Economic pErspEctivEs
ThurSdAy
Address by Governor Øystein Olsen
15 FeBruAry
to the Supervisory Council of
2018
Norges Bank and invited guests on
Thursday 15 February 2018
perspectives 2017
introduction
"All things will pass, even a crisis. After the darkness comes the dawn."1
With these words, former central bank governor Nicolai Rygg summarised the turning
point in the 1930s.
The advanced economies have emerged from another challenging period. Ten years
ago the world economy was hit by a shock and thrown into the deepest recession since
the 1930s (Chart 1).
Chart 1 Economic growth following the financial crisis.
GDP per capita. Index. Value in year recession started = 100
120 120
Euro area (2007=100)
US (2007=100)
1)
Previous recessions
110 110
100 100
90 90
80 80
-5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10
Number of years before and after recession
1) The first year of a recession is defined as a year where per capita GDP growth turns negative.
Previous recessions are defined as the median of all recessions in the period 1920 - 2002, based on the
Jordà-Schularick-Taylor Macrohistory Database. The database covers 17 countries.
Sources: Thomson Reuters, Jordà-Schularick-Taylor Macrohistory Database and Norges Bank
The economic downturn that followed the financial crisis stands apart from earlier
recessions.2 It was both deeper and longer. Potent measures were deployed to address
the crisis, but it has still taken time to get the world economy back on its feet.
The financial crisis has taught us important lessons. First, low and stable inflation was
not enough to guarantee economic stability. A complex financial sector, insufficient
capital in the banking industry and substantial debt among some groups created risks
that were underestimated. Second, we have been given a stark reminder of how severe
the impact of a financial crisis can be. A credit crunch, high uncertainty and falling
1 Rygg, N. (1948): "I økonomisk stormvaer" [Weathering the economic storm]. Festschrift for Joh. H. Andresen, also
published as an annex to the periodical Statsøkonomisk tidsskrift nr. 3/4 1948 (Norwegian only).
2 Data are from Jordà, O., M. Schularick, and A. M. Taylor (2017): "Macrofinancial History and the New Business
Cycle Facts" In: M. Eichenbaum and J. A. Parker. NBER Macroeconomics Annual 2016, volume 31. University of
Chicago Press.
Monetary policy had to take on substantial responsibility.
In the past few years, advanced-economy growth has steadily strengthened.
Unemployment has fallen back, in Europe too. In parallel with this, longer-term
structural developments have changed the economic landscape. A more closely
integrated world economy and technological changes are transforming aspects of
everyday life and also have consequences for economic policy.
tradE and tEchnology
Trade and technology have been key driving forces of growth in Norway over the past
two hundred years. Oil and gas resources have provided a substantial boost to our
income level, but even more important is the efficient use of our labour and capital.
Technological advances, increased education and better capital equipment have made
us more productive. Contact with other countries has helped us get more out of our
common resources. Many innovations have come from abroad, where we have also
found markets for our own products.
Over the past fifty years, global trade has more than doubled as a share of global GDP
(Chart 2). The scaling back of trade barriers has been an important driving force. Since
2011, trade has expanded at a slower pace, primarily reflecting lower growth in the
world economy. Private investment in particular has lagged, but growth has also
slowed because trade barriers are being reduced more slowly than earlier.
2)
Chart 2 Global trade as a share of GDP.1) Percent
70 70
60 60
50 50
40 40
30 30
20 20
1968 1974 1980 1986 1992 1998 2004 2010 2016
1) Trade is defined as the sum of exports and imports of goods and services.
2) Projections for 2017 and 2018.
Sources: IMF, World Bank and Norges Bank
Global trade has generated substantial welfare gains. As consumers, we have gained
access to cheaper and better products. More importantly, over one billion people have
been lifted out of poverty.3 Many people would be negatively affected if the tendency
is reversed towards higher trade barriers.
ready access to information about contractors in other countries. Today, it is also
possible to manage production processes in distant locations. This has made it easier
to locate high-tech production in low-cost countries.
