in the OECD area means that domestic demand will be more important than usual for Swedish growth. As cyclically-adjusted net lending in 2014 will be considerably lower than the surplus target would permit in the longer term, fiscal policy will need to be tightened in subsequent years. Given the extensive need for tightening, the NIER believes that general government net lending will not meet the surplus target until 2018, the year after the economy reaches full capacity. Low resource utilisation, low inflation and low interest rates abroad suggest that the Riksbank will leave the repo rate unchanged until the third quarter of 2015.

This chapter begins with an overview of the NIER's forecast for the global and Swedish economies in 2014-2018 before looking in greater depth at the forecast for monetary and fiscal policy. A more detailed presentation of economic developments in 2014-2015 can be found in the subsequent chapters of the report. Public finances and fiscal policy are covered in more detail in the chapter "Public Finances".

International Developments

CONTINUED RECOVERY IN THE GLOBAL ECONOMY

Leading indicators suggest that the global economy will continue its recovery, but the global picture is mixed. Growth is much higher in the US, the UK and Japan than in southern Europe. GDP growth in emerging markets is weaker than normal (see Diagram 14), but they have fewer idle resources than in the OECD. When the Federal Reserve began to taper its quantitative easing, some emerging markets were also hit by outflows of capital, leading to falling share prices and weaker currencies.

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SLOW RECOVERY IN THE OECD

The adjustment of competitiveness between countries in the euro area is continuing. Relative cost levels have improved in several countries with structural current account deficits, but further structural reforms will probably be required in some countries to correct both internal and external imbalances. It is also important that decisions are made on a credible framework for the management of bank crises, and that the stress-testing of the European banking sector by the European Central Bank (ECB) does not uncover any previously unknown problems. Household saving is expected to remain high, and the public sector will continue its fiscal tightening. As debt returns to more stable levels, lending rates are expected to fall for households and firms, and demand for credit will increase as the economy recovers. This will gradually enhance the effect of the region's expansionary monetary policy, which will contribute to the recovery. However, the recovery will only marginally reduce unemployment, which will remain high in the coming years. High unemployment and weak resource utilisation mean very low price pressure in the euro area as a whole (see Diagram 15). Prices in the euro area as a whole will also be held back by low inflation in Germany, because greater competitiveness for euro countries with structural current account deficits depends on prices rising less than in Germany.

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In the US, the recovery has slowed recently, due mainly to weather-related disruptions. This slowdown will not persist, however, and the recovery is expected to accelerate again before long. US households are being favoured by rising asset prices, and the debt adjustment process is considered largely complete. Combined with unemployment continuing to fall, this has prompted greater confidence among both consumers and firms, which is stimulating consumption, investment and, thereby, growth. The level of idle resources is still considered to be high, however, which means that monetary policy will remain highly expansionary, contributing, in turn, to resource utilisation gradually increasing and normalising in 2018.

In Japan, expansionary monetary policy has contributed to substantial depreciation of the yen. This has stimulated exports and contributed to increased investment and lower unemployment. The expansionary monetary policy has also pushed up both households' and firms' inflation expectations. Higher inflation expectations, high resource utilisation and the increases in consumption tax in 2014 and 2015 are expected to turn deflation into inflation of around 2 per cent.

GDP in the OECD countries is expected to grow by an average of 2.4 per cent per year in 2014-2018 (see Table 3), but resource utilisation is low and will not normalise until the end of 2018 (see Diagram 16). This low resource utilisation will put a damper on inflation, which means that the expansionary bias of monetary policy is not expected to threaten these countries' inflation targets. This means, in turn, that the recovery may continue to be bolstered by low central bank policy rates in the coming years (see Diagram 17).

EMERGING MARKETS HAVE LOST MOMENTUM

Activity in emerging markets grew more slowly in 2013 than in 2012, due partly to lower trend growth and partly to financial turbulence as a result of the Federal Reserve's tapering of asset purchases, which has led to falling share prices, weaker currencies and tighter monetary policy in countries with large current account deficits. In Brazil, low productivity growth, low investment and poorly functioning infrastructure have led to a drop in trend growth. In China, growth is expected to be much slower in the coming years than the average of just over 10 per cent in 2000-2012. This is due to measures to promote transition to a growth model based on a higher share of private consumption and a lower share of investment. GDP in emerging markets is nevertheless expected to grow by an average of 5.6 per cent per year in 2014-2018 (see Table 3), which is much higher than in the OECD countries.

