Econ Report q 407

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Number12008

The Swedish economyStatistical perspective

From the contents:

Growth slowed down during 2007 ....... page 3GDP growth was 2.6 percent during 2007, which is thelowest since 2003. The calendar adjusted growth for thefourth quarter was 2.8 percent. Rising interest rates, rawmaterial and energy prices during the year have led to signsof increased ination rate at the end of the year.

The unpredictable investments

in inventories ....................................... page 13What signicance have inventory investments for the bu-siness cycle? Information from national accounts indicatesthat investments in inventories have had a slightly destabili-sing effect. The peaks have been somewhat higher while therecessions have been deeper due to inventories.

Higher ination rate ............................ page 21The ination rate, measured as the change in the latesttwelve months, was 3.1 percent in February. An article de-scribes the Consumer Price Indexs (CPIs) production meth-

ods and design. The differences between CPI, CPIX, NPIand HICP are also described. By way of conclusion, a shorthistorical comparison with a connection to the developmentof the producer price index.


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Table o contents

Summary ................................................................. 3International perspectives ........................................ 4

Exports and imports ................................................. 5

Exports of services .................................................... 7

Household consumption .......................................... 9

General government consumption ......................... 10

Gross capital formation ..........................................

Inventory investment and the business cycle .......... 13

Developments in the business sector ...................... 17

Financial services (FISIM) .......................................9

Labour market ........................................................ 20

Consumer price index (CPI) ................................... 21

The Swedish economy published March 2008


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Summary

Slower growth in 2007GDP growth was 2.6 percent in 2007, the slowest since

2003. During the fourth quarter calendar adjusted growthwas 2.8 percent. Rising interest rates and rising prices ofraw materials and energy have lead to signs of increasingination in 2007. The ination rate according to CPI was 3.1

percent in February while the underlying ination accordingto CPIX was 2.0 percent.

During the fourth quarter of 2007 the unadjusted GDPgrowth was 2.2 percent while the calendar adjusted growthwas 2.8 percent. Economic growth in Sweden has slo-wed down rather signicantly during the last year afterthe growth of 4.1 percent in 2006. At the same time the

increased global demand that has caused rising prices onenergy and raw materials has contributed to rising prices forconsumers. The ination rate was 3.1 percent in February.The largest part of the price increase, 1.1 percentage points,was caused by increased interest charges while the contri-bution from higher food prices was 0.7 percentage pointsand rising prices for fuel 0.6 percentage points.

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Contribution to GDP growth adjusted for imports2007 compared to 2006Percentage points

Source:Nationalaccounts

Househ.consump.

Governm.

consump.

Gross fixedcap. form.machinery

Gross fixedcap. form.

constr.

GDP Inven-tories

Exports

During the fourth quarter growth was mainly powered bydomestic demand. Household consumption as well asgross capital formation contributed by about 1.5 percentagepoints to GDP growth. At the same time the consequence ofincreased domestic demand was that imports of goods roseconsiderably faster than exports of goods. As a result netexports held back GDP growth by 1.2 percentage points.However, exports of services continued upwards at a fastrate. Three different kinds of services dominate the exports

of services from Sweden: First, transport services, which aremainly conducted by ships. Secondly, income from foreigntourists and business travellers who consume goods and ser-

vices within Sweden. The third and largest kinds of servicesare business services, where merchanting is the dominating

part.A calculation of the contributions to GDP growth, wherethe different components on the expenditure side havebeen adjusted for their import contents shows that exports,in spite of rather poor development during 2007, are veryimportant for the Swedish economy. During 2007 exports,adjusted for import contents, contributed to 1.1 percentagepoints of GDP growth, which is a larger share than anyother component.

It should also be noted that over a longer period of time thegoods-producing industries have gradually lost their leadingrole as a driving force for GDP growth. Instead serviceproduction has gradually increased its importance. Amongservices, the contribution from wholesale and retail tradehas been fairly stable over time, while the contribution fromother service industries has expanded.

Household disposable income increased sharply during2007 partly because of rising employment, and partlybecause of changes in the tax and transfer systems duringthe year. This has permitted higher household consumption,at the same time as the savings rate has risen. For the entire

year of 2007, real disposable income rose by 4.1 percent,while the savings rate increased to 8.1 percent.

Gross xed capital formation developed strongly duringthe fourth quarter after a slight weakening during the thirdquarter. The growth for 2007 was 8.1 percent. The growthrate during the fourth quarter was the highest one duringthe year, as a result of a rapid increase of investments inthe business sector. The manufacturing industry continuedto invest at a high level, but the increasing investment ratewas mainly explained by high investments in the energysector, trade and business services. Investment in machi-

nery and equipment continued upwards at a fast rate, but itwas mainly construction, excluding housing, that led to anincreased investment rate. Housing investments continueddownwards. Change in inventories contributed extraordina-rily to GDP growth during 2007.

During 2007 productivity growth in the Swedish businesssector slowed down. This affected most industries. Duringthe rst quarter productivity fell for goods as well as serviceproducers and also for the manufacturing industry. Howe-ver, in the three following quarters development was nega-tive only in the service industries. A reduced productivity

level in the Swedish business sector has not been previouslyrecorded for the period starting in 1994 onwards, not evenduring the IT crisis of 20002001.



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International perspectives

Global economic slowdown in 2007Global growth continues to be good. IMF estimates it to

land at 4.9 percent for the entire 2007. However, there isa risk that growth may be lower due to the weaker fourthquarter GDP growth in the USA and the Euro zone. Global

growth in 2006 was 5.0 percent and the average for the lastfour years was 4.8 percent. Global growth has steadily in-creased over the last few decades. Between the years 1995and 2006 global growth reached 4.0 percent annually andfor the period of 1983 to 1994 it was 3.3 percent.

The explanation for the long-term rising growth trend in theworld economy can be found in such countries as China,India and other newly industrialized countries with a

signicantly higher underlying potential for growth than themore matured economies. This is made possible by a higherinvestment ratio in these economies and that the labourmarket is restructured and the percentage of productivejobs in industry increases. The consequence is that thesecountries percentage of global growth will increase as longas their growth exceeds the global average.

07060504030201009998979695

Global GDPAnnual percentage growth

Data up to and including 2007Source:IMF

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World

Growth economies

Euro zone

Growth in the world economy is primarily driven by deve-lopment in the newly industrialized economies that makeup an ever larger part of the global growth. For example,the BRIC countries (Brazil, Russia, India and China) makeup over half of the worlds GDP growth. At the same time,the USAs percentage of the world economy decreases whenthe new economies are integrated into the world economy,with increased global growth as a consequence. China andIndia continue to grow with high growth numbers througha continued strong domestic demand as well as a growing

foreign trade within the Asian region, and they seem to nothave been affected as adversely from the slowdown of theAmerican economy. In case of a deeper slowdown in theAmerican economy the effects of such will leave their markin the high-growth countries expansive development. This

is the case because the American household consumptionstill has a considerable effect on the total demand for goods

and services in the world economy.

USA slows downThe USAs GDP growth for the third quarter was 4.9 percentat annual rate, which was then clearly higher than Japanand the larger European countries, but also signicantlylower than countries such as China and India. The FederalReserve warned of a signicant slowdown of GDP growthin the USA for the fourth quarter GDP growth as early as atthe release of the third quarter results. Such proved to bethe case when the preliminary fourth quarter GDP estimates

were published. Growth was a weak 0.6 percent calculatedat annual rate. That means a growth of 2.2 percent for theentire year 2007, compared to a GDP growth of 2.9 percentduring 2006.

The USAs economy is dependent on domestic consumptionas a driving force for growth rather than exports to a greaterextent than smaller countries such as Sweden, because alarge part of trade occurs within the country rather thanwith other countries. Household consumption expendituresincreased by 1.9 percent in the fourth quarter, compared toan increase of 2.8 percent the quarter before. In any case,

consumption among American households has remainedhigh in the second half of the year, even if somewhat wea -kened by the end of the period.

The housing sector and the motor vehicle industry were twoweak areas where fourth quarter growth in GDP decreased.Weak development in the housing sector, with falling pricesand reduced production of new housing, held back GDPgrowth by nearly a percentage point. Car and other motorvehicle production gave a negative contribution to thegrowth, nearly as large as that of the housing sector.