Society is being transformed by advances in information and communication
technology. The capacity of computer devices has increased while their size has
become smaller and smaller. Moving a 5 megabyte hard disk used to require
substantial muscle. Today, a several hundred thousand megabyte memory stick is
easily lost among pocket change. At the same time, the price of ICT equipment has
decreased in relation to other goods, paving the way for ever new applications.
A more open world economy and technological innovation have an impact on working
life. The world of work is changing. Jobs are being taken over by machines or
transferred to firms in different locations. At the same time, new jobs are created.
Every year roughly one in ten jobs disappears in the Norwegian economy, and about
as many are added.4 This is part of the restructuring needed to generate growth. In
order to profit from new technology, work must become less labour-intensive. When
labour flows into other profitable activities, we get more out of our resources.
Restructuring in the Norwegian financial industry has been successful. The banking
crisis in the early 1990s became a catalyst for exploiting new technological solutions
(Chart 3). Labour-intensive operations were made more efficient. The Norwegian
financial industry was also an early adopter of digital payments. Households and
enterprises have been quick to use faster and simpler payment solutions. Few of us
miss having to run to the bank during our lunch break. We have seen the transition
from banking in person to postal giro, online banking and mobile payment applications.
Chart 3 Financial sector productivity growth.
GDP per hour worked. Index. 1990 = 100
350 350
Finance and insurance
Mainland Norway
300 300
250 250
200 200
150 150
100 100
50 50
1990 1994 1998 2002 2006 2010 2014
Sources: Statistics Norway and Norges Bank
In parallel, banks' branch networks have changed. In 1987, there were almost 200 bank
branches in Oslo, while today there are fewer than 40. This has cut costs substantially
for both banks and the general public. Our payment system is now among the world's
most modern and cost-efficient.i
another immediately, regardless of amount. Maybe your car purchase can be paid by
pressing "send" on your mobile phone and, at the very same instant, the seller can
safely hand you the keys.
Banks continue to play a dominant role in the payment system, but there are clear
signs that their position can be challenged. New regulations and technology are
making it easier for new participants to take market share. Global technology
companies with a large customer base are making their way into the payment system.
New technology and new participants give rise to new challenges. International
platforms gather substantial information about us as individuals, especially if they
know our payment patterns. Such information should not fall into the wrong hands.
We are living in an increasingly digital world. From the comfort of our sofas, we can
now access an unprecedented array of music, film and literature. From a tablet or a
mobile phone, we can order groceries or control the temperature in our holiday home.
Artificial intelligence and robotisation are also in focus. By managing processes using
machine learning, work can be made more efficient. But even if technology appears to
be advancing more rapidly than ever before, there is little visible effect on productivity
growth for the economy as a whole. Both in Norway and among our trading partners,
productivity growth has declined (Chart 4). In recent years, growth has been around
one percent.
Chart 4 Productivity growth in Norway and abroad.
GDP per hour worked. Average percentage growth
6 6
Trading partners
Mainland Norway
5 5
4 4
3 3
2 2
1 1
0 0
1950-59 1960-69 1970-79 1980-89 1990-99 2000-09 2010-17
Sources: The Conference Board Total Economy Databasetm (Original version) November 2017,
Norwegian Technical Calculation Committee for Wage Settlements, Statistics Norway and Norges Bank
Productivity growth may be lagging because the diffusion of new technology into
goods and services production takes time. Productivity growth will only increase once
the use of information technology and digital solutions reduces the use of labour.
Behind the average figures we also find an interesting pattern. In many sectors, the gap
between the most productive firms and the rest has increased (Chart 5).5 The chart
shows the gap within the service sector, but the same picture applies to other sectors.
firms to laggard firms.
Chart 5 Productivity for frontier firms and other firms.
Services.1) OECD countries. Index. 2001 = 100
150 150
Five percent most productive firms
Other firms
140 140
130 130
120 120
110 110
100 100
90 90
2001 2003 2005 2007 2009 2011 2013
1) Defined as firms in sectors 45 - 82 (excluding 64 - 68) in NACE Rev. 2.