Developments in Sweden

PROLONGED SLUMP

The weak global economic climate in the wake of the financial and debt crises has meant that the Swedish economy remains in the doldrums more than five years after the financial crisis erupted. High export dependence has resulted in the Swedish economy being hit hard by dwindling external demand. The nature of the crises has also fuelled uncertainty about future economic developments, causing households and firms to postpone consumption and investment. Despite expansionary economic policy, resource utilisation in Sweden is much lower than normal. Based on the NIER's calculations, GDP in 2013 was around 2 per cent below potential GDP, or the level of production associated with normal utilisation of labour and capital (see Diagram 18).

WEAK PRODUCTIVITY GROWTH HAS HAMPERED GROWTH IN SWEDEN

The NIER believes that recent years' demographic developments and economic policy--especially the earned-income tax credits--have helped increase the structural supply of labour and thereby potential hours worked. Meanwhile, productivity growth in the business sector has been weak (see Diagram 19), which is believed to be a reflection to some extent of lower growth in potential productivity. This can be explained partly by low resource utilisation leading to lower investment growth for a prolonged period, with negative effects on capital formation. Weak productivity growth in many other countries suggests that the development and introduction of new technology have slowed. All in all, potential GDP is estimated to have grown by an average of 1.9 per cent per year in 2007-2013, which is almost half a percentage point lower than the average rate of growth in GDP in 1980-2006.

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The recovery in the Swedish economy in 2014-2018 means that investment in fixed assets will pick up relatively quickly. The capital stock will therefore grow more quickly, promoting a gradual increase in potential productivity growth (see Table 4). Potential hours worked will continue to rise, and altogether this translates into stronger growth in potential GDP in the coming years.

STRONGER EXTERNAL ECONOMY IMPORTANT FOR SWEDISH RECOVERY

The fourth quarter of 2013 saw extensive stockbuilding by firms after two quarters of destocking, and government consumption increased considerably, due partly to temporary factors. Indicators point to significantly lower growth in the first quarter this year, with GDP forecast to rise by just 0.1 per cent. GDP will then grow more quickly, and resource utilisation will rise as the economy continues to improve in 2014-2018. The severe economic downturn in connection with the financial crisis has meant that the current slump has been unusually protracted. By the time resource utilisation in the economy as a whole normalises at the beginning of 2017, the slump will have lasted for a period of eight years.

The recovery in the Swedish economy can to a great extent be explained by the brighter economic outlook abroad. The NIER estimates that demand for Swedish exports will grow by an average of almost 5 per cent per year in 2014-2018 (see Dia gram 20). Export growth will be somewhat below the historical average in 2014-2018, however, and the recovery will be more dependent on a higher rate of growth in domestic demand. Reduced uncertainty and an investment backlog in the household and business sectors will contribute to increased domestic demand in the coming years. Economic policy will be important in supporting this process. As new instruments for macro-prudential supervision are still relatively untested, the Riksbank is expected to continue to make allowance for household debt levels in the formulation of its monetary policy, which will delay the Swedish recovery slightly. Monetary policy is nevertheless expected to remain expansionary in the coming years (see Diagram 21 and the section "Monetary Policy and Exchange Rates" later in this chapter). This is particularly important given that fiscal policy is expected to be tightened in order to meet the surplus target in 2018.

STRONG CONSUMPTION GROWTH AFTER A LENGTHY PERIOD OF UNCERTAINTY AND HIGH SAVING

There has been great uncertainty about the economy in the wake of the financial and debt crises. Over the past year, however, consumer confidence has increased in many OECD countries, including Sweden. Although the consumer confidence indicator in the Economic Tendency Survey has fallen back at the beginning of 2014, it is still close to the historical average, and its recovery in 2013 reflects growing optimism. The rise in the saving rate to record levels indicates that the uncertainty has caused households to postpone consumption. As uncertainty in the household sector eases further, the high level of saving will facilitate increased consumption (see Diagram 22). Consumption growth will also be supported by low interest rates and further employment growth. All in all, this means that household consumption expenditure will grow by 2.8 per cent in 2014 and by an average of 2.7 per cent per year in 2015-2018. The saving rate will therefore drop back to around 7 per cent of disposable income in 2018.

