The Swedish economy slowed significantly in 2001. At 1¼ per cent, the expansion of output was well below its estimated potential rate of 2¼ to 2½ per cent. Decelerating from a growth rate in excess of 3½ per cent in 2000, the slowdown was more pronounced than in the euro area. Private consumption had already slowed markedly around mid-2000, and remained subdued throughout 2001. Weaker consumer confidence, driven mainly by the bursting of the stock market bubble, was important in this context. The slowing of global demand subsequently acted as a significant further brake on activity, not least because of Sweden’s specialisation in information and communication technology (ICT) goods and services. These factors aside, the macroeconomic environment has remained supportive of growth. Fiscal and monetary policies remained expansionary, while increasing house prices and a sizeable exchange rate depreciation also injected stimulus. Notwithstanding some levelling out of late, consumer and business confidence have rebounded since late 2001. Evidence that a recovery is underway has now spread to various indicators of demand and output, including exports, industrial production and retail sales. The 2001 slowdown was accompanied by a cyclical decline in productivity growth, but the pace of employment gains also abated considerably, especially when measured by hours worked (Figure 1). The unemployment rate ceased falling, but it has not risen as it has done elsewhere, and it remains below the OECD’s estimate of its structural level. Thus, with unemployment currently at 4 per cent of the labour force, Sweden is entering the recovery with a relatively tight labour market.