During the second half of 2007, exports of goods andservices from the USA increased by an annual growthrate of roughly 11 percent, measured in constant prices.The weaker dollar and the brighter economic growth inrecipient countries economies are offered as explanations.Foreign trade was also a bright point for the fourth quarterand contributed 0.9 percentage points to real GDP growth.A strong development for exports in combination withreduced imports also gave some improvement to the U.S.trade balance.

Weak consumption in the Euro zone

During the fourth quarter the Euro zone economies have,in general, developed at a more modest pace than before.Consumption grew weakly during the last quarter of lastyear, for household as well as public sector consumptionwent virtually unchanged from the previous quarter. Real



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Exports and imports

A negative year in spite o late turnaround inoreign trade

A certain degree of recovery showed mercy towards exportsin the fourth quarter of 2007. After four quarters in a rowwith higher rates of increase for imports than exports, seaso-nally adjusted and compared with preceding quarters, thelast quarter again showed a higher growth rate for exports.Otherwise, foreign trade held back GDP growth by 1.2

percentage points for the entire year of 2007.

The year 2007 was not good for Swedish trade abroad.The net trade of goods and services contributed to a wea-kening of growth in the country. GDP growth stopped at 2.6percent, signicantly weaker than the 4.6 percent measured

for 2006, which was otherwise a strong growth year whosestarting point was already at a high level. Foreign trades res-training effect on GDP growth, by 1.2 percentage points in2007, was the largest during the whole period since 1994.The reason for the setback in the Swedish economy last yearis thus explained by weakened foreign trade. A strongerexchange rate to the dollar, worsened terms of trade withthe USA and Asia, delays in certain expanding productionlines and a decreasing trend in some large and signicantindustries can be seen as the foremost reasons for the weakdevelopment.

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0706050403020100999897969594

Contributions from net exports to GDP growthIncluding import contents. Percentage points

Data up to and including 2007Source:Nationalaccounts

Russia surpassed China in Swedish exportsstatistics

Swedens nearest neighbouring countries have increasedtheir importance as export markets. Foreign trade statisticscan now be summarised this way, as 2007 has come to anend. The Nordic countries together with Germany import athird of Swedens exports. All these countries have also in-creased above the average, which means that the percenta-ge has increased from barely 33 percent to 34 percent. Thatmeans that exports to neighbouring regions compensates forgenerally weaker development affecting exports to placesfarther away. Exports to the USA showed the least favoura-ble development. It decreased by 14 percent in current pri-

ces during 2007, while exports on the whole increased by5 percent. Exports to Russia and Poland increased stronglylast year by 27 percent and 24 percent, respectively. Thus,Russia surpassed China as a recipient country for Swedishexports.

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20072006200520042003200220012000

Exports of goods by countriesSEK millions, current prices. Trend cycle estimation

Data up to and including December 2007

United States

United Kingdom Denmark

Norway

Germany

Source:Foreigntradestatistics

Foreign trades increased signifcance or theSwedish economySwedish foreign trade in goods and services has on averageincreased by 5 percent since 1980. This is signicantlyhigher than the annual production growth and means that

GDP growth for the Euro zone decreased from 2.6 percentto 2.2 percent between the third and fourth quarters. Thecontribution came primarily from foreign trade throughreduced imports to the Euro zone. A certain decrease wasalso noted for exports in the fourth quarter.

GDP growth among the larger countries in Europe variedfrom 2.9 percent in Great Britain to 1.9 percent in Germany

(gures from Italy are not available). Growth in Germany

declined from 2.5 percent during the third quarter. In GreatBritain, perhaps the country most affected by the nancialturmoil aside from the USA, growth decreased somewhatfrom 3.3 percent the quarter before. However, 2.9 percentwas still regarded as continued good economic growth.

Contact person: Martin Daniels, 08-506 942 64



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the size of imports and exports in relation to Gross Domes-tic Product (GDP) has risen over the years. This would seemto lead to an increased signicance of exchange rates forthe Swedish economy, when imports and exports as per-centages of production increase. It is not only foreign tradethat has had a high growth rate. Swedish direct investmentsabroad increase at an even higher rate than foreign trade.

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10050095908580757065605550

Exports and imports of goods and servicesPercentage of GDP


Imports of goods and services

Exports of goods and services

The great importance of world trade as a factor in the goodeconomic development of recent years is asserted by theUN in the report World Economic Situation and Prospects2008. During the last four years global trade has increasedtwice as fast as production. Last year world trade grew by 7percent. Asia, and in particular China, has been the motorfor increasing global foreign trade. Asia contributed approx-imately 40 percent of the growth in foreign trade while thedeveloped countries accounted for 45 percent of the 2007growth and roughly half of the growth since 2001.

Foreign trade shows continued upward trendThe increasing foreign trade and its increasing importancefor the Swedish economy have been ongoing for many de-cades and is now a known fact. During certain periods fo-reign trade has increased quicker than during others. Recentyears have been such a period with good growth in foreigntrade. The tendency over the last year has been that the rate

of increase for exports has fallen off, even if the fourth quar-ter indicated a certain improvement, while imports showeda continued high growth rate. Exports of services have, onthe other hand, continued to perform well and Sweden hasenjoyed a foreign trade surplus for many years.

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20082007200620052004200320022001

Exports and imports of goodsBillion SEK, current prices. Trend

Data up to and including January 2008

Imports

Exports

Net trade

Source:Foreigntradestatistics

As mentioned earlier, the rate of increase in exports and im-ports has exceeded the GDP growth rate, which generated

increased imports and exports percentages in relation to theGDP. It seems to be that during weaker growth years thatforeign trade grows more slowly than GDP. For example,recipient would have seemed to be the case in the early1980s, in the 1990s nancial crisis and the IT crisis of 2001.Note that the rate of change for imports was weaker than forexports during those years as well. The diagram illustrateshow activity in the economy has decreased during crisisyears and how the change in foreign trade has been small.

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080604020098969492908886848280

Exports and imports of goods and GDPPercent change from previous year. Constant prices


Imports of goods

GDP

Exports of goods

Contact person: Martin Daniels, 08-506 942 64



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Exports o services

Trade in services grow at expense o traditio-

nal exports o goodsCross-border trade in services now increase faster than tradein goods for many countries. However, trade in servicesis still lower than trade in goods. This is the case for mostOECD countries. The USA is the country with the largestexport revenues from service trade but loses ground, amongother things, to the advantage of Euro countries. Denmarkis the largest service exporter among the Nordic countries.Service production in relation to trade in goods, sometimescalled business services, is the service category that gene-rates the biggest export revenues for Sweden and others in

the OECD collective. Merchanting is the most importantcontribution to the increase in Swedish service exports.

The service sector makes up approximately 70 percent ofGDP and is, thus, an important part of the economy forcountries in the OECD. Consequently, manufactured goodsmakes up barely a third of the total production. This divisionalso holds true for Sweden. Luxembourg has the highestpercentage of services, approximately 80 percent, whileNorway is one of the developed countries with the lowestpercentage of service production, at approximately 60 per-cent, according to statistics from the World Bank.

When it comes to cross-border trade in goods and servicesthe division reverses itself. An important explanation is, ofcourse, that primarily public sector services but also the pri-vate service sector is designed to provide for the domesticmarket. Thus, trade in services accounts for only 20 percentof the total exports and imports in OECD countries, whiletrade in goods consequently accounts for nearly 80 percent.Swedens percentage of cross-border trade in services issomewhat higher than the OECD average. Service exportsamounted to nearly 28 percent of the total export of goodsand services during 2007, while the percentage for service

import was approximately 26 percent. Seen over the lasttwenty ve years, both imports and exports of services haveclearly increased faster than trade in goods in Sweden andthat is why the percentages have steadily increased. Sincethe mid 1990s the increase in service exports is signicant from roughly 20 percent to 28 percent today.

It would seem that obstacles do limit the trade in servicesdespite service production being primarily designed toserve the domestic market. There are many reasons for thiscircumstance it has historical, technological and, simplyput, protectionist reasons. The reason why cross-border

trade in services has such a small percentage of total tradeshall not be pursued further in this article. Instead thepurpose is to summarise different aspects of service exportsbased on recently published statistics from the OECD.

Euro zone increase (at expense o the USA)

The USA accounts for over a fth of the total service exportsfor OECD countries, and as an individual country hasthe largest service exports in terms of value. It should benoted that the USAs percentage has decreased since theturn of the millennium. This depends on the Euro zonestotal service export performed quite well but also becauseGreat Britain has taken on market share at the expense ofthe USA. The weakened dollar is also a contributing factorto the USA reduction. France shows a downward trend forservice exports from big EU countries, while Germany andGreat Britain increase percentages.

