Interest rate and inflation

Interest rate and inflation

Interest rate is related to the currency, inflation and net export. Basically speaking,

the normal interest rate cannot be below zero. But last month the Sweden central bank cut the interest rate to -0.1%. Here is the news I got from BBC.

After that, some economists said that Sweden became the latest Scandinavian state to join Europe’s escalating currency wars. So why it happened?

This graph showed the tendency of interest rate in Sweden. After the financial crisis in 2008, Sweden kept a low interest rate which comes near to 0. Apart from the quantitative easing policy, there are some other significant reasons.

l  The instability of global economy is increasing, especially in Europe.

l  Stimulate the economy with expansionary monetary policy.

l  To relive the risks of long-term deflation and low oil price.

Central bank negative rates are intended to encourage companies and individuals to borrow more, increasing investment and consumer spending and driving up inflation.

In the other word, the deflation in Sweden hinders the economy. Deflation can be regarded as the negative inflation, Sweden suffered from the deflation recent years.

 

 

The deflation means that the prices, money supply and economic growth continue to decline, which will finally cause the high unemployment and recession. it usually begin with the price declining, falling prices mean consumers hold off purchasing goods in the belief that they will get even cheaper, which in turn damages the economy as demand drops, producers suffer and unemployment ensues. Sweden's price growth of just 0.1 percent is well below the central bank's target of 2 percent and this has put pressure on the Riksbank (central bank in Sweden) to stimulate more spending, which could be problematic for a country with high levels of borrowing and household debt. The low interest rate policies are aimed to ride up the inflation rate to 2%, so that the country could avoid the risk in Japan, Japan experienced what has become known as a "lost decade" to deflation in the 1990s.

 

 

The welfare system in Sweden

 

The welfare system in Sweden

 

Sweden is famous for its social welfare system which is modeled by many countries. The welfare system is based on the government income and social development, it has a tight relationship with people’s living standard. Next is a brief analysis about this system.

 

The welfare in Sweden is defined as financial security in the case of illness, old age and for the family; social services; health care; promotion of health and children's rights; individual help for persons with disabilities and coordination of the national disability policies



education spending 1995-2012, 2005=100

About the education, most of the responsibility for education rests with local municipalities. The majority of the education budget is financed by local taxes, and approximately half of the municipal budget is spent on education.

 

 

Most elderly care is funded by municipal taxes and government grants. In 2010, the total cost of elderly care in Sweden was SEK 95.9 billion (USD 14.0 billion, EUR 10.7 billion), but only 3 per cent of the cost was financed by patient charges. Health care costs paid by the elderly themselves are subsidized and based on specified rate schedules.

There is no doubt that the welfare system is of great benefit to the Sweden people. However, it is not as good as we see. Despite a few excellent social policies, the redistributive goal of the social security system is failing, with increasing portions of benefits going to relatively well-off families instead of the poorest. Besides, it’s a big deal for government to maintain the high level expenditure on the welfare. It is not easy under this economic circumstance.

Unemployment situation in Sweden

Unemployment situation in Sweden

Benefit from the high development level and the advanced industrial structure, unemployment is not serious in Sweden. Its unemployment rate ranks No. 115 among 199 countries in the world. But due to the thorough education and economic situation recent years, Swedish start to worry about their jobs. Here is some aspects about the unemployment in Sweden.

 

1.     Background of unemployment in Sweden

Unemployment rate, 1980-2010, Sweden

Long-term unemployment rate, 2002-2013, Sweden

Sweden has always maintained a low unemployment rate until 1990s. At the beginning of 1990s, more and more immigrations came to Sweden and many European countries started to adjust the government policy and industrial structure, which lead to a short-term economic crisis. Then, the unemployment declined to the normal level. 

 

 

 

2.   Reasons of the low unemployment rate in Sweden

From the above picture we can see it clearly that the unemployment rate really hasn't changed much from 2002 to 2010, meanwhile, it fluctuates around 7%. The possible reason is listed.  

l  Building national institutional framework by the employment policy, relevant laws and regulations.

l  To set up specialized agencies, provide more employment guidance.

l  To emphasize the positive employment, reform the employment methods.

l  Education and effective exploiting of human resource.

 

3.     Youth unemployment

The youth unemployment rate is the number of unemployed 15-24 year-olds expressed as a percentage of the youth labor force. Youth unemployment is high in Sweden. Too many graduated students swarm into the labor market every year. The number actually exceeds the quantity of demand. It is a serious problem not only to the Sweden government but also extra countries.

 

As an important economic entity of the global trade system, the development of Sweden has a big impact on the world-wide economy, and the unemployment rate has a big impact on the Sweden economy. That deserves our attention.

 

 

 

 

 

 
 

Sweden CPI

Sweden CPI

Consumer Price Index CPI in Sweden reached an all-time high of 315.49 Index Points in April of 2012. The latest data showed that CPI in Sweden decreased to 310.75 Index Points in January of 2015 from 314.05 Index Points in December of 2014.

We use the date chart from 2005 to 2015 by Statistics Sweden. As we all know that the whole tendency of CPI is always increased. Specifically there are two periods of time we should pay some attention.

