Erik Thedéen: On risk, uncertainty and geoeconomic fragmentation

The last five years have been unusually turbulent. We have lived through the worst pandemic in a hundred years, Russia has invaded Ukraine, and the United States has started trade conflicts with several of its most important trading partners, including China and the EU. We have also had a period of very high inflation that has now fortunately fallen back to normal levels; see Figure 1.

In recent months, uncertainty in the global economy has increased strongly, not least due to the United States' new trade policy. In our latest Monetary Policy Update, published last week, we assessed that international developments – particularly the elevated uncertainty – are dampening the economic prospects in Sweden. In turn, this suggests that inflation, in the long term, may become lower than in our most recently published forecast from March. But we also pointed out that there are several risk factors, such as those linked to companies' global value chains, and that inflation thus could well become unexpectedly high.

This illustrates, almost too clearly, that the economic outlook and inflation prospects are always uncertain and there are several reasons for this. One of them is that our models cannot capture all the complex relationships that characterise real economies. There could also be uncertainty over political decisions or how developments abroad affect the Swedish economy. However, regardless of the reason, we cannot exactly know what inflation will be in two years or how changes in the policy rate will affect inflation. The pandemic also reminded us that sometimes unpredictable events happen that can have major economic consequences.