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Growth in general government consumption will accelerate from 1.2 per cent in 2014 to 1.8 per cent in 2018. This mainly reflects a growing need for public services towards the end of the forecast period as the proportions of children and elderly in the population rise more quickly.

INVESTMENT BACKLOG SPELLS HIGHER INVESTMENT GROWTH

Investment, which normally varies considerably over the course of a business cycle, fell by no less than 15 per cent in the crisis year of 2009. Despite relatively strong growth in subsequent years, investment is still much lower relative to GDP than before the crisis. The investment-to-GDP ratio will increase in 2014, and the NIER expects that it will then rise further and move above 20 per cent for a few years to build up stocks of real capital.

According to both Statistics Sweden and the Economic Tendency Survey, capacity utilisation in industry increased in 2013. The recovery in demand in the coming years means that capacity utilisation will continue to rise, increasing the need for investment. A pent-up need for new housing also spells a rapid increase in housing investment in the coming years. For example, investment in new housing is forecast to grow by almost 20 per cent in 2014. This means that investment as a whole will grow relatively quickly at the beginning of the forecast period and slightly exceed 20 per cent of GDP in 2018 (see Diagram 23). Investment is expected to average around 20 per cent of GDP in the longer term.

RECOVERY LEADS TO LOWER UNEMPLOYMENT

Although GDP will grow by 2.7 per cent in 2014, unemployment will fall only marginally to 7.9 per cent and will therefore still be slightly more than 1 percentage point above the NIER's estimate of equilibrium unemployment for 2014. This is because the labour force is continuing to grow relatively quickly. Unemployment is then expected to fall gradually, due partly to the number of employed rising somewhat faster when resource utilisation at firms normalises, and partly to growth in the labour force slowing with growth in the working-age population (see Diagram 24). By 2017, unemployment will have fallen to 6.5 per cent and the labour market will be more or less in equilibrium (see Table 6).

WAGE GROWTH CLOSE TO 3 PER CENT PER YEAR IN 2014-2018

Most of the central pay settlements reached in 2013 run for three years. High unemployment has meant that the wage growth resulting from these agreements is lower than normal. Low resource utilisation can also be expected to rein in wage drift over and above this. All in all, therefore, wages are expected to grow somewhat more slowly during the current three-year period than the average for 1997-2012 of 3.4 per cent. Wage growth will be 2.8 per cent in 2014, but will climb to 3.3 per cent in 2018 due to rising resource utilisation in the labour market in the coming years (see Diagram 25).

After increasing slowly in 2013, unit labour costs in the business sector will rise by 1.2 per cent this year and an average of 1.3 per cent per year in 2015-2018. This level of growth is believed to be compatible with inflation close to 2 per cent in the longer term and means that labour costs' share of value added in the business sector will fall marginally in 2014-2018.

LOW INFLATION FOR YEARS TO COME

Weak resource utilisation in Sweden and large parts of the rest of the world has made it hard for firms to raise prices, and inflation has remained low despite relatively strong growth in unit labour costs in 2011 and 2012. Resource utilisation will improve gradually in the coming years, which can be expected to bring somewhat faster price rises. The krona will continue to strengthen, however, which will put a damper on import prices. All in all, inflation as measured by the CPIF (consumer price index with constant mortgage rates) will remain low and will not reach the inflation target until the end of 2017 (see Diagram 26). The Riksbank will begin raising the repo rate in the third quarter of 2015, and mortgage rates will then also start to rise, helping CPI inflation to hit 2 per cent about a year earlier.

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Monetary Policy and Exchange Rates

UNCHANGED REPO RATE

The Riksbank decided to leave the repo rate at 0.75 per cent in February, and its forecast for the repo rate was also largely unchanged. Low resource utilisation and low expected inflation have led to record-low interest rates since the most intense phase of the financial crisis. At the same time, the Riksbank has long expressed concern about growth in household debt. The Riksbank's reasoning is that excessive debt brings a risk that households will be forced to sharply increase saving at some point, which could have unfavourable effects on the real economy and jeopardise the achievement of monetary policy goals beyond the bank's forecast horizon. (4) A majority of the Riksbank's executive board has presented this argument in recent years for not lowering the policy rate further.

