Vulnerabilities On a microeconomic level, the still-fragile condition of regional financial and corporate sector institutions remains a real threat to medium-term stability. Notwithstanding significant official rescue efforts, regional financial sectors remain burdened by a high level of problem loans, and require further substantive bolstering of capital and reserves. Authorities, by and large, have yet to articulate a program for reprivatizing banks and liquidating purchased assets. Improvements in the financial system infrastructure depend critically on follow-through on these issues, a long-term process. Corporate sectors similarly remain fragile: recent debt restructurings have involved a high degree of debt rescheduling, and firms across the region remain burdened with significant amounts of debt. The relatively limited restructuring of corporate operations to date across the region raises questions about the medium-term sustainability of recent improvements in bank asset quality. The relative lack of breadth in the region’s recovery also creates vulnerabilities. Asia’s export orientation has long been a key focal point of strength, to which the recent recovery attests. However, too great a dependence on export-driven growth brings increased vulnerability to external shocks. Asia, in particular, will feel the negative effects of a worldwide slowing from last year’s strong rate of growth. Moreover, domestic demand has not recovered sufficiently from the crisis to sustain the region’s economies. With fiscal policy constrained to varying degrees by heavy public sector debt burdens, regional central banks, in some cases with new-found independence, will need to maintain their stimulative policies to support the recovery.

At the same time, petroleum-related exports, which account for about a quarter of mainland exports, will likely decrease due to a decline in global offshore investment. It will likely take time for the effects of lower oil prices on the mainland economy to become fully visible. So far, unemployment has only shown a slight increase. A flexible labour market appears to be curbing the rise in unemployment. Employment growth has also remained firm, although an increasing mismatch between the number of unemployed and job vacancies points towards more slack in the labour market. In regions and sectors closely linked to the petroleum sector, unemployment has increased. BIS central bankers’ speeches  3  Weaker growth prospects may reduce the willingness of mainland firms to invest. On the other hand, improved competitiveness will provide a basis for expanding capacity in some sectors. In addition, housing investment is likely to support overall investment activity. House price inflation remains high. Growth in household consumption has been moderate in recent years and household saving has reached a high level, in spite of low interest rates. The pension reform and uncertainty surrounding economic developments have probably induced households to increase saving. Overall, we expect growth in private consumption to remain moderate ahead and the saving ratio to remain at a high level. Debt-to-income ratios for Norwegian households are high, reflecting a long period of rapidly rising house prices.