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0605040302010099989796

Exports of servicesPercentages of total OECD exports of services

Data up to and including 2006Source:OECD

Germany

SwedenScandinavia and Finland

Euro zone

United States

United KingdomFrance

Swedens percentage of the service exports is relativelymodest at over two percent. The development in recentyears does, however, show that the Swedish percentage hasincreased somewhat. It should be noted that this contraststhe background of Sweden having lost percentage of tradein goods worldwide since 1970.

Merchanting lits Swedish service exportsThree service categories dominate Swedish service exports.Firstly, there are transport services, a traditional Swedishexport source, where transport by ship dominate Transportshave historically been the service category that has genera-ted the most income for Sweden. Transports percentage oftotal service exports has decrease signicantly in recent ye-ars. The second category is income from travel services, i.e.the consumption of goods and services by foreign touristsand business travellers in Sweden. The travel service shareof total service exports has been very stable for a long timeand makes up roughly 20 percent.

1 National Board of Trade (Trade-political status report 2005:1, Newspring for Swedish exports?).



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0504030201009998979695949392

Swedish exports of servicesPercentages of total exports of services


Travel

ConstructionRoyalties,license fees

Other business

Computer and inform.

Transportation

The third, and since the 1990s largest service category, isthat which has been somewhat anonymously named otherbusiness services. Other business services refer primarily to

service production arising in relation to trade in goods. Oneof the dominant service categories within this category, thathas shown especially strong growth gures in recent years,is merchanting, which means Swedish enterprises buyingand selling goods from abroad that are then sold abroadwithout being brought into Sweden. The trade margin ari-sing from the difference between purchase price and salesprice is called merchanting. Merchanting has increased at adramatic pace equal to how Swedish companies have pla-ced production of goods abroad. This often is about produc-ts with low production costs but high knowledge content

from earlier research and development. This means that incertain cases very signicant margins arise between purcha-se and sales. Merchanting is the single service category thatoffers the largest contribution to the increase of Swedishservice exports. It deserves to be noted that merchanting isnot a service affected by stiff competition between countriesghting for market shares. Rather, it reects certain forms ofcorporate behaviour where Swedish companies report largeexport revenues due to being well established internatio-nally. One might also say that the phenomenon of merchan-ting is, to some extent, compensation for the decrease in

Swedish goods exported mentioned earlier by moving theproduction of goods abroad and measuring such as trade inservices.

Sweden is not alone when it comes to business services be-ing the most important service category in terms of income,but rather the same is true of the entire OECD collective.Sweden is alongside Ireland, the country that shown thegreatest increase in that item since the middle of the 1990s.

In value terms, the USA has the largest percentage of OECDcountries total export for other business services, but since2001 the lead is closing. Of the countries in the diagram,

1 For more information about merchanting see Swedens economy statistical perspective fourth quarter 2004 and Merchanting a gro-wing part of service exports by Kurt Gustafsson and Lars Fors, SverigesRiksbank, Economic Review 3/2006.

Germany and especially Sweden and Ireland, display anopposite trend.

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05040302010099989796

Other businessPercentages of total OECD service exports


Germany

SwedenScandinavia and Finland

Ireland

United States

United Kingdom

France

Denmark, biggest among Nordic countriesThe Nordic countries accounted for seven percent of theOECD countries service exports during 2006. This can becompared to the Nordic countries percentage of OECDareas total GDP that only amount to 3.5 percent. Duringthe past ten years, the Nordic countries have slowly but su-rely increased their percentages of service exports. Denmarkis the country that accounts for the largest increase duringthe period and the countrys service exports were the largestamong the Nordics in 2006. Denmarks service exportswere dominated by transport where the shipyard incomes

were of course largest. Both Norway and Finland have hadrelatively unchanged market shares since the middle ofthe 1990s. Finland deviated last year from the other threecountries and noted a relatively decrease in service exports.It should be noted that Denmarks strong upturn in serviceexports is partially an effect of improved measurements andmeasuring methods implemented by Statistics Denmark atthe end of the 1990s.

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0605040302010099989796

Exports of servicesPercentages of total OECD service exports


Finland

Sweden

Norway

Denmark

Contact person: Anders Lindstrm, 08-506 949 09



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Household consumption

Household consumption increased stronglyHousehold consumption contributed 1.5 percentage pointsto the GDP growth, as demand from households continued

upwards during the fourth quarter of 2007. For the secondquarter in a row, household consumption growth was over3 percent. Disposable incomes continued upwards but thehigh consumption also conferred an unchanged householdsavings ratio. Disposable income increased by 4.1 percentfor the entire year 2007, while the household savings ratiorose to 8.1 percent.

Real disposable income for households rose by 2.8 percentin the fourth quarter compared with the same quarter lastyear. The increase for the entire year was 4.1 percent, butthe growth rate decreased during the second half of theyear. Higher incomes from wages and salaries, together withreduced income and wealth taxes, have formed the basis fora positive development for household incomes.

Household consumption rose by 3.2 percent in constantprices during the fourth quarter of 2007 compared with thesame period last year. This means that during the secondhalf of the year, consumption grew signicantly faster thanin the period of January to June. Household consumptionrose by 3.1 percent for the entire year 2007.

The fourth quarter consumption pattern coincided with the

entire years development. Leisure products continued toshow high growth and contributed 1 percentage point tohousehold consumption. Demand for audiovisual equip-ment continued to increase by 25 percent during the fourthquarter and charter trips increased by 12.5 percent. Carsales continued to increase during the last quarter of theyear. Demand for food as well as clothing and footwear de-creased during the period, the rst time a decrease occurredfor these products during a single quarter since 2004.

Housing costs rose more than normally and contributed by0.4 percentage points during the quarter, as a result of hig-

her energy consumption when the weather vane was chillierthan it was for the same period in 2006. This item makesup one fourth of household consumption and affects theconsumption development to a comparatively large extent.

Financial services showed a continued increase, amongother things, as a consequence of the premium for trafcinsurance being raised in June, and also due to a turbulentnancial market.

During the fall, foreign consumption in Sweden did notincrease at the same rate as during the last 23 years, and

during the fourth quarter the increase was only 1.9 percent.Demand for leisure products grew the most, which contri-buted 1.0 percentage points to household consumption.Financial services and car purchases also contributed acombined 1.0 percentage point of growth in the sector.

Household consumption 2007

Household Volume Contributionto consumption,% change, growthin

% household consumption, %points

Housing 23.1 0.5 0.1Recreationandculture 13.7 8.4 1.0Transport 12.8 3.2 0.4Foodandnon-alcoholicbeverages 12.3 1.6 0.2Miscellaneousgoodsandservices 10.1 6.3 0.6Furnishingsetc. 5.4 5.9 0.3Clothingandootwear 5.2 3.9 0.2Restaurants,hotels 5.1 5.6 0.3Communications 4.0 3.4 0.1Alcoholicbeveragesandtobacco 3.4 0.8 0.0

Health 2.7 1.8 0.1Education 0.3 3.3 0.0Directpurchasesabroadbyresidents 4.2 9.8 0.4Purchasesbynon-residentsinSweden 5.3 17.2 0.5Non-proftinstitutionsservinghouseholds 3.0 1.2 0.1Totalconsumption 100.0 3.1


Savings increased during 2007The household savings ratio increased during 2007 by one

percentage point to 8.1 percent. Saving was greatest duringthe rst half of the year and savings rose during the fourthquarter to SEK 8.6 billion, which is a virtually unchanged le-vel compared to the same quarter last year. Total householdsavings reached SEK 126 billion during 2007. Individualhousehold savings, household savings exclusive of occu-pational pensions, was SEK 31 billion at the New Year. Theindividual household savings ratio rose to 2.1 percent.

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Household savings ratePercent of disposable income


Household savings rateHousehold individual savings rate

Contact person: Monica Nelson Edberg, 08-506 945 66



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General government consumption

An average year or general governmentconsumption expenditures

General government consumption expenditures rose by 0.8percent during 2007, a weaker increase than the previousyear. The increase was greatest for county councils, whilecentral government reduced spending. The trend for thefourth quarter of 2007 was somewhat more evenly distri-buted among the sub-sectors. At the same time, the fourthquarter was the only period with increased central govern-ment spending.