Source: OECD
In the past decade, the fallout from the financial crisis has probably had a dampening
impact on productivity growth. Weak economic growth and heightened uncertainty
have reduced businesses' willingness to invest. In addition, banks in many countries
held back on lending for a long period. This may have discouraged new entrants and
slowed the replacement of outdated production equipment.
The legacies of the financial crisis are now fading. Investment is picking up across
countries. This could lift productivity ahead.
But this will not materialise of its own accord. It is up to us to take advantage of the
possibilities provided by technological innovation. Economic restructuring must
continue. A flexible labour market, high education levels and a solid social safety net
are preconditions for successful restructuring. In Norway, much of this is in place, but
we too must be prepared to adapt to changing circumstances. In addition, nature has
endowed us with advantages that it will be important to build on in the years to come.
low pricE and wagE inflation
Not everyone benefits from a more closely integrated global economy and new
technology. In many countries, the competition for low-skilled jobs has intensified,
depressing wages for these workers. On the other hand, technological advances have
pushed up demand for high-skilled labour for which there is a wage premium. The
result is wider wage gaps.
The income distribution between labour and capital has also changed. It had long been
a widely-held view among economists that the labour share of GDP would remain
fairly constant over time. Keynes described the stability of the labour share as "one
of the most surprising, yet best-established, facts in the whole range of economic
statistics".6 Yet since 1980, corporate profits have risen faster than wages (Chart 6).
Selected advanced economies.1) Percent
Economic
55 55
pErspEctivEs
15 FeBruAry 2018
54 54
53 53
52 52
51 51
50 50
1978 1983 1988 1993 1998 2003 2008 2013 2018
1) Belgium, Denmark, Finland, France, Germany (data for West Germany before 1992), Ireland, Italy, Japan,
Netherlands, Portugal, Spain, South Korea, Sweden, Switzerland, the UK and the US. GDP-weighted average.
Sources: European Commission, Thomson Reuters and Norges Bank
Technological advances have reduced the relative cost of capital goods. Tasks have
been taken over by robots and other capital equipment. This probably explains some
of the decline in the labour share.7
The emergence of global technology companies is also reducing the labour share.
With broad platforms and vast numbers of users, they dominate the market, which
translates into both market power and substantial profits. The winner takes all. A few
technology companies stand out by virtue of their size (Chart 7). Alphabet is one
example. 80 percent of the world's web searches are done through its Google search
engine.8 Another example is Amazon. In 2017, the company accounted for 44 percent
of all US online retail sales.
Chart 7 The world's largest listed companies. Market capitalisation in billions of USD1)
Apple
Alphabet
Microsoft
Amazon
Facebook
Tencent
Berkshire Hathaway
JPMorgan
ICBC
Johnson&Johnson
ExxonMobil
Bank of America
0 100 200 300 400 500 600 700 800
1) Market capitalisation at 9 February 2018.
Source: Bloomberg
The decline in the labour share can primarily be explained by the fundamental
transformation of the global labour market in recent decades. More countries are
participating in global trade, labour mobility has increased, and offshoring production
7 Hagelund, K., E. W. Nordbø and L. Sauvik (2017): "Lønnsandelen" [The labour share], Aktuell kommentar 9/2017,
Norges Bank (Norwegian only).
8 Source: Financial Times, January 2018 (https://www.ft.com/content/95d16c88-f795-11e7-88f7-5465a6ce1a00).
, p j
the global market economy, the labour force of countries participating in world trade
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doubled.9
15 FeBruAry 2018
The result is that workers in advanced economies face competition from new groups,
which pushes down wage growth and affects the income distribution between labour
and capital. Lower unionisation levels have also weakened workers' bargaining power.
Since 1980, unionisation in the OECD area has fallen from around 35 percent to below
20 percent.
Low wage growth feeds through to prices for goods and services. Many firms also
face competition from firms that have relocated production to lower-cost countries.
In addition, online shopping reduces the advantage of physical proximity to customers,
narrowing the scope for passing on higher costs to prices. Globalisation thus restrains
the general rise in prices.