Based on forward pricing, market players generally expect interest rates to start going up rather later and rather more slowly than indicated by the Riksbank's interest rate path (see Diagram 27). One likely explanation is that market players expect inflation to remain significantly below target even in two years' time (see Diagram 28). The Riksbank's forecast from February indicates that CPIF inflation will be close to 2 per cent by the end of 2015, which is much earlier than in the NIER's forecast (see Diagram 29).

DEBT LEVELS IMPACTING ON MONETARY POLICY

Despite the actions already taken, the NIER believes that household debt will grow slightly more quickly than disposable income in the coming years, moving the debt-to-income ratio even higher. Since the effects on the debt-to-income ratio of previous measures and untested new instruments for macroprudential supervision are uncertain or hard to gauge, it is assumed that this growth in the ratio will mean that the Riksbank continues to make allowance for household debt levels in the formulation of monetary policy. In other words, the Riksbank will pursue a slightly less expansionary monetary policy line than would otherwise have been the case. In the short term, this will come at the cost of lower resource utilisation and of inflation undershooting the target for somewhat longer.

While accepting that there may be risks associated with high levels of household debt, the NIER does not currently see any justification for making allowance for these risks in the formulation of monetary policy. Fundamental factors appear to explain much of the increase in household debt, and the weight of evidence suggests that changes in the central bank policy rate do not have any significant impact on debt levels and house prices. (5)

LOW POLICY RATES ABROAD KEY TO MOVEMENTS IN REPO RATE

Interest rates outside Sweden, especially in the euro area, will remain very low throughout the forecast period (see Diagrams 30 and 31). This is due largely to continued debt consolidation in both the government and household sectors limiting the expansionary effect of central bank policy rates on demand. Very low interest rates will therefore be needed for a long period by historical standards, supplemented with unconventional measures to increase resource utilisation and push inflation towards the target levels.

Sweden's expansionary monetary policy has cushioned the drop-off in demand and been an important factor in the economic recovery that commenced at the end of last year. The deep slump still engulfing many of Sweden's export markets means that economic recovery in Sweden will be slow, however, and so monetary policy will need to remain expansionary for a long time. Household debt will also increase slightly relative to disposable income. To rein in household debt and avoid excessively high resource utilisation further ahead, with inflation overshooting the target, the Riksbank will begin to raise the repo rate gradually from the third quarter of 2015. Monetary policy will thus help resource utilisation in the economy as a whole to normalise in 2017. The repo rate will then still be at much lower levels than have historically been associated with normal resource utilisation. With very low interest rates abroad, a higher repo rate in Sweden would cause the krona to appreciate, which would slow recovery and further subdue inflation. A return to more normal resource utilisation outside Sweden, with gently rising interest rates, will see the Riksbank gradually raise the repo rate to 3 per cent at the end of 2018 (see Diagram 32).

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GOVERNMENT BOND YIELDS TO RISE AS THE GLOBAL ECONOMY RECOVERS

In the wake of the financial crisis and the ensuing debt crisis, many countries have pursued highly expansionary monetary policy to counter weak domestic and external demand. This expansionary monetary policy has entailed not only very low policy rates but also unconventional measures, such as extensive bond purchases by central banks, which have sent government bond yields to very low levels. Considerable uncertainty about the economic outlook has also caused many investors to move into low-risk assets, which has further eroded yields.

Now that uncertainty about the recovery in the major economies is easing, demand for riskier assets is picking up, and this may help explain the stock market rally in many countries over the past year. It has also meant that demand for safe government bonds in countries with stable government finances is waning. As unconventional monetary policy measures also start to be phased out, and central bank policy rates begin to be raised in many of the major economies, yields will rise further. By historical standards, however, short-term interest rates will rise slowly in both the euro area and the US, which means that government bond yields will remain low for a long period (see Diagram 33). Swedish 10-year government bond yields will follow the international pattern and climb to 2.9 per cent in 2015 and 4.3 per cent in 2018 (see Table 8).