As of the release of the third quarter of 2007, calculations ofgeneral government consumption expenditures in constantprices are affected by a new method for volume calcula-

tion of governmentally produced individual services. Themethod is called the production method, in contrast to thepreviously used costs method.

As a consequence of implementing the new method, it is nolonger possible to analyse volume development of the costcomponents of the expenses such as intermediate con-sumption, salaries and collective fees, consumption of xedcapital etc for neither the sub-sectors nor for the generalgovernment on the whole. In the future, only volume deve-lopment for individual and collective consumption as wellas social benets in kind for the sub-sectors and the generalgovernment can be analysed.

General government consumption expenditures20052007Volume change, percent

Method 2005 2006 2007

Generalgovernment productionmethod 0.4 1.5 0.8 costsmethod 0.1 2.4 1.8Municipalities productionmethod 0.4 1.5 0.6 costsmethod 0.6 3.0 2.7 Countycouncils productionmethod 3.5 2.2 3.0 costsmethod 2.2 2.2 2.2Centralgovernm.+ productionmethod 2.5 0.9 0.8socialsecurityunds costsmethod 2.8 1.5 0.3


Collective and individual consumption varyin size in the sub-sectors.Individual consumption is largest within municipalities andcounty councils, and thus these sectors are most affected bythe production method. Within the county councils, healthand medical care account for the largest percentage, while

within the municipalities education and social protectionhave the highest shares. The following tables illustrate the

situation in broad strokes.General government consumption expenditures 2007

Collective Individual General General consump- consump- government government tion tion consump- consump- tion tionofGDP

SEKbillionsGeneralgovernmentconsumptionexpenditures 216 580 796 26Municipalities 58 329 387 13Countycouncils 4 192 196 6Centralgovernment 154 59 213 7

PercentGeneralgovernmentconsumptionexpenditures 27 73 100Municipalities 15 85 100Countycouncils 2 98 100Centralgovernment 72 28 100


The affect of the change in methods in volume developmentof general government consumption expenditures is notinsignicant. The new calculations method of governmentalproduction of individual services lowered general govern-ment consumption expenditures by 1 percent and thus

also GDP growth for the entire year of 2007 by 0.3 percentcompared to the calculation made according to the costsmethod.

General government consumption expenditures 2007for individual servicesSEK billions

Municipalities County Central General councils govern- government ment consump. expenditures forindividual

consumptionHealthandmedicalcare 2 188 4 194Leisureactivities,cultureandreligion 18 1 4 23Education 163 2 28 193Socialprotection 146 1 23 170Total 329 192 59 580


Contact person: Vera Norrman, 08-506 943 04



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Continued strong upswing or gross fxedcapital ormationThe gross xed capital formation made a strong nish in2007 after slowing in the third quarter. Revision of the thirdquarter made the slowdown more visible, but the fourthquarter showed the years highest growth rate as a conse-quence of a quick upturn for the business sector. Industrycontinued to invest heavily, but the increasing growth ratecould be found primarily in the energy sector, trade and bu-siness services. Machine investments continued to increaseat a fast rate, but it was buildings rather than housing thatsparked the investment rate. Housing investments, on theother hand, continued to slow.

The gross xed capital formation continued to increase ata fast rate during the fourth quarter. The rate of increase,after slowing during the third quarter, rose again in the lastquarter to 2.1 percent compared with the nearest precedingquarter. The difference to the third quarter is more visiblein so far as the third quarter was revised downwards andshowed a clearer slowdown than was evident from theNational Accounts released in November. This was thecase despite the increased third quarter investment at 1.3percent, compared to the preceding quarter.

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2007200620052004200320022001200019991998

Gross fixed capital formation

Volume index 2000=100. Quarterly figures,seasonally adjusted

Data up to and including fourth quarter 2007Source:Nationalaccounts

Gross fixedcapital formation

GDP

After a minor downward revision of the rst quarter also,the gross xed capital formation increased for the entireyear by as much as 8 percent. Since the millennium, thisgrowth rate has only been exceeded by the development in2005, when the increase reached 8.9 percent. Investmentshave now increased ve years running, something that has

not happened since the 19821990 period when invest-ments increased eight years in a row. The rate of increaseover the last four years has also exceeded GDP growth,which has caused the investment ratio to rise. The invest -ment ratio, calculated as the gross xed capital formation

percentage of the GDP in current prices, rose in 2007 to18.9 percent of GDP, which is the highest value since 1991.

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080604020098969492908886848280

Gross fixed capital formationPercentage of GDP


Excl. housing

Total

Break in timeseries 1993

Energy, trade and business services behindthe rising investment rateCompared with the corresponding quarter last year, thegross xed capital formation increased by 7.5 percentduring the fourth quarter and have, thus, continued to beone of the most growth-creating components on the ex-

penditure side of GDP. The gross xed capital formationcontributed 1.4 percentage points to the 2.2 percent GDPgrowth. Seen for the entire year, investments made up 1.5percentage points of the GDP development of 2.6 percent.With due consideration for import content, the effect onGDP development is estimated, by means of a standardisedcalculation, to 0.5 percentage points both for the fourthquarter and the entire year. In both cases buildings made upthe larger part of the contribution while machines, with ahigher import content, made up a smaller part.

Behind the high rate of increase and powerful effect on

GDP development was investments in the business sector,where the rate of increase rose to 8.7 percent during thefourth quarter. On the contrary, the rate of increase forpublic sector investments has slowed down. Municipal in-vestments still increased at a high rate, but there was a slightslowdown compared to the third quarter and the rate ofincrease was signicantly weaker compared to the rst halfof the year. General government investments again turned toa minor reduction after increasing a corresponding amountin the third quarter.

The positive development for investments in the business

sector in the fourth quarter had a broad foundation in thestrong increases for goods and service producers. The gro-wing rate of increase depended, however, primarily on theenergy sector, wholesale and retail trade and business servi-ces where the investment growth accelerated, compared to

Gross capital ormation



12/26


13/2613

Inventory investment and the business cycle

The unpredictable investment in inventoriesOf what signicance is investment in inventories for thebusiness cycle? The economic theory on inventory stocks is

built on the notion that inventories are held so that compa-nies can maintain a steady production rate, despite tempo-rary disturbances in demand for their products or in delive-ries of input goods. The theory also allows for inventories tohave a destabilising effect on production. National Accountsdata on inventory investment since 1993 suggest that theyhave had a mildly destabilising impact, which means that

production has varied more than sales. The peaks of thebusiness boom have been somewhat higher while the reces-sions have been deeper due to inventories.

The fact that many goods can be kept in inventories al-lows production to be freed from sales and the end use toa certain extent. Goods can be produced and/or deliveredin quantities that are much larger than required for dailyconsumption, which is conducive to solutions in productiontechnology that make the goods less expensive. Inventorystocks also allow delivery times to shorten, so that custo-mers experience a higher level of service and the vendorcan charge higher prices.

On the other hand, inventory stocks also confer costs. Asidefrom costs for premises, handling of goods and a certain

obsolescence, inventories bear an interest cost for the timespan between the production cost and the income from sa-les. The interest costs were the main argument for the cam-paign for reduced inventory stocks conducted by corporateconsultants during the 1980s, when many touted the sloganof delivering just in time. It appears that the campaign hadan effect on industrys inventories, especially on the stocksof nished goods. Inventories decreased up to the middle ofthe 1990s but appear to have had a rising trend after that.

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07039995918783797571

Inventories in manufacturing industryBillion SEK. Seasonally adjusted, constant prices

Data up to and including third quarter 2007Source:Nationalaccounts

Work in progress Finished goods

Intermediate goods

Inventories in the production o goods andservicesIn goods production, including industry, agriculture andforestry, ofcial statistics distinguish between three kindsof inventories: input goods, goods in process, and nishedgoods. The values of the three inventory kinds are roughlyequal. Stocks of input goods consist of goods awaiting entryinto the production process. Goods in process are interme-diate goods that are objects of processing on the occasionsof measurement. In production activities where one worksfor long periods of time on one product, like shipbuilding,the inventories of goods in process can be rather large.Stocks of nished goods consist of goods awaiting deliveryto a buyer. Inventory stocks are measured at quarterly shifts

and published quarterly by Statistics Sweden. Inventoryinvestment, a component of GDP, is the difference betweenthe measured inventory stocks.