Cheap imports from low-cost countries have long been an important source of low
inflation in advanced economies. In Norway, prices for clothing and footwear have
fallen by almost half over the past 20 years. The price effects of globalisation have not
been exhausted. A rising number of low-cost countries are competing on the global
stage. So far, global competition has had less influence on services prices than on
goods prices (Chart 8). However, global trade in services has increased recently.
This may lead to renewed downward pressure on prices.
Chart 8 Goods and services inflation.
Average annual change 2000 - 2017. Percent
4 4
Goods1)
Services
3 3
2 2
1 1
0 0
US Euro area UK Norway
1) Goods excluding food and energy for all countries except the UK.
Sources: Statistics Norway, Thomson Reuters and Norges Bank
The tendency of lower global price and wage inflation has consequences for monetary
policy. On the one hand, inflation is likely to show smaller fluctuations than earlier.
But this also means that it may be more difficult to bring up inflation once it has fallen
to a level that is too low.
The Phillips curve - the relationship between unemployment and wage and price
inflation - may have changed. In many countries, wage growth has been fairly weak,
even though unemployment has fallen (Chart 9). The reason for this, among other
tightening labour market.
Chart 9 Unemployment and wage growth.
Selected advanced economies.1) Percent
4 10
Wage growth (l.h.s)
Unemployment (r.h.s.)
9
3
8
2
7
1
6
0 5
2003 2005 2007 2009 2011 2013 2015 2017
1) Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Netherlands, Portugal, Spain,
South Korea, Sweden, Switzerland, the UK and the US. Unweighted average.
Sources: Thomson Reuters and Norges Bank
Expansionary monEtary policy in many countriEs
Never before have global interest rates been as low as today over such a long period
(Chart 10). The interest rate level was moving down long before the 2008 crisis.
What lies behind this is a prolonged decline in long-term real interest rates owing to
structural changes. Low productivity growth and weaker labour force growth have
diminished the growth capacity of advanced economies and dampened the willingness
to invest. At the same time, groups and countries with a high saving rate account for a
larger share of income growth, partly owing to demographic changes and wider income
gaps. Both lower investment and higher saving have contributed to depressing real
long-term interest rates.
Chart 10 Global real interest rates. Yield on 10-year government bonds adjusted
for inflation. 14 OECD countries.1) Percent
7 7
6 6
5 5
4 4
3 3
2 2
1 1
0 0
-1 -1
Many central banks still found it difficult to provide a sufficiently accommodative
monetary stance, and the room for further interest rate cuts was gradually exhausted.
Central banks were led into unknown territory and implemented unconventional
measures. They have purchased securities on a large scale. In addition, a barrier has
been breached. In the euro area, Denmark, Sweden, Switzerland and Japan, policy
rates have been cut to below zero. Monetary policy has been stretched far.
The purpose of the large-scale asset purchases by central banks has been to bring
down long-term interest rates even further. This policy has had a broad impact. The
average real yield on ten-year government bonds is now negative in the OECD area.
Portfolios were rebalanced, which also pushed down yields on bank and corporate
bonds.
The potent medicine has worked. Growth in all the major advanced economies has
gained a firm footing. Unemployment in major economies is lower than before the
financial crisis. Price and wage inflation is rising from low levels.
The need for monetary accommodation is thus diminishing. Global interest rates have
bottomed out. Policy rates in the US, UK and Canada were raised in the course of
2017, with more central banks likely to follow suit in 2018. The Federal Reserve has
begun to unwind its bond holdings. Other central banks have tapered their asset
purchases.
The global interest rate rise will probably be gradual (Chart 11). After a long period of
very low rates, the effect of higher interest rates on the economy is uncertain. It is also
uncertain how quickly wage and price inflation will rise as activity gains momentum.
Chart 11 Policy rates.1) Percent
8 8
Current policy rate
Expected policy rate 20212)
Historical average 1990 - 2007
6 6
4 4
2 2
0 0
-2 -2
US Euro area UK
1) In the chart, the policy rate for the US refers to the mid-point of the target range for the federal funds rate.