STRONGER KRONA IN THE COMING YEARS

The krona as measured by the effective exchange rate index KIX has strengthened by almost 1 per cent so far this year and is now almost 7 per cent stronger than it was in August 2008 before declining as a result of the financial crisis (see Diagram 34). In real terms, the KIX index has strengthened by approximately 2 per cent over the same period. Smaller trade surpluses are expected to coincide with a strengthening of the real exchange rate against several trading partner currencies. The KIX index also includes several emerging market currencies. In the slightly longer term, these countries are expected to have higher productivity growth than Sweden, which suggests that the krona will weaken against their currencies in real terms. All in all, the krona is forecast to appreciate in real terms by almost 1 per cent by 2018. Higher external inflation means that it will strengthen slightly further in nominal terms (see Diagram 34 and Table 9).

Fiscal Policy

FISCAL TIGHTENING TO COMMENCE NEXT YEAR

Fiscal policy was expansionary in 2013 and contributed to cyclically-adjusted general government net lending falling to -1 per cent of potential GDP after being slightly positive in 2012. Unfunded measures amounted to around SEK 25 billion and included a reduction in the corporate income tax rate from 26.3 to 22 per cent and initiatives on the expenditure side in areas such as education, research, justice and the labour market.

The Budget Bill for 2014 contained proposals for unfunded measures totalling SEK 24 billion. The Riksdag rejected the proposed increase in the threshold for state income tax, leaving measures amounting to SEK 21 billion. (6) A fifth earned-income tax credit is the largest of these and is expected to reduce tax revenue by SEK 12 billion. Combined with much lower dividends from state-owned enterprises this year, these measures mean that cyclically-adjusted net lending will fall slightly further this year to -1.3 per cent of potential GDP (see Diagram 35).

Next year, fiscal policy is expected to include spending increases of SEK 10 billion funded by tax increases of the same magnitude. Whatever the outcome of the parliamentary elections in the autumn, it can be assumed that there will be some spending increases or tax cuts. In the absence of fiscal space, however, the scope of these measures is expected to be limited. Although the net effect on cyclically-adjusted net lending of active fiscal policy measures is expected to be neutral, due to automatic budget strengthening net lending will still increase by 0.8 per cent. The fiscal policy stance is therefore expected to be contractionary next year.

TIGHTENING CONTINUES THROUGH TO 2018

The fiscal policy forecast for 2016 onwards is guided by the principles for the Swedish fiscal policy framework. The corner stone in this assessment is the surplus target for net lending, but the expenditure ceiling and the balanced budget requirement for the local government sector are also taken into account. The surplus target means that net lending in the general government sector is to average 1 per cent of GDP over a business cycle. For net lending to reach this level on average, the NIER believes that cyclically-adjusted net lending needs to be 1.2 per cent of GDP when resource utilisation in the economy is normal. (7) The fiscal policy forecast assumes that fiscal policy in the longer term will be steered towards the surplus target, and that any departures from the target will gradually be corrected, taking due account of economic developments and other factors.

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The present forecast assumes that the output gap will close in 2017, which means that the economy will then feature normal levels of resource utilisation (see Diagram 36). Since the surplus target requires cyclically-adjusted net lending to increase by no less than 2.5 per cent of potential GDP, from -1.3 per cent this year to the target level of 1.2 per cent, it is likely that a return to the surplus target will take somewhat longer than the period to 2017. Reaching the target of 1.2 per cent in 2017 would require relatively far-reaching discretionary tightening over a three-year period. The forecast therefore assumes tightening at a rate that brings cyclically-adjusted net lending back to 1.2 per cent only in 2018. Fiscal policy will therefore remain contractionary in 2016- 2018.

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NO SPACE FOR UNFUNDED MEASURES IN THE COMING YEARS

The NIER also estimates general government net lending based on unchanged rules--in other words, in the absence of measures beyond those already decided upon. (8) This differs from the NIER's fiscal policy forecast, but enables comparison with the government's forecast for public finances in the medium term. The calculations are also used for the assessment of fiscal space (previously referred to as the scope for reforms).

Unchanged rules would mean that cyclically-adjusted net lending rises much more slowly than in the NIER's forecast, reaching a level of 0.1 per cent of GDP in 2018 rather than 1.2 per cent (see Table 10). In other words, in the absence of active decisions on fiscal tightening, net lending would be substantially weaker than is compatible with the surplus target.