Only goods can be inventoried, not services. This does notprevent inventories from playing a part in the productionof services, especially in trade where there are large inven-tories, of course. In certain respects, the outgoing stocksof industry and trade inventories substitute one another. Ifindustrys production of a product exceeds trades sales ofit during a given period, then this could as easily result inan increase in trade inventories as in industry inventories.

In the same way, trades inventories of intermediate goods,to a certain extent, are a substitute to the industrys stock ofinput goods. This means that overproduction of intermediategoods can result in an increase in the stocks of nishedgoods in the producing industry, an increase in trade in-ventories, or an increase in the stocks of input goods in theindustry that uses the intermediate goods. This undeniablycomplicates the analysis of inventory variations, amongother things due to the fact that industrial inventory statisticsare kept according to industry sectors while those for tradeare kept according to product groups.

Production, sales, and inventory investmentAll goods in inventories contain some form of value ad-ded. This means that a change in inventories, regardless ofwhether it deals with stocks of input goods, goods in pro-cess, or stocks of nished goods, is part of the value added,which is the GDP on the aggregate level. On the aggregatelevel, the following relationship applies:

Value added = Final use + Inventory increase

which, in terms of GDP on the expenditure side, can be

expressed asGDP = Private sector consumption + Private sectorxed investment + Public sector consumption +Public sector investment + Net exports + Increasein inventories.



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On the non-aggregate level, e.g. on the level of industrialsectors or companies, inventory changes are included in asomewhat different relation. Inventory increase is the dif-ference between the gross production (not value added) andthe sales, that is

Gross production Sales + Inventory increase

where

Gross production Consumption of intermediategoods + Value added

and

Sales Sales for nal use + Sales of intermediategoods.

A goods producing company can, thus, sell its products tohouseholds for consumption or to companies for investmentbut also to other companies for consumption, while alsousing other companies products as inputs. Sales of input

goods and the use of them cancel one another out on theaggregate level, which makes value added and gross pro-duction identical.

Buer inventory theoryBuffer inventory theory is the most common way of lookingat inventory stocks in economic literature. It regards stocksof nished goods as a means of guarding oneself against un-expected sales increases or service interruptions. Stocks ofinput goods are, in a similar way, a safeguard against serviceinterruptions in the delivery of input goods. The basic idea isthat companies want to maintain as steady a rate of pro-duction as possible, even if the demand for their productsand the availability of input goods vary. It is natural to thinkthat the desired outgoing stock is proportional to the salesexpectations and that the desired incoming stock is propor-tional to the planned production volume.

This means that inventories, existing to stabilise the rate ofproduction, can easily have a destabilising impact. Assumethat a company has a weekly (5 workdays) production vo-lume that matches sales and an inventory stock that matchesone days sales, and that they are satised with that status.

Assume that sales suddenly increase by 20 percent. To meetthe increase in sales the company needs to increase produc-tion by 20 percent. Even if they can do this immediately, theinventory stocks now match less than one days production.To restore the inventorys relation to sales, the companymust increase production more than what would match theincrease in sales for a limited period of time. In a similarway, one can imagine that inventory stocks make produc-tion decrease more than the sales in times of recession.

The company can thus decide either to adapt inventorystocks to changed circumstances, which leads to even grea-

ter variations in production, or to allow inventory stocks tofull their purpose and even out production over time. Thedecision probably depends to a great extent on whether thevariations in sales are regarded as temporary or permanent.

An increase in sales regarded as being a part of a largerbusiness boom, or even a changed long term trend, shouldmotivate an increase in both stocks of nished goods andstocks of intermediate goods. Increases regarded as tempo-rary, such as seasonal changes, should probably be evenedout by using the inventory.

The desired inventory size also depends on costs for inven-

tory stocks. Higher interest rates mean, e.g., higher nancialcosts for inventories and believably would have a restrain-ing effect. These costs can be weighed against the risk oflosing revenue, through reduced goodwill etc., due to notbeing able to meet customer requirements.

If one accepts the idea that companies strive to maintain acertain size of inventories and that this varies with sales ex-pectations, the planned production volume, level of interestrates etc., then the question remains how quickly the actualinventories are adapted to new desired levels. The statusof the productive capacity and other factors inuence the

exibility of production. When sales begin to increase aftera recession, inventories start to build up quicker if thereis an underemployed labour force in the company than ifnew employees have to be recruited. In the same way, theinventories will be reduced more rapidly when demandwanes after a business boom, if the company can easily andquickly reduce the labour force than if the process if slowand expensive.

Inventories, stabilising or destabilising?To get an indication of whether Swedish inventory invest-

ment has had a stabilising or destabilising effect on pro-duction at the aggregate level (GDP), we use the quarterlyNational Accounts. The starting point is that sales, that isnal use2, (F) is the difference between GDP and the inven-tory investment (L), that is

F = GDP L

To gain a clear image of the business cycle variations, it isnecessary to eliminate the long term growth trends fromGDP. Inventory investment can not be a long term growthcomponent, but is rather assumed only to affect GDPsvariations around a given trend. The diagram below showsthe GDPs and sales variations around a linear trend andthe inventory investment since 1993.

1 National Accounts data on inventory investments are naturally, like allstatistics, associated with uncertainty due to errors in measurement etc.Furthermore, it is often the case that inventory investment is adjusted inthe follow-up of National Accounts, when production and use data arereconciled, and, thus, contains a correction item.

2 The concepts sales and nal use are synonyms on the aggregatelevel. We prefer to use sales because it connects to the customarylanguage of inventory research. (Actually the concept deliveries ismore correct, because it indicates that the transfer of goods is whatcounts, rather than a business agreement.)



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20

070605040302010099989796959493

GDP, sales and change in inventoriesBillion SEK. Seasonally adjusted, constant prices

Data up to and including third quarter 2007Source:Nationalaccounts

Change ininventories

Sales deviationfrom trend

GDP deviationfrom trend

A simple criterion for whether or not inventory investmenthas a stabilising or destabilising impact is if the variation in

production is greater or lesser than the variation in sales,which means that GDP variance > F variance indicatesa destabilising impact from inventory investment and theconverse.

Measured in terms of the seasonally adjusted variablesdeviation from the linear trend

GDP variance = SEK 42 109 millions and

F variance = SEK 40 378 millions.

Inventory investment, thus, appears on average to have

made GDP vary more than what is justied by sales varia-

tions.

Traditional business boom peaks in GDP in 1995 and 2000,as well as the delayed peak in 2006 are clearly seen inthe diagram. The pattern for sales is, on the other hand,

1 The years ending in a 0 (zero) or 5 (ve) have been years of businessbooms ever since the Second World War.

somewhat more diffuse, which indicates that the impact ofinventory investment in not wholly regular. Some episodeswhere inventory investment is thought to have had a clearimpact on the business cycle can be noted.

The GDP upswing in the second quarter of 1994 startedwith a strong inventory build up. The business boom in1995 was enhanced and extended due to inventories being

increased over nine consecutive quarters.The GDP upswing after the subsequent recession alreadystarted in the second quarter of 1997, which means it beganone year before the sales began to increase. The level of therecession was also weakened by the inventory investment.

The business boom of 2000 was enhanced due to inventorybuild up.

During the recession of 2003 the inventory investmentimpacted only marginally and the GDP largely followed suitwith sales.

The latest business boom has been extended due to positiveinventory investment. Sales began to wane at the end of2006 but GDP had only levelled off as of the third quarterof 2007.

In summary, one can say that inventory investment seems tohave impacted interchangeably stabilising or destabilisingon GDP development since the beginning of the 1990s, andit seems to have played a signicant part for the develop-ment of the business cycles in certain periods. Because in-ventory investment has been predominantly positive, it has

had a tendency to amplify the business booms and weakenthe recessions.

Contact person: Claes-Hkan Gustafson, 019-17 61 19



16/2616

Contribution to GDP growthActual GDP growth was 2.6 percent in the year 2007. The volumeincrease from 2006 to 2007 for the different components on theexpenditure side of GDP and their effect (or contributions) toGDP growth was as is indicated in the table.

Volume Contribution,percentage change, Notimport points

percent adjusted Import adjusted

Householdconsumptionexpenditure 3.1 1.5 0.6Generalgovernmentconsumptionexpenditure 0.8 0.2 0.1Grossfxed machinery 9.1 0.9 0.1capitalormation construction 6.6 0.5 0.3Inventories 0.7 0.3Netexports 1.2Exports 5.6 2.9 1.1

Imports 9.5 4.1

The rst contribution column shows contributions from the diffe-

rent components on the expenditure side according to traditionalreporting, where no correction is made for import content in thedifferent components. However, demand in each component re-fers to a greater or lesser percentage of imported products. Usinginput/output tables for 2000 and the import relationships presen-ted there, it is possible to adjust for the import content in demandand to calculate an adjusted contribution measuring demand inSwedish production to GDP2.