Firstly, CPI suffered a great decrease from 2008 to 2009, it is easy to think of the American financial crisis which spread all over the world.

 Second period is the recent three years, as you can see from the chart that the CPI of Sweden fluctuated around 315 without continually increasing. Why? Is it health or not for the Sweden economy? What did the Swedish government do to deal with the situation?

Using the CPI solely we won’t have the answer. Because what matters most importantly is not the value of CPI itself, but its function to calculate the Inflation Rate, thus affecting the interest rate.

Sweden GDP Components

Sweden GDP Components





CHART1

CHART2

This chart is from World Bank.According to our textbook, Y=C+I+G+NX. However the formulas and terms used in the real economic world are slightly different.

Formulas (Chart1)GDP = Gross national expenditure + External balance on goods and services

Gross national expenditure = Final consumption expenditure, etc. + Gross capital formation





Final consumption expenditure, etc. = Household final consumption expenditure + General government final consumption expenditure.



When we apply the definition to each sector and make some adjustment. Here comes a chart applying our textbook formula to show the composition of Sweden GDP.  (Chart2)
Among the fours GDP components- C, I, G, NX, there are two of we should pay special attention. 

 

Government purchases

Comparing with the 21% of U.S government purchases in GDP and 8% of HK. Swedish government purchases takes up 27% of the GDP is quite a high value. The government tax a lot from the citizens and using the money to building infrastructure like railways, hospitals and to support its huge welfare system. And we will discuss it in The welfare system in Sweden page.

We can say that Sweden has a ‘big’ government due to the great government spending. But here is a video telling us that the Swedish government is getting ‘smaller’. As of 2012, total tax revenue was 44.2% of GDP, down from 48.3% in 2006.

Net export

Net export contributes 6% to the whole Sweden GDP. Sweden relies a lot on world trade and it is a developed export-oriented diverse economy whose main export partners are Germany, United States and Norway, while the agriculture heavily relies on import.

Pillar industry  

From chart1 we can see that services contributes 74.3% to the GDP, following by industry 24.2%, agriculture 1.5%.

The service sector is definetely the Pillar industry by far the largest in the Swedish economy in terms of employment. It consists not only of traditional services like financial, educational and medical but also of an increasing service part in production industries. Large parts of the Swedish service industry belong to the public sector (especially the welfare system), for instance are almost all hospitals, schools and child care centers owned by the State.

The engineering industry is the largest manufacturing industry in Sweden. The industry has a very high technological level. There are brands that famous all over the world like Volvo, Ericsson, etc.

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 

 

 

The general situation of Sweden GDP

The general situation of Sweden GDP

The Gross Domestic Product (GDP) in Sweden was worth 557.94 billion US dollars in 2013. The GDP value of Sweden represents 0.90 percent of the world economy. (Sweden GDP, 2015)

Sweden is a major North European economy and to be ranked in the 15th of the top GDP per capita countries according to the data from World
Bank.
Undoubtedly Sweden is a rich country.Its GDP per capita even exceeds Germany. You can see the Sweden’s GDP per capita comparison with Germany and the United States. The high GDP ensured a high living standard to the Swedish people.
 
 

Despite strong finances and underlying fundamentals, the Swedish economy slid into recession in the third quarter of 2008 with a record low of -3.80 percent in the fourth quarter of 2008 and growth continued downward in the fourth as deteriorating global conditions reduced export demand and consumption.

Economic history of Sweden

Economic history of Sweden

 

The economic process of Sweden is said to be have started after 1870, which is regarded as a latecomer comparing with most West European Country.  However, from that period of time, Sweden experienced an astonishing and sustained rate of economic growth, resulting in a 2.1% per year from 1870 to 1970 on GNP, as compared with 1.5-2% for most West European Country and North America.  This sustained economic growth could not get away from the advanced and comprehensive welfare system.  Correspondingly, a relatively high taxation policy was implemented (figure 1). 

figure 1

However, the economic growth of Sweden is not without a hitch at all.  After 1970, the economy of Sweden have faced  a series of fluctuation.  Specially, economic bloom and recession had taken placed continually afterward, which was contributed by the global economic condition and the policy making of Sweden government.

In the early stage after Swedish Social Democratic Party had come to power, the Sweden government accepted extensive welfare benefits policy.  It resulted in about 5-10% decrees in unemployment for 20 years.  This policy preserved until mid-70s—the first significant economic recession after WWII.  A large unemployment rate occurred.  It drove the welfare policy transformation and facilitated the economic democratization which enhanced the substantial welfares including the protection of unemployment, employment welfare to reconstruct the welfare policy.

During 1991 to 1992, a housing bubble derived by the rapid increase in leading had deflated.  It resulted in a widespread insolvency of bank.  In the figure 2,

it shows a catastrophic unemployment rates during the crisis.  Sweden government had learnt a lesson from that and reconstruct the housing policy to comprehend the economic system.

In the modern economy, as the world will be more globalized, the economy of Sweden is interrelated to the global economic situation.  The financial tsunami caused the downturn of Real GDP.  Looking forwards, the economic growth is gradually recovering.