For the euro area, historical policy rates are calculated using the interest rate on the ECB's main
refinancing operations from 1999 to 2007. Before 1999, the Bundesbank's discount rate is used.
The rate on the ECB's deposit facility is used for the current and expected policy rate.
2) June 2021.
Sources: Bloomberg and Norges Bank
, y y
decades ago. The structural conditions that have depressed the global neutral interest
Economic
pErspEctivEs
rate will not reverse overnight.10
15 FeBruAry 2018
Central bank asset purchases have also made a mark beyond fixed income markets.
We have seen a sharp rise in equity and real estate prices (Chart 12). When the major
central banks put monetary easing into reverse, investors who have taken on added
risk may seek to rebalance their portfolios. This could lead to financial market
volatility, as we have noted in recent weeks. Strengthening global growth will help
reduce the risk of sharp movements in equity markets. But a bigger correction than
seen so far cannot be ruled out.
Chart 12 Equity prices and earnings per share.1) Standard & Poor's 500.
Index. 1970 = 100
3000 3000
Share index
Earnings per share
2500 2500
2000 2000
1500 1500
1000 1000
500 500
0 0
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
1) The latest oberservation at the end of each quarter. For 2018 Q1, data from 9 February 2018 are used.
Source: Bloomberg and Norges Bank
Monetary policy had to play a substantial role in the wake of the financial crisis.
Fiscal space was already limited in many countries and narrowed further through the
crisis. Fiscal policy is still constrained. The public sector has done little to deleverage.
At the same time, the interest rate level is low and there is very little margin for further
cuts. There is less latitude to counter another downturn in the near future.
monEtary policy - lEssons from thE financial crisis
Ten years of historically low interest rates and large-scale asset purchases give cause
for reflection. An important question is what responsibilities should rest with a central
bank. A related theme is what is meant by the objective of low and stable inflation.
Let me take a closer look at these questions.
The primary objective of monetary policy is to maintain monetary stability, which
ensues from the central bank's responsibility for the monetary system. Behind
traditional currencies stands a central bank assigned with the mission of maintaining
confidence in the value of money. This is in stark contrast to the so-called
cryptocurrencies. They fail the crucial test that a means of payment must pass.
gl q , y
wealth redistribution, underinvestment and resource misallocation that may leave
Economic
pErspEctivEs
resources idle. The result is lower activity and lower welfare.
15 FeBruAry 2018
In the distant past, the central bank was to safeguard the value of the country's monetary
unit in terms of a precious metal. This was later replaced by fixed rate regimes.
Various forms of fixed exchange rate regimes are still in use in many countries.
However, since 1990 an increasing number of countries have chosen to link monetary
stability to a numerical inflation target.
Since the financial crisis, all of these countries have maintained their inflation
targeting regimes. This reflects their overall positive experience with this framework.
It did not get in the way of a powerful response to the financial crisis. With a floating
exchange rate and a credible inflation anchor, monetary policy could be geared to
stabilising the economy.
In Norway too, inflation targeting has functioned well. Inflation has remained low and
stable since it came down in the early 1990s (Chart 13). We can now look back on a
quarter century of stable prices. At the same time, employment variability has been
lower since 2001 than in previous periods despite the shocks to the Norwegian
economy.
1)
Chart 13 Inflation in Norway. Four-quarter change. Percent
16 16
Consumer price index
14 14
Five-year moving average
Inflation target
12 12
10 10
8 8
6 6
4 4
2 2
0 0
-2 -2
1973 1978 1983 1988 1993 1998 2003 2008 2013 2018
1) Projection for 2018 Q1.