The NIER uses developments in cyclically-adjusted net lending with unchanged rules to assess the amount of fiscal space on a five-year horizon. Fiscal space is defined here as the scope for unfunded measures that have an enduring impact on the budget, which is why fiscal space is not assessed for individual years. Fiscal space can be seen as any surplus arising in public finances with unchanged rules over and above that which is required by the surplus target. The reason why such a surplus can arise is that tax revenue largely follows GDP, while expenditure tends to fall in relation to GDP. (9)

The NIER assumes that 1.2 per cent of GDP is the level of cyclically-adjusted net lending that is compatible with the surplus target with normal resource utilisation in the economy. As resource utilisation is expected to return to normal within a five-year period, net lending of 1.2 per cent in 2018 is the starting point for the calculation of fiscal space. The estimated fiscal space on a five-year horizon therefore emerges as the difference between net lending in 2018 with unchanged rules and the target level of 1.2 per cent. Since cyclically-adjusted net lending will be just 0.1 per cent in 2018 with unchanged rules, fiscal space is negative at -1.1 per cent of GDP, or a negative SEK 47 billion. (10) This negative fiscal space should be interpreted as the amount of fiscal tightening required to meet the surplus target in the form of increases in taxes, decreases in expenditure or a combination of the two.

The fact that fiscal policy needs to be tightened for the surplus target to be met does not rule out the possibility of measures that increase central government expenditure. In the absence of fiscal space, however, these measures must be fully funded by corresponding tax increases or spending cuts in other areas.

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FISCAL POLICY WILL FEATURE TAX INCREASES

The NIER has forecast the content of fiscal policy in 2016-2018 on the basis of the tightening required to gradually reach the surplus target in 2018 and the increase in expenditure needed to maintain the public sector commitment. (11)

For the period 2016-2018, the measures forecast on the expenditure side of the central government budget correspond to an unchanged public sector commitment at 2015 levels. This means decisions on expenditure increases of SEK 43 billion (see Table 11). This expenditure comprises increased central government consumption and increased central government grants to the local government sector in Une with demographic developments, plus increased replacement levels in the transfer systems in line with nominal wages. For the full period 2015-2018, expenditure increases of SEK 53 billion are forecast, including SEK 10 billion in 2015.

On the income side of the central government budget, total tax increases of SEK 100 billion are assumed for 2015-2018. These will not only finance the measures on the expenditure side (SEK 53 billion) but also provide the fiscal tightening required to reach the surplus target in 2018 (SEK 47 billion). Together with tax increases in the local government sector, this translates into a rise in the overall tax-to-GDP ratio from today's 44 per cent to just over 46 per cent in 2018. (12) This means that the ratio will return to around the level prevailing in 2008-2009 (see Diagram 37). The net effect of the measures forecast for 2015-2018 on cyclically-adjusted net lending is SEK 47 billion and corresponds to the negative fiscal space.

Fiscal policy concepts

Cyclically-adjusted net lending is an estimate of general government net lending with normal resource utilisation (economy at capacity) and a normal composition of the main tax bases. It is usually expressed as a percentage of potential GDP.

The fiscal policy stance in any given year is determined by the change in cyclically-adjusted net lending in relation to potential GDP. A decrease in cyclically-adjusted net lending indicates that fiscal policy is expansionary in terms of resource utilisation (the output gap) in the economy. The reason may be that cyclically-adjusted tax revenue rises more slowly than potential GDP (due to lower tax rates, for example), that general government expenditure rises more quickly than potential GDP, or a combination of the two. Similarly, an increase in cyclically-adjusted net lending indicates that fiscal policy Is contractionary. Fiscal policy is neutral when cyclically-adjusted net lending is unchanged in relation to potential GDP.

Unfunded measures are fiscal policy decisions to increase expenditure and/or decrease taxes that are not funded by decisions to decrease expenditure and/or increase taxes in other areas by the same amount. Such measures therefore erode general government net lending and normally have a positive effect (multiplier) on GDP.

Unchanged rules are defined as how fiscal policy variables develop with no further fiscal policy decisions being taken by the government or parliament. In practice, however, there are significant demarcation problems.

Automatic budget strengthening refers to the increase In general government net lending that normally occurs even with unchanged rules. This tightening is a result of tax revenue moving largely in line with GDP, while expenditure tends to fall in relation to GDP with unchanged rules.