The modied calculation shows that exports, despite a compa-ratively weak development in 2007, accounts for 1.1 percentagepoints of GDP growth, which is a larger percentage than for anyother component on the expenditure side of GDP. Exports are

thus of the greatest importance as a driving force in the economy,even when the development seems rather weak. The contributionfrom investments in machinery decreases drastically after adjust-ment due to the large import content, while the difference is lessfor general government consumption and construction invest-ments, as well as for household consumption.

A corresponding calculation can also be done for GDP, produc-tion approach. In this case the contribution from the differentindustries to the change in total value added is calculated. Resultsfor 2007 are indicated in the table. In 2007 service productionaccounted for two thirds of GDP growth.

Contributions to GDP growth from selected industry ag-gregates in 2007

Goodsproduction,total 0.7owhichmanuacturing 0.4Constructionindustry 0.2Serviceproduction,total 1.8owhichwholesaleandretailtrade,hotelsandrestaurants 0.5

It can also be stated that over the course of time, at least since1994 from which year there are unbroken time series, the goodsproducing industries have successively lost their leading role as adriving force for GDP growth. Instead, service production has gra-dually climbed in signicance. Wholesale and retail trades contri-bution has, among the services, been stable to a high degree overtime, while other service industries have expanded. The construc-

tion industrys contribution to GDP growth has consistently beenof a low level, even if the signicance appears to have increasedover the past few years.

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3.0

0706050403020100999897969594

GDP growth contributions from differentindustriesPercentage points. Including trends


Trade

Service production

Goods production

Contact person: Leif Munters, telefon 08-506 945 09

1 The weights used are subsequently not especially relevant and theresults may therefore be regarded with due caution. New input andoutput tables for 2005 should be published during 2008.

2 For more information of these calculation methods, see Swedisheconomy statistical perspective number 1 2007.



17/2617

Stagnation in productivity growthIn 2007 productivity development in the Swedish business

sector came to a standstill. This phenomenon affectednearly all industries. During the rst quarter of 2007, pro-ductivity fell for goods and services production alike thiseven affected the manufacturing industry. However, duringthe three following quarters only service production noteda downward trend. Reduced productivity in the businesssector has not been registered at all during the period19932006.

The large increase in the number of hours worked in indu-stry by an entire 4 percent in 2007 and the non-existent pro-ductivity growth must be seen in light of the developmentduring the most recent years. These years have been charac-terised by a strong productivity development, while at thesame time the number of hours worked dropped sharply fora few years, followed by a slight rise for another few years.Starting in 2006, the fth year in a row with sharp producti-vity growth, the number of hours worked clearly increased.

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0706050403020100999897969594

Labour productivity and hours workedTotal business sector. Percent change compared toprevious year. Constant prices


ProductivityHours worked

A historically poor productivity growthAs illustrated in the gure above, development in 2007implies a marked break in the previously very strong pro-ductivity development which followed the crisis in 2001.The increase in the number of hours worked by 4 percentin 2007 was the largest growth ever registered during theentire period. In the beginning of the period, productivityand hours followed each other well, but since then havediffered sharply. Following a period of reduced and thenlargely constant employment from 2002 to 2006, employ-

ment increased dramatically at the same time as productionstarted to stagnate, leading to the very special developmentin 2007. This development was not dependent on specialconditions in particular industries but was spread to both

goods and services industries.

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

200720062005200420032002

Labour productivity and hours workedTotal business sector. Percent change compared toprevious quarter. Seasonally adjusted, constant prices



A closer examination of the later years with the help ofquarterly data reveals a clear pattern where increases inthe number of hours worked gradually rose until a level ofone percent was reached during the third quarter of 2006.Since then employment growth has remained very close to

this level for a full six quarters in a row. Even when lookingat the entire period 19932007, it seems that if producti-vity growth is sufciently high, the change in employmentgradually becomes positive.

The seasonally adjusted quarterly productivi-ty development was weakest during the frstthe quarterProductivity dropped pronouncedly during the rst quarterof 2007 compared to the previous quarter, both for the totalbusiness sector as well as the goods and services producing

industries. Since then development has continued unfavou-

rably for the service sector, even though the drop has beenconsiderably less in size. As a result, the improvement ofproductivity that occurred in the goods producing parts ofthe business sector during the last three quarters of 2007has not been able to lift the total business sector to higherproductivity levels. Productivity for the total business sectorhas continued to drop during the last two quarters, eventhough the drop has been very limited.

Developments in the business sector

1 A reservation should be made concerning the conclusions of produc-tivity development. In general, the quarterly productivity data needs to

be interpreted with great caution as it consists of the difference betweenseries which have been seasonally-adjusted independently of eachother. A seasonal adjustment of the actual non-calendar corrected pro-ductivity gures directly would give considerably more reliable gures.However, until this adjustment is carried out, the analysis is based onthe available but less reliable data.



18/2618

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-1

0

1

2

3

4

200720062005

Labour productivityPercent change compared to previous quarter.Seasonally adjusted, constant prices


Goods producers

Service producers

Total businesssector

Service producers productivity continues to

be unchangedAs seen in the gure, with the exception of nancial ser-vices during the rst quarter and real estate and businessservices in the last quarter of 2007, all the four big serviceindustries together with the hotel industry have decreasedtheir productivity during both the rst and the last quartersof 2007. However, business services have had the leastfavourable productivity development of all these serviceindustries during 2007. Nevertheless, there was a consis-tent positive trend over the year and productivity changenearly reached the zero point during the fourth quarter. The

transport and communication industries have had a veryunsteady development and even if there has been a slightlypositive development, the downturn from the third to thefourth quarter was signicant.

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-1

0

1

2

3

20072006

Labour productivity in service industriesPercent change compared to previous quarter.Seasonally adjusted, constant prices


Hotels

TransportsRetail trade

Real estate

Financialservices

Productivity growth in the engineering indu-stry seems to have passed the lowest pointThe engineering industry has taken the lead in productivitygrowth during the entire period of 19932007. After theextremely high growth in 2004, which was considerably dri-ven by the recovery of the electronic industry, productivitygrowth has gradually fallen. However, productivity still roseand the decrease in productivity growth from 2006 to 2007has no comparison concerning development of value addedwhich was roughly 5 percent for both years.

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0706050403020100999897969594

Labour productivity and hours workedManufacturing industry. Percent change compared toprevious year. Constant prices



When studying the actual development of the productivitydevelopment of the engineering industry in 2007, wherethe situation for a certain quarter is compared to the cor-

responding quarter the previous year, we see a gradualimprovement of the actual development. During the rstquarter of 2007, the productivity level exceeded that of therst quarter of 2006 by only 0.1 percent, followed by 0.6and 2.7 in the next two quarters. During the fourth quarterof 2007, productivity was 3.7 percent higher than producti-vity for the fourth quarter of 2006. This change was due to agreater difference in value added as well as a lesser increasein the number of hours worked.

However, a 3.7 percent growth in productivity for theengineering industry is still poor in a historical perspective,

or not even half of the historical average of 8.1 percent peryear.

Contact person: Hans-Olof Hagn, 08-506 944 66



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Financial services (FISIM)

The fnancial turmoil and the value o FISIM

During the fourth quarter of 2007, nancial markets weredistinguished by the global turmoil that started in the USAas a result of all too generous loans in the sub-prime market.The credit crisis caused the worlds banks to be more restric-tive with their loans to one another. This depended in parton the uncertainty factor about which banks were affectedby the housing loan crisis, but also to a certain extent on thebanks wanting to maintain high liquidity until it becomesclear to what extent they were affected themselves. Swedishcredit institutions, which largely nance loans through de-

posits and the emission of securities and not through loans

from other banks, were indirectly affected of the crisis dueto higher borrowing costs.

Financial Intermediation Services Indirectly Measured(FISIM) or indirectly measured nancial services, refers tothose services that nance institutions produce in relationto loans and deposits but do not get directly paid for in theform of commissions and fees. FISIM is calculated as thedifference between a reference rate and the rate on depositsand loans multiplied by each amount loaned. The referencerate shall correspond to the risk free cost of a loan. Reducedliquidity during the fourth quarter of 2007 resulted in Stibor

(Stockholm inter-bank rates), which is used in estimating thereference rate in FISIM calculations, reaching the highestlevel in years. The effects of the estimates of FISIM on Natio-nal Accounts were most noted by the change in the distribu-tion of production between loans and deposits.