Sources: Statistics Norway and Norges Bank
The formal monetary policy regimes remain intact, but lessons have been learned
along the way. Initially, central banks had high ambitions to steer inflation to target
within a clearly defined time horizon. But the experience with these regimes provided
useful insight, and the ambitions were later adjusted. When confronted with shocks,
small open economies in particular experienced that a rapid return to the inflation
target could have undesired consequences for the real economy.11 Norges Bank
addressed this concern by giving greater weight to output and employment. The
inflation target horizon has been extended and monetary policy has gradually become
more flexible.ll
average somewhat below, the target of 2.5 percent. Inflation has consistently remained
within a band where the deviations from the target cannot be said to have entailed
significant economic costs.
As mentioned, the importance of financial markets and financial stability was
underestimated before the crisis - also by central banks. The financial crisis revealed
how harmful financial imbalances can be. Monetary policy can in given situations take
account of the risk of a build-up of financial imbalances. But monetary policy cannot
take primary responsibility for heading off a gathering storm.
This has been of little concern among the major central banks. Their focus has been on
counteracting a deeper and more prolonged downturn and on preventing deflation.
In countries that were less affected by the crisis, more attention has been devoted to
financial stability considerations. In high-tech, global financial markets, capital
moves rapidly between different currencies. At trading desks in the City of London
geographical distances vanish. A wide interest rate differential could have a substantial
impact on the exchange rate, with repercussions on inflation, output and employment.
This is why low interest rates in large economies that were severely hit by the financial
crisis quickly led to lower rates in countries where the cyclical situation, in isolation,
would have implied higher rates. This was the case in Norway until oil prices fell.
Other small open economies have been in the same situation.
These countries have imported low interest rates and experienced rapidly rising house
prices and debt (Chart 14). They have introduced measures to limit household debt in
order to prevent imbalances from building up further. In Norway, stricter mortgage
lending requirements have been imposed on banks. These measures have probably
contributed to the recent correction in Norwegian house prices.
Chart 14 Nominal house prices.1) Index. 2005 = 100
220 220
Australia, Canada, New Zealand and Sweden
Norway
200 200
US, euro area and Japan
180 180
160 160
140 140
120 120
100 100
80 80
2005 2007 2009 2011 2013 2015 2017
1) Latest available quarterly data for 2017 are used as estimate for 2017 (broken lines). Series is GDP-weighted.
Sources: Eiendomsverdi, Finn.no, Real Estate Norway, Thomson Reuters and Norges Bank
The exchange rate places a limit on how far Norwegian interest rates can deviate from
foreign rates. But with a floating exchange rate, monetary policy can help to stabilise
the economy when it is exposed to shocks. In addition, the krone exchange rate acts as
p , p
confidence in the inflation target, monetary policy has been able to underpin a weaker
Economic
pErspEctivEs
krone.
15 FeBruAry 2018
The krone depreciation, combined with moderate wage settlements, has contributed to
a marked improvement in business profitability and competitiveness. This has provided
a considerable boost to Norwegian firms exposed to international competition. At the
same time, an expansionary fiscal policy and lower interest expenses have been
important in sustaining domestic demand.
This year, the policy rate may be increased for the first time in seven years - this is a
good sign. Two years since the cyclical trough was reached in Norway, growth has
gained a firm footing and the unemployment rate is approaching a normal level
(Chart 15). The impetus from abroad has strengthened and exports are picking up.
There is renewed optimism in the petroleum industry. A number of large development
projects will contribute to a rebound in oil investment in the coming years.
Chart 15 Mainland GDP. Four-quarter change. Percent
4 4
3 3
2 2
1 1
0 0
2012 2013 2014 2015 2016 2017
Source: Statistics Norway
Increased economic activity should lead to a pickup in inflation. On the other hand, the
effects of technological advances and a more integrated world economy may continue
to exert downward pressure on wage and price inflation.
In its conduct of monetary policy, Norges Bank weighs the outlook for inflation
against developments in output and employment. In an environment of low inflation,
solid economic growth and low unemployment, a conflict may arise between inflation
considerations and considerations relating to the real economy. In that situation, we
would be less worried about low inflation than if real economic prospects were also
weak. We can then choose to bring inflation up to target over a longer horizon,
particularly if interest rates are already low and there are signs that financial
imbalances are building up.
