Financial conditions facing the emerging world have worsened, and there is the risk of a sharper deterioration. In China, despite stabilizing activity, risks remain, especially in its financial system. In Latin America, there are still economies in need for adjustments and others making changes that could create some turbulence. At home, the inflationary surprises of recent months concentrate in prices linked to the exchange rate and foodstuffs, but some delay in inflation’s convergence to 3% cannot be ruled out, especially if capacity gaps widen more than forecast. Meanwhile, the evolution of the peso will continue to be subject to a high degree of uncertainty, which could affect shortterm inflation in either direction. Regarding activity, the most recent figures put a note of caution, even considering the volatility of month-to-month data and that demand-side information at hand has been more favorable. Also, the deterioration of external financial conditions could have a stronger than anticipated impact. Conversely, the baseline scenario considers that the level reached by the price of copper in recent weeks will not remain over the projection horizon. This, because there has not been any corresponding change in its fundamentals and because its increase has gone counter to the evolution of global interest rates and the value of the dollar. However, it is possible that the current prices of the metal will last for longer than expected, which could boost domestic spending once again —for example by an earlier recovery of investment in the sector— or because it could improve confidence sooner.

In the first round, heightened competition affects companies’ profit margins. But enterprises will respond by reducing their costs. This will occur in part in the enterprise itself, but subcontractors will also be required to reduce their prices and enhance efficiency. Increased competition therefore usually triggers higher productivity growth in the economy. Low inflation may thus be matched by higher productivity. Low inflation in the Nordic countries Norway is not the only country where inflation has been low. In Sweden, underlying inflation fell sharply. Excluding energy prices, core inflation stands at 0.8 per cent in Sweden. Inflation has also slowed in Finland and Denmark. One explanation for this, common to all these countries, appears to be intensified competition, which has led to high productivity growth. Real exchange rate and competitiveness High wage growth over several years as from 1998 has eroded the competitiveness of the Norwegian business sector. The nominal krone exchange rate, as measured by the trade-weighted index, has now reverted to around the level prevailing in the mid-1990s, while labour costs in manufacturing have risen considerably more than among our trading partners in the same period. However, the business sector is still feeling the effects of the loss in competitiveness that resulted from high wage increases. The exposed sector has been scaled back. Companies that are still in operation may be in a better position to cope with the high wage level. A more effective service sector may also have strengthened the export industry. Nevertheless, costs may limit activity and employment.