(4) See the article "Financial imbalances in the monetary policy assessment" in Monetary Policy Report, July 2013, Sveriges Riksbank.

(5) See the article "The effects of monetary policy on household debt", Monetary Policy Report, February 2014, Sveriges Riksbank.

(6) See the special analysis "The Budget Bill for 2014" in The Swedish Economy, December 2013, for a more detailed examination of the content of the bill.

(7) The conclusion that cyclically-adjusted net lending needs to be 1.2 per cent of GDP with normal resource utilisation for the surplus target to be met, rather than 1 per cent, is based on an assumption that the business cycle is asymmetrical with more lows than highs. See the special analysis "The Surplus Target for General Government Finances" in The Swedish Economy, March 2013.

(8) Unchanged rules here means the rules after the implementation of the measures proposed in the Budget Bill for 2014, excluding the increase in the threshold for state income tax. See www.konj.se/alternativfinanspolitik for a model-based macroeconomic forecast assuming unchanged fiscal policy (in Swedish).

(9) See the special analysis "The NIER's Assessment of the Scope for Reforms", The Swedish Economy, March 2013, for a more detailed analysis of the automatic stabilising effect of unchanged rules.

(10) This is SEK 9 billion less than indicated in The Swedish Economy, December 2013, when fiscal space was forecast to be a negative SEK 56 billion. The change is due mainly to revisions of general government interest Income and costs.

(11) This forecast, which is associated with considerable uncertainty, does not necessarily reflect what the NIER considers to be the most appropriate fiscal policy.

(12) Taxes In the local government sector are forecast to be raised by a total of 0.34 per cent In 2015-2018, or SEK 8 billion, resulting in total tax increases in the period of SEK 108 billion. The NIER estimates that the total financing required for the general government sector to meet the surplus target in 2018 and maintain the public sector commitment at 2014 levels is SEK 112 billion. This figure is the sum of the negative fiscal space (SEK 47 billion) and the total spending increases of SEK 65 billion needed to keep the public sector commitment unchanged at 2014 levels.

Table 3 GDP and CPI, world-wide
Percentage change

 2012 2013 2014 2015

GDP, OECD 1.5 1.3 2.2 2.6
GDP, emerging
 markets (1) 5.1 4.9 5.2 5.3
GDP, world-wide 3.2 3.0 3.7 4.0
CPI, OECD 2.2 1.6 1.8 2.0
CPI, world-wide 4.0 3.8 3.7 3.6

 2016 2017 2018

GDP, OECD 2.5 2.4 2.2
GDP, emerging
 markets (1) 5.7 5.7 5.9
GDP, world-wide 4.1 4.1 4.1
CPI, OECD 2.1 2.2 2.2
CPI, world-wide 3.4 3.4 3.4

(1) Emerging markets here refer to all non-OECD
member countries.

Note. GDP figures are calendar-adjusted and in
constant prices. Aggregates are calculated using
purchasing-power adjusted GDP weights from the IMF.

Sources: IMF, OECD and NIER.

Table 4 Potential GDP, employment and productivity
Percentage change unless otherwise noted

 2013 2014 2015 2016 2017 2018

Potential GDP 1.7 2.0 2.2 2.5 2.4 2.2
Potential hours worked 0.6 0.7 0.9 0.9 0.7 0.5
Potential employment 0.9 0.8 0.7 0.6 0.6 0.5
Of which demographic
 contribution (1) 0.3 0.5 0.5 0.4 0.4 0.3
Potential productivity 1.1 1.3 1.3 1.5 1.7 1.6
Potential productivity,
 business sector 1.7 1.7 1.7 1.9 2.1 2.1

(1) Contribution to potential employment due to population
growth, percentage points. In addition, the development of
potential employment is also affected by the business cycle
and by economic policy.

Sources: Statistics Sweden and NIER.