FISIM is produced on both loans and deposits and is depen-dent on both the loan stocks and the level of the referencerate. The total loan stocks for Swedish credit institutions,inclusive of mortgage institutions, are approximately 2.5times as large as the total deposit stocks. Despite this,FISIM production for Swedish credit institutions during the

fourth quarter of 2007 was largely produced on deposit andborrowing stocks. In a situation where the reference raterises, without corresponding changes in rates for loans anddeposits, the margin for loans is pressed down while themargins for deposits, on the contrary, increase. Those creditinstitutions that mainly are devoted to loans, e.g. mortgageinstitutions, reported that a result of this was a lower FISIMproduction during the fourth quarter of 2007. In the longterm, one can anticipate that the entire increased cost for

creditors to be transferred to debtors in the form of higher

interest rates on loans. The banks that have the majority ofall deposits have instead seen relatively high FISIM produc-tion. Nearly 70 percent of household bank deposits occurin transactional accounts, whose average relatively low rateof interest has not risen on the same scale as the referencerate. This creates the interest rate gap in the banks advan-tage, which increases FISIM production.

The redistribution of FISIM production has gone on for sometime but has earlier been a result of increased competi-tion between loan institutions, which led to pressed loanmargins and thereby to lower FISIM production in the loan

markets. During the fourth quarter of 2007 it was, however,the high reference rate that affected FISIM the most.

The nancial turmoil resulted in a concerted effort fromseveral central banks to increase liquidity in the nancialsystem at the end of the fourth quarter 2007. The aim was toreduce the inter-bank interest rates.

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

200820072006200520042003

Difference between the repo rate and STIBOR 3and 12 months respectivelyMonthly averages

Data up to and including February 2008

3 months

12 months

Source:Reuters,Ecowin

Contact person: Caroline Flodberg, 08-506 947 46



20/2620

Labour market

Continued employment growthDevelopment in the labour market has been strong during2007 and the year ended with a strong increase in employ-

ment in the fourth quarter as well. According to the LabourForce Survey, the number of employed increased by 2.2 per-cent compared with the fourth quarter of 2006. Accordingto the enterprise-based employment statistics the numberof employed rose by 2.7 percent. Unemployment was 5.5

percent compared to 6.0 percent a year earlier.

0.0

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1.0

1.5

2.0

2.5

3.0

3.5

Q 4Q 3Q 2Q 1Q 4Q 3Q 2

Employment and employed personsPercent change from corresponding quarterprevious year

Data up to and including fourth quarter 2007Source:LFSandenterprise-basedemploymentstatistics

Employed personsEmployment LFS

2006 2007

The increase in employment continuesAccording to the Labour Force Survey, employment in-creased in the fourth quarter among people 15 to 74 yearsold by 97 000 people or 2.1 percent, compared to thecorresponding quarter of 2006. A total of 4 549 000 peoplewere employed. The number of employed rose, especiallyamong those of foreign birth. Despite the large increasecompared with the fourth quarter of 2006, the percentage

of employed did not increase for this group, because thenumber of foreign born members of the population alsorose signicantly during the same period.

The increase in employment among different age groupswas especially large for youths aged 15 to 24, where thenumber of employed rose by 6.6 percent. Over the lastsix quarters, the increase for young people has been verystrong, with 30 000 to 50 000 more employed per quartercompared with corresponding quarters one year earlier,which probably has to do with the large number of youthsentering the labour market during the past few years at the

same time as vacancies also increased signicantly.The increase in employment during the fourth quarter of2007 was evenly distributed among men and women. Theincrease primarily affected people with permanent employ-

ment. The enterprise-based employment statistics showedan increase in the number of employees by 2.7 percent.Both the Labour Force Survey and the employment statis-

tics showed that an increase occurred in the private sector.According to the Labour Force survey, the increase wasstatistically signicant in the construction industry as wellas in business services (inclusive of nancial services). Theemployment statistics also showed that aside from theseindustries, there were upward trends within wholesale andretail trade as well as hotels and restaurants.

The number of hours worked was 146.7 million on av-erage, according to the Labour Force Survey. Comparted tothe fourth quarter of 2006, this upward trend reached 2.7percent.

Unemployment continues to decreaseUnemployment continued to decline. During the fourthquarter the number of unemployed was 264 000 personson average, or 5.5 percent of the labour force. This means adecrease by 0.5 percentage points compared with the fourthquarter of 2006. Of the unemployed, some 77 000 werefull time students that sought and gained employment. Thenumber, as well as the percentage of unemployed amongmen, has decreased. Unemployment was at 5.1 percent formen and 5.9 percent for women in the fourth quarter. Those

of foreign birth has signicantly higher unemployment. Forthis group, unemployment was at 11.6 percent, while only4.5 percent among the native born.

Many jobs available, but signs o slowdownStatistics on available jobs indicates a continued increase innumber of jobs available. The long term rate of increase foravailable jobs in the private sector is higher than the deve-lopment in the fourth quarter, but still there are many jobsavailable. The number of available jobs was over 44 400 inthe private sector during the fourth quarter, and over 52 200

available jobs for the total Swedish labour market. In com-parison with the fourth quarter of 2006, there is an increaseby approximately 15 percent in both cases.

Acute lack o labour increasedVacancies increased to over 20 600 in the private sector.This means that 46.4 percent of the available jobs arevacant and can be lled immediately. Within nancial ser-vices and business services as well as construction industry,the corresponding numbers were 55.1 percent and 70.3percent, respectively. In total there were 2 500 vacancieswithin the construction industry and almost 8 400 in thenancial services and business services elds.

Contact persons: Raitis Sedlenieks, 08-506 948 88 and EricHellsing, 08-506 943 16



21/2621

Consumer Price Index (CPI)

Higher ination rate

The ination rate, measured as the change in the CPI (Con-sumer Price Index) during the last twelve months, was 3.1

percent in February. The ination rate has not been as highas it has been for the past three months since December1993, when it was 4.1 percent. The underlying ination rate,according to the CPIX, earlier called UND1X where mort-

gage interest costs and tax effects are excluded from the CPI,was 2.0 percent in February and 2.1 percent in January. Thefollowing areas are described in greater detail in this article:the design and composition of CPI, the differences betweenCPI, CPIX, Net Price Index (NPI) and Harmonised Index of

Consumer Prices (HICP). Also, a short historical comparisonwith connection to price development in the producer priceindex is described.

An ination rate of 3.1 percent means that consumer pricesfor a given combination of goods and services, a so calledindex basket, has increased by 3.1 percent on average overthe past twelve months. This means that the same basketthat cost SEK 1 000 last year now costs SEK 1 031 for theaverage consumer. An SEK 31 price increase may not seemlarge but aggregated over a longer period of time, all otherthings being equal, it means that the price increase hol-

lows out the purchasing power. For example, an annualination rate of 3.1 percent means that the basket that costSEK 1 000 ten years ago now costs SEK 1 357, which cor-responds to a 35.7 percent price increase. In reality priceshave increased signicantly less during the last ten years(15.1 %), which means that the price of the basket hasincreased to SEK 1 151.

In Sweden the CPI aims to approximate a cost of livingindex. The economic approach to this index theory buildsupon the assumption of optimising behaviour of the hous-eholds, which has its origin in microeconomic theory. CPI

aims, in accordance with these, to illuminate how pricechanges affect the costs of maintaining an unchangedstandard of living. Such an index implies comparisonsbetween two situations, where not only prices but also thecomposition of consumption distinguished themselves, dueto the households adaptation to changes in relative prices.In practice however, a price index must be calculated froma xed basket. In Sweden the index basket compositionis classied according to Classication of Individual Con-sumption by Purpose (COICOP), which is an internationalsystem of classication. There are twelve main groups ac-

cording to COICOP and their percentage of the total CPI isillustrated in the graph below, in part for 2008 and in partfor ten years ago.

