In this environment, stock prices significantly declined and bank equity prices were particularly hit, both globally and in Europe. The sharp fall in bank equity prices reflected the sector’s higher sensitivity to a weaker-thanBIS central bankers’ speeches  1  expected economic outlook; it also reflected fears that some parts of the banking sector were exposed to the higher risks in commodity-producing sectors. The bulk of euro area listed banks, although they have relatively limited exposure to emerging markets and commodity producing countries, are currently trading well below their book values. The fall in bank equity prices was amplified by perceptions that banks may have to do more to adjust their business models to the lower growth/lower interest rate environment and to the strengthened international regulatory framework that has been put in place since the crisis. However, we have to acknowledge that the regulatory overhaul since the start of the crisis has laid the foundations for durably increasing the resilience not only of individual institutions but also of the financial system as a whole. Banks have built higher and better-quality capital buffers, have reduced leverage and improved their funding profiles. Moreover, the Basel Committee on Banking Supervision noted that substantial progress has been made towards finalising post-crisis reforms and that the remaining elements of the regulatory reform agenda for global banks are being finalised. The clarification of these elements will provide regulatory certainty on the stability of the future framework.

The easing of monetary policy and low inflation have resulted in strong growth in household real disposable income. Private consumption and housing investment have risen sharply. House prices have continued to rise. Debt growth remains high. We expect that growth in household demand will continue this year and next. Mainland business fixed investment expanded sharply in the last quarters of 2004. Moderate wage growth, low interest rates and rising demand have improved corporate profitability. Reports from Norges Bank’s regional network point to a continued increase in corporate profitability. There are prospects of continued high growth in investment ahead. Higher prices for many Norwegian export goods and solid global growth have generated growth in traditional merchandise exports. High export prices have contributed to an increase in capacity and higher exports from the processing industry. Some moderation in global growth is expected to result in somewhat slower growth in Norwegian exports of traditional goods ahead. Import growth has been strong in recent years and picked up last year. Brisk demand for imported goods and services reflects strong growth in the Norwegian economy and a low rise in prices for some imported goods. In addition, a larger share of demand growth, for example in the construction industry, has probably been satisfied by increased imports of services. The economic upturn is expected to continue this year. High petroleum investment, the international upturn and higher commodity prices have boosted production and earnings in the manufacturing sector. Statistics Norway’s business tendency survey points to continued favourable prospects for Norwegian manufacturing.