Slowdown in foreign trade worrying for Swedish economy
News, Staff memo Global trade has increased rapidly since the early 1990s, thanks to technological developments and increasingly liberal trade regulations. But, after the great recession of 2008–2009, this development has come to a halt. A return to a global economy that is less open would probably entail major changes and negative effects for welfare.
In a Staff Memo, Erik Frohm discusses, on a general level, how the Swedish economy has been affected by the increase in foreign trade between 1990 and 2008, and primarily by the participation of Swedish companies in global value chains. The Staff Memo also analyses how developments following the financial crisis can affect different parts of the Swedish economy. The analysis was done prior to the outbreak of the coronavirus pandemic. It is still too early to say how the pandemic is affecting these trends, but it is likely that many companies will review their supplier and production chains in the period ahead.
The Staff Memo shows that Swedish productivity growth can be both lower and higher depending on whether Swedish companies participate less in global value chains as a result of increased trade barriers or technological development. It also shows that export growth can become more sensitive to exchange rate changes, at the same time as export market growth will probably be lower when global value chains become less significant.
The trends of increasingly widespread trade in global value chains may have dampened inflationary pressures between 1990 and 2008. But since the crisis years, participation in global value chains has decreased while inflation has continued to be relatively low. This means that these factors cannot be the main explanation for the weak development of inflation in recent years.
A slowdown in foreign trade is worrying for the Swedish economy. Households have benefited from good access to globally produced goods and services of high quality and at low prices. Companies have been able to expand their operations thanks to increased demand from abroad and they have benefited from the specialisation of working tasks in global value chains. A return to a global economy that is less open would probably entail major changes and negative effects for welfare, for both Swedes and people around us.
The Staff Memo has been written by Erik Frohm. The author works in the Riksbank’s Monetary Policy Department.
ABOUT THE RIKSBANK’S STAFF MEMOS
Staff Memos are a form of publication from the Riksbank and a complement to other publications, such as Economic Commentaries and Riksbank Studies. A staff memo provides members of the Riksbank’s staff with the opportunity to publish advanced analyses of relevant issues. It is a publication for civil servants that is free of policy conclusions and individual standpoints on current policy issues.