Table 5 GDP by expenditure
Percentage change, constant prices, calendar-adjusted values

 2013 2014 2015 2016 2017 2018

Household consumption
 expenditure 2.0 2.8 2.3 3.1 3.0 2.3
General government
 consumption expenditure 2.0 1.2 1.6 1.5 1.8 1.8
Gross fixed capital
 formation -1.3 6.1 7.8 5.9 4.7 3.6
Final domestic demand 1.3 3.0 3.2 3.3 3.1 2.5
Stockbuilding1 0.2 0.3 -0.1 0.0 0.0 0.0
Total domestic demand 1.5 3.3 3.1 3.3 3.1 2.5
Exports -0.9 4.6 5.1 5.0 4.9 4.7
Total demand 0.7 3.7 3.8 3.9 3.7 3.2
Imports -1.2 6.2 5.7 6.1 5.8 5.1
Net exports 0.1 -0.4 0.0 -0.2 -0.2 0.0
GDP 1.5 2.7 2.9 2.9 2.7 2.4

(1) Change in per cent of GDP preceding year.

Sources: Statistics Sweden and NIER.

Table 6 Labour market
Percentage change

 2013 2014 2015 2016 2017 2018

Hours worked (1) 0.4 1.1 1.3 1.4 1.1 0.8
Employed 1.0 0.9 1.3 1.1 0.9 0.8
Labour force 1.1 0.8 0.6 0.6 0.6 0.4
Unemployment (2) 8.0 7.9 7.3 6.8 6.5 6.2

(1) Calendar-adjusted. (2) Per cent of labour force.

Sources: Statistics Sweden and NIER.

Table 7 Earnings and prices
Percentage change

 2013 2014 2015 2016 2017 2018

Hourly earnings (1) 2.6 2.8 2.9 3.1 3.1 3.3
Hourly earnings,
 business sector 2.5 2.7 3.0 3.1 3.1 3.3
Unit labour cost,
 business sector 0.4 1.2 1.1 1.3 1.2 1.4
CPI 0.0 0.1 1.2 2.3 2.6 2.8
CPIF 0.9 0.7 1.4 1.6 1.9 2.1

(1) According to Short-term Earnings Statistics.

Sources: National Mediation Office, Statistics Sweden and NIER.

Table 8 Interest rates
Per cent

 2013 2014 2015 2016 2017 2018

At year-end
Repo rate 0.75 0.75 1.25 1.75 2.25 3.00

Annual average
Repo rate 1.0 0.8 0.9 1.5 2.0 2.6
5-year government bond 1.6 1.7 2.4 3.0 3.6 4.0
10-year government bond 2.1 2.4 2.9 3.5 3.9 4.3

Sources: The Riksbank and NIER.

Table 9 Exchange rates

Index 1992-11-18=100 and SEK per currency
unit, respectively

 2013 2014 2015 2016 2017 2018

KIX 103.0 102.5 100.5 99.2 99.5 99.8
Euro 8.65 8.79 8.52 8.35 8.37 8.39
US dollar 6.51 6.49 6.52 6.55 6.57 6.58

Sources: The Riksbank and NIER.

Table 10 General government net lending and cyclically
adjusted net lending
Per cent of GDP and per cent of potential GDP

 2013 2014 2015 2016 2017 2018

Net lending -1.3 -2.0 -0.8 -0.3 0.6 1.3
Net lending
 excl. fiscal
 policy 2015-2018 -1.3 -2.0 -0.9 -0.4 -0.2 0.2
Cyclically adjusted
 net lending -1.0 -1.3 -0.5 0.0 0.6 1.2
Cyclically adjusted
 net lending excl.
 fiscal policy
 2015-2018 -1.0 -1.3 -0.5 0.0 0.0 0.1

Source: NIER.

Table 11 Forecast fiscal policy and automatic budget
strengthening, 2015-2018

SEK billion and per cent of
potential GDP, respectively

 2015-
 2015 2016 2017 2018 2018

Income policy measures 10 14 37 39 100

Expenditure policy 10 15 10 18 53
 measures
Fiscal policy effect on
 cyclically adjusted
 0 0 27 20 47

Per cent of 0.0 0.0 0.6 0.4 1.0
 potential GDP
Automatic budget 0.8 0.5 0.0 0.2 1.5
 strengthening (1)
Change in
 cyclically adjusted
 net lending (1,2) 0.8 0.5 0.6 0.6 2.5

Cyclically adjusted -0.5 0.0 0.6 1.2
 net lending (1)

(1) Per cent of potential GDP. 2 The change in cyclically
adjusted net lending consists of the sum of the fiscal
policy effect and the automatic budget strengthening.

Note. Due to rounding, components may not add up.

Source: NIER.