Food 13 %

Alcoholic beveragesand tobacco 4 %

Clothing andfootwear 5 %

Housing 26 %

Furnishings and

household goods 6 %

Health 3 %

Transport 15 %

Communication4 %

Recreation andculture 12 %

Restaurants andhotels 7 %

Miscellaneous goodsand services 5 %

Education 0 %

2008

Food 14 %

Alcoholic beveragesand tobacco 5 %

Clothing andfootwear 6 %

Housing 33 %

Furnishings andhousehold goods 5 %

Health 3 %

Transport 13 %

Communication

3 %

Recreation andculture 10 %

Restaurantsand hotels 4 %

Miscellaneous goodsand services 4 %

Education 0 %

1998

It is clear that housing costs now make up a smaller part ofthe total consumption expenditure compared to ten yearsago. The other groups have changed signicantly less. Con-sumption of food and non-alcoholic beverages, alcoholicbeverages and tobacco, as well as clothing and footwearall have a reduced percentage share while at the same timefurnishings, household equipment and routine maintenanceof the house, transport, post and telecommunications,recreation and culture, restaurants and hotels as well asmiscellaneous goods and services are now purchased togreater extents.

Changes in the index basket between the different maingroups are usually small from year to year, while changeswithin the different main groups sometimes can be largerdue to the occurrence of substitution in commodity groups.In addition, new goods enter the market every year whileothers are consumed less frequently or disappear. Over thepast three years the following goods, among others, have



22/2622

been added to the CPI basket: campers, heating pellets,district heating for owner occupied dwellings, E-85; MP3players, downloading of MP3 formatted music, child careand leisure time child care fees. At the same time, goodsand services such as colour television repair, video tapes,video tape players, television rentals and portable CD play-ers have been excluded.

The purpose of the CPI is to measure the average price de-velopment for the total private domestic consumption. Thebasis for how much the different goods and services in theCPI will affect the measurement, that is to say their weightsin the index basket, is primarily derived from the privateconsumption in National Accounts in the form of consump-tion values. Household budget statistics are used to cate-gorise certain amounts that are not reported in the degreeof detail used in the CPI. The CPI presently has a coverageof approximately 95 percent of the private consumption,which means that the index baskets total weight cor-

responds to more than SEK 1 120 billion. Part of the goodsand services in the private consumption are missing in CPIsuch as certain parts of health care and nancial services.

From 2005 onwards, the CPI is calculated as a Laspeyreschain index, where index links indicating the relation bet-ween the average prices for two consecutive years are suc-cessively multiplied or chained to one another. The formulaused for the calculation of these year-to-year links belongsto a class of index formulas called superlatives. These aretypically symmetrical to the extent that the index basket onwhich the comparison is based is equally representative for

each period. Further, a nal index link is calculated thatindicates the relation between prices for the actual monthand the average price two years earlier, which is also theyear the index basket refers to. By multiplying these linkswith the chained index numbers for earlier years, we obtainindex numbers for individual months. This method of cal-culating the index numbers ensures that the indexs deve-lopment remains accurate in the long term.

Jan

Dec

Dec

Dec

Dec

Dec

Dec

Dec

DecJan

IIIII

IIII

2008

2006

2006

2005

2005

2004

2004

,2003

,2003

,2002

,1982

,1981

,1981

,1980

,1980

1980

,2008

1980

...

...=

Passing link betweenthe new and the oldindex construction.

Superlative index link according toWalsh formula between two sub-sequent years, where consumptioncomposition for both years is used.

Final Laspeyres link, where prices foractual month are compared to pricesfor the entire year t2; using consump-tion composition t2.

If, for example, the index for January 2008 is to be compa-red to the one for December 2007, (i.e. the monthly change

in January 2008) then there are a number of different linksto be considered. In December the index chain ends with alink indicating the relationship of prices in December 2007to the calendar year of 2005. Instead of using price changesfrom the entire year of 2005, the January 2008 index uses a

link indicating the relationship between the average pricesduring 2006 and the average prices during 2005 and a linkthat indicates the relationship between prices in January2008 and the average prices during 2006. These links havediffering compositions of the index basket, such as:

the link comparing prices in December 2007 toprices during 2005 has been calculated based on

the consumption composition during 2005; the link that compares prices in 2006 to those

during 2005 has been calculated on the basis ofconsumption composition for both of these years;

and, the link that compares prices in January2008 to those during 2006 has been calculatedbased on the consumption composition during2006.

The effect of changing the CPI basket at the turn of the yearnormally causes a decrease of approximately 0.2 percen-

tage points to the monthly CPI change in January. Thiseffect was 0.5 percentage points in January of 2008, whichprimarily depends on the National Accounts data havingundergone pervasive revisions that normally are done everyfth year. The published ination rate in January thereforedecreased by 0.2 to 0.3 percentage points compared to theDecember ination rate.

The composition of the CPI basket will change again at theturn of the year 2008-2009. If the decrease from changedbasket composition once again is normalised near 0.2percentage points, then the ination rate in January 2009,

with the same price changes from December to January as ayear earlier, is expected to rise 0.2 to 0.3 percentage pointscompared to December 2008.

Price changes during the last twelve monthsConsumer prices rose by an average of 3.1 percent fromFebruary 2007 to February 2008. As usual, the differencebetween product groups was large.

The primary reason for the rise in the ination rate thepast year is increased housing costs (5.1 %), which contri-buted by 1.3 percentage points. The higher housing costs

are mainly explained by increased mortgage interest costs(21.5 %), which in turn are explained by higher interestrates (15.0 %) as by increased real estate prices (5.0 %). Inthis context, real estate prices refer to the component of theCPI that describes the change in households capital alloca-ted to one- or two-dwelling buildings, calculated to acqui-sition price. Price changes for houses affect the CPI mainlyin the event of a change of ownership, when the real estateis sold at a price other than that when it last sold. Pricechanges for new production also affect the CPI. Anothermajor contributing factor to the ination rate in February is

higher prices for transportation (5.7 %), which contributedwith a rise of 0.8 percentage points. This group is domina-ted by higher fuel prices (14.5 %), but also by higher pricesfor local transportation (10.5 %). The most common form offuel by a wide margin is 95 octane petrol, which on its own



23/2623

affected the ination rate by 0.5 percentage points in Fe-bruary. Energy products in total make up 8.9 percent of theCPI basket. Aside from fuels, this group includes electricity,heating oil, natural gas, heating pellets and district heatingfor owner occupied housing. The price of these products in-creased on average by 7.8 percent between February 2007and February 2008.

The prices within the group food and non-alcoholic be-verages (5.9 %) began to rise sharply in October last year,which is mostly explained by the marked increase in pricesfor grain products (9.9 %) and dairy products (9.9 %). Theprice increases in this group affected the ination rateupwards by 0.8 percentage points February. The price ofrestaurant visits has also increased (4.6 %), which furtheraffected the ination rate by 0.3 percentage points upwards.

The ination rate is primarily affected downwards by pricedecreases for the group audiovisual equipment and com-puter equipment (19.1 %), where a number of products

like televisions, DVD players, digital cameras and compu-ters decreased in price. In February the contribution fromthese products was 0.4 percentage points downwards. Pricereductions for clothing and footwear (2.1 %) as well aspostal and telephone services (4.4 %) affected CPI down-wards in February by 0.1 percentage point and 0.2 percen-tage points respectively.

Domestically produced goods and services make up ap-proximately 64.3 percent of the CPI basket, the price of the-se goods and services increased on average by 2.5 percentduring the last year. The percentage of imported goods and

services, as well as interest rates, amounts to 31.2 percentand 4.5 percent, respectively. In February the twelve monthchange for these was 1.4 percent and 21.5 percent, respec-tively. The numbers should be interpreted with a certaindegree of caution, as it becomes more and more difcult todistinguish those product groups that are mainly domesti-cally produced and those that are imported.

-0.6 -0.3 0.0 0.3 0.6 0.9 1.2 1.5

Contributions to inflation rate in February 2008

Source:Consumerpriceindex

Communication

Clothing and footwear

Miscellaneous goods and services

Health

Restaurants and hotels

Education

Furnishings and household goods

Recreation and culture

Alcoholic beverages and tobacco

Food

Transport

Housing

Taxes that have aected the consumer pricesover the last twelve monthsThe CPI is calculated based on the prices actually paid byconsumers, which means that part of the prices are made

up of taxes and that certain products really could be moreexpensive if they are subsidised. Statistics Sweden alsocalculates inationary estimates that aim to show pricechanges exclusive of taxes and subsidies.

The Net Price Index (NPI), like the CPI, is considered as apart of Sweden

Econ Report q 407

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Transcript of Econ Report q 407