Facts: The National Institute of Economic Research’s forecast 2022
Russia’s war of aggression against Ukraine has significant consequences for economic development in Europe. Sharp rises in commodity prices create further upward pressure on the already high inflation in many countries, including Sweden. Both the ECB and the Riksbank are expected to bring forward their interest rate hikes to September this year. At the same time, Swedish GDP growth is being maintained, partly due to a sharp increase in public consumption.
The war causes a huge humanitarian catastrophe and great human suffering. Approximately 200,000 Ukrainian refugees are expected to come to Sweden this year, which will lead to large increases in public spending.
The big challenge with refugee reception in the short term is primarily about housing and school for those who come to Sweden. However, public finances are strong. Despite sharply increased public spending, structural net lending is close to zero in the next few years. The Swedish economy enters a mild boom at the end of this year and unemployment will fall to just under 7 percent in 2023.
Households’ purchasing power is reduced by high inflation, but the phasing out of pandemic restrictions contributes to them reducing their savings and household consumption still increasing.
The high inflation and the growing resource utilization in the economy mean that the Riksbank is abandoning the zero interest rate policy and will initiate a series of interest rate increases in September this year.
Source: National Institute of Economic Research
– A natural next step is for this theory to be incorporated into, for example, the Riksbank’s models, says Erik Öberg, one of those behind the study.
Several similar models exist before, but this one takes the step further by examining several parameters.
Behind the model are Erik Öberg, researcher at Uppsala University, and Karl Harmenberg at BI Norwegian Business School in Oslo. They have worked together on the project since 2015.
– The big difference is that this model also incorporates capital goods – something you buy today to consume over a long period of time, like a car, says Erik Öberg.
The consumption pattern in the model follows both households’ actual and expected finances – which is also reflected in the pattern of demand for the various product categories.
Expected income
Öberg gives an example: Capital goods decline mainly at the beginning of a recession, while the decline in consumables, such as food, is evenly distributed.
The model assumes that households with small financial buffers are less likely to spend extra on capital goods, while the tendency is the opposite for groceries.
– When you buy capital goods, you commit to consuming the services for a longer period of time. Then the purchases will be more sensitive with your expected income in the future, he says.
He adds that this happens even if you are not directly threatened by unemployment.
Can be used in monetary policy
At the same time, he emphasizes that their results should not be seen as a definitive answer, but rather a clue as to where future empirical research is needed.
And especially in two areas, he says.
– Part of the research in the future will be to examine households’ decisions at the micro level to test whether the model is correct. The second way is to integrate this into larger macroeconomic models and see what it means for fiscal and monetary policy.
The hope is then that they will be able to measure the consumption effect of monetary policy stimuli very quickly.
– If it is true that consumption demand is very sensitive to household expectations, then our model can be used to see which measures provide direct and greatest effect, says Öberg.