With flexible inflation targeting, monetary policy can make an important contribution
to stabilising the economy. When the economy is exposed to shocks, we can respond
rapidly by adjusting the policy rate, as we did in 2008 and 2014. Nevertheless,
monetary policy cannot assume primary responsibility for output and employment.
The level of economic activity depends on overall economic policy, including wage
and income formation, the tax and social security system and the functioning of the
labour market. Monetary policy is only one component of this framework.
norway as a financial invEstor
Economic
While high public debt has made it difficult for many countries to cope with a pErspEctivEs
15 FeBruAry 2018
downturn, Norway has been in a fortunate position. We have built up one of the
world's largest sovereign wealth funds. It has provided us with fiscal space both during
the financial crisis and in the wake of the fall in oil prices in 2014. The first transfer of
close to NOK 2 billion was made to an account at Norges Bank in 1996. Since then,
the value of the fund has risen to almost three times mainland GDP. The value of the
fund is now around NOK 8 000 billion (Chart 16).12 Its assets are invested abroad in
equities, bonds and real estate. With the substantial capital accumulated in the fund,
Norway has become a major investor in the global capital market.
Chart 16 Government Pension Fund Global. In billions of NOK. To 2017 Q3
10000 10000
Government's net cash flow
Return
Krone exchange rate
8000 8000
1)
Non-oil budget deficit
Value of fund
6000 6000
4000 4000
2000 2000
0 0
-2000 -2000
1998 2001 2004 2007 2010 2013 2016
1) Including discrepancies attributable to accounting differences between the central government accounts and Norges
Bank's financial statements. The cumulative discrepancy varies between NOK 5 billion and NOK 41 billion.
Sources: Ministry of Finance and Norges Bank
During periods of substantial oil and gas revenues, large capital transfers have been
made to the fund. The government's total net cash flow from petroleum activities
comes to around NOK 5 000 billion.
The return on the fund has been solid. The cumulative return amounts to more than
NOK 3 800 billion.13 Since 2014, the krone depreciation has also contributed to the
considerable increase in the value of the fund in krone terms. This does not, however,
affect the fund's international purchasing power.
The green bars in the chart show fund withdrawals used to finance the structural
non-oil budget deficit.
Both returns and exchange rates vary over time. High equity prices have generated
substantial gains for the fund in recent years. But this means we must also be prepared
for losses when markets turn.
Looking back a few years to 2011, euro area financial markets were marked by the
debt crisis. The return on the fund was negative. Weak returns resulted in a decline
in the value of the fund corresponding to 15 percent of mainland GDP (Chart 17).
But the decline was not larger than what could be expected in one of six years based
on historical experience.
Decline in value as a percentage of mainland GDP given the same return as during
1)
Economic
the euro area debt crisis 2011 - 2012
pErspEctivEs
0 0
15 FeBruAry 2018
-10 -10
-20 -20
-30 -30
-40 -40
Fund size and Fund size and
composition composition
as in 2011 as in 2017
1) Bond/equity allocation of 40/60 for 2011 and 30/70 for 2017. The return on the two asset classes is repre-
sented by the fund's benchmark indexes, measured in foreign currency, for the period June 2011 to May 2012.
Sources: Statistics Norway and Norges Bank
Today, the fund is far larger than in 2011. As a result, return variations will have a
greater impact. With the current size and composition of the fund, the same return as
in 2011 would have resulted in a loss of almost NOK 1 000 billion, or close to
35 percent of mainland GDP.
The fund has become important for the Norwegian economy. The fiscal rule links
fiscal policy to the value of the fund. This year, 15 percent of general government
spending is projected to be financed by transfers from the fund. Looking ahead,
movements in global capital markets will be the main source of variation in the value
of the fund, and at times in a negative direction. The actual stance of fiscal policy must
allow for this uncertainty.
The fund had several good years following the euro crisis. Markets turned around, and
quickly the loss was more than reversed. We cannot take for granted that this will
always be the case.
conclusion
Let me conclude. The global economy finally appears to have fully recovered from