Retiring DG tracks several years of poorer purchasing power

Urban Hansson Brusewitz turns 65 next year and did not want to commit to another three years as CEO.

After discussions with the government, he was instead commissioned within the framework of the long-term inquiry to investigate the relationship between fiscal policy, which is governed by the government and the Riksdag, and monetary policy, which is governed by the Riksbank.

And he took it.

– I get a freer role and for a year and a half as I wanted it, he says.

He leaves his mail when Sweden is on the brink of a recession – and where perceptions of how serious the situation is vary more than usual.

– Households probably perceive it as at least as serious, if not more so, as during the pandemic. If you look at our business cycle barometer for households, it is down in the basement now and at the same level as when it was at its worst during the financial crisis, says Brusewitz.

– On the other hand, companies are not as pessimistic at all. The labor market is also doing well. Employment has risen and unemployment has fallen so it is a bit divided, he adds.

It’s not hard to understand that households have a more bleak view of the future than companies. They see it in rising prices and interest rates and in falling real wages (wages after inflation is deducted), which erodes purchasing power.

– Households, both in Sweden and abroad, experience price increases as dramatic. But this is probably, at least in Sweden, a transient phenomenon, says Brusewitz.

– We have not yet seen that price increases have stuck to wage increases to a corresponding degree, that we are about to get a price-wage spiral that we have had historically, he explains.

This is the concern of the Riksbank and others who are fighting inflation – that demands for compensation for inflation during the wage negotiations are driving a spiral in which prices and wages are “chasing each other” upwards.

There are signs of this, especially in the USA and in parts of Europe, but not in Sweden.

It does not mean that the Swedish economy does not go into a recession – because it does.

The National Institute of Economic Research will present a new economic forecast this week, and Urban Hansson Brusewitz does not want to reveal details. However, he gives an overall picture of the situation.

– Previously, we thought we would go into a mild boom – we do not think so now, he says.

– But we do not see in front of us a very deep recession. This is not our main scenario, but it should not be ruled out, he adds.

But do you not see a risk that a dramatic change in monetary policy, as we now see in Sweden and in other countries, could trigger a recession (shrinking economy)?

– Yes, there is a risk, but that is not our main scenario, Brusewitz answers

He points out that Sweden has a centralized wage formation, unlike the United States and parts of the euro area. Therefore, Sweden has not received the development that has taken place in the United States, where wages have risen rapidly, which risks fueling inflation and forcing the US Federal Reserve to take strong measures.

Last week, for example, it raised its key interest rate by as much as 0.75 percentage points.

Also in Sweden we will get higher interest rates.

– We will need to raise the interest rate, but not above normal levels. Then the interest rate can stabilize there and inflation falls back and real wages begin to recover in a few years’ time. That’s the main picture we have.

At the same time, Brusewitz emphasizes that nothing can be ruled out. There are continued risks of trade disruptions as China still has zero tolerance for covid and shuts down entire cities and ends up with the slightest outbreak.

The war in Ukraine also leads to what economists call supply disruptions – products and inputs do not reach customers on time, leading to rising prices.

“Of course there are risks, but our main hypothesis is that covid disruptions will resolve next year and that energy prices will stabilize and Europe will become more independent of Russian oil and gas,” he says.

– Energy prices will continue to be high, but they will not continue to rise. Inflation will fall during the course of 2023 – that is our main hypothesis, he adds.

Wage earners will receive a sharp reduction in real wages this year. Next year, they may not get another reduction, but no increase either

But for the wage earners The crisis means that real wages fall, in other words their purchasing power deteriorates when inflation takes hold of wage increases.

– Wage earners will receive a sharp reduction in real wages this year. Next year, they may not get another reduction, but no increase either, says Brusewitz.

– It may take until 2025,2026 before real wages are back to the old level. It is clear that it is gloomy at the same time as mortgage rates are rising. So you understand that households are gloomy in our measurements, he adds.

Do not you feel that you are going now when it is most exciting?

– Well, it’s a bit of a shame, but I’m coming to a new job – it feels good.

Urban Hansson Brusewitz also points out that earlier in his career as a civil servant he has had to handle and analyze crises – including at the Ministry of Finance as budget director in the final phase of the financial crisis and the refugee crisis in 2015.

– Professionally, it is a challenge to analyze when things happen. But I have had my doses of crises in my professional life, he says with a laugh.