shares in domestic and foreign markets partly because of the strong real krone exchange rate. in the face of major restructuring as a result of shifts in the international division of labour, it is a disadvantage for norwegian business and industry that costs are high. reports from norges bank ’ s regional network confirm the picture of an expanding economy. in the august / september round of interviews, our contacts throughout the country reported continued growth in all the main industries. in region east, the rate of growth in manufacturing is somewhat lower than earlier this year, while growth in the building and construction sector is increasing. residential construction is still driving activity in this sector. although commercial building activity now appears to be picking up in other parts of the country, this does not as yet apply to region east. business sector demand for services is rising. the market for commercial services and it and telecommunications services is showing marked improvement. the retail trade sector reports rising demand, particularly for consumer durables such as cars and furniture. our contacts in services and retail trade report a moderate increase in investments in the year ahead. signals from the regional network indicate that employment is continuing to increase in the building and construction sector, while manufacturing reports a slight decline. employment in the service sector is rising for the first time since the network was established in october 2002. directorate of labour figures show that unemployment has fallen most in region south and region east since the beginning of 2004. in region east, an important sector is commercial services, accounting for close to 15 per cent of employment. it is in this sector, in addition to manufacturing, that unemployment has fallen most on a nationwide basis. since july, oil prices have varied between usd 34 and 52, the highest nominal levels recorded. measured in real prices, oil prices are nonetheless clearly lower than the levels recorded in the beginning of the 1980s. in contrast to earlier periods of sharply rising oil prices, the main reason behind the current rise in oil prices is a surge in demand and limited excess production capacity. growth in oil demand has been particularly strong in regions where production is relatively energy - intensive, such as china and other non - oecd countries. china alone accounts for about 1 / 3 of global growth in oil demand this year. moreover, there has been a marked reduction in excess production capacity in opec countries. small production problems have therefore affected prices more than would otherwise have been the case. in the short term, oil prices constitute the greatest risk to the outlook for the global economy. high oil prices

reserves are the means of interbank payment. in the euro area, interbank payment settlement takes place in two stages : banks have their settlement account in the national central bank, while each country ’ s central bank has, in turn, an account at the ecb. if, for example, deposits are transferred from a greek bank to a german bank, the greek bank ’ s deposits in the greek central bank are reduced, while the german bank ’ s deposits in the bundesbank increase by the same amount. the greek central bank ’ s debt to the ecb increases in turn, while the bundesbank ’ s claims on the ecb bis central bankers ’ speeches increase accordingly. such changes in claims and liabilities are expressed in the target2 balances. chart : target2 balances in a well functioning market, the bank that had drained its central bank reserves would borrow to replace them in the interbank market, balancing the transfer described above. imbalances in target2 are a symptom of an interbank market that is not functioning efficiently between all countries in the euro area. if banks in the north are no longer willing to lend to banks in the south, the southern banks must meet their need for reserves by borrowing directly from the central bank. the northern banks increase their reserves at the central bank accordingly. in addition to increasing the claims in the target2 system, this inflates the eurosystem balance sheet. the central banks are the hub of the system and are required to receive deposits from areas where banks have a surplus of reserves and extend loans to areas where banks as a whole need more funding. imbalances between countries in the target2 system give no indication of who will bear the losses if a bank defaults and the value of the collateral posted is not sufficient. any losses are allocated among the participating national central banks according to their relative shares in the ecb ’ s paid - up capital. to sum up the international picture : over the past year, growth prospects have been lowered for all the large advanced regions. in europe, activity is likely to decline this year owing to debt problems and fiscal tightening. unemployment is on the rise. fiscal and monetary policy space is limited, or virtually exhausted. many countries must tighten fiscal policy to reduce debt to a sustainable level. central banks have responded by communicating that interest rates will be held low for an extended period. and they have stretched the limits of monetary policy to counteract a deeper and more persistent downturn