that is too high. the global economy has experienced a slowdown during the last year. the downturn in the us has had contagion effects on european and asian economies through its impact on world trade and the financial markets. capital markets are global, and when revenues decline in the us, enterprises with operations in many countries also reduce investment and operating expenses in europe and asia. industrial production has declined markedly in all major regions of the world economy. in norway, manufacturing output has been more stable. norges bank presented its last inflation report on 27 february. we expect price inflation to be about 2½ per cent in two years, if growth in the global economy picks up as assumed. the tight labour market will probably continue to result in fairly strong growth in labour costs and rather sharply rising prices for domestically produced goods and services. annual wage growth is projected at 5 per cent in the period ahead. a subdued rise in prices for imported goods is pushing down overall price inflation. the projections are based on the technical assumption that the krone exchange rate will remain stable. on the whole, the risk associated with the inflation projection is regarded as balanced. exchange rates between the major currencies fluctuate widely. the effective exchange rate on the us dollar has risen by more than 30 per cent since 1995. the german mark ( later euro ) has depreciated by about the same amount. the effective exchange rate for the japanese yen has fluctuated sharply. small countries have also experienced wide exchange rate fluctuations. the swedish krona has changed considerable in the last 10 years and is now 10 per cent weaker than in the summer of 2000. the australian dollar has depreciated by more than 30 per cent since the spring of 1997. countries whose exports include a large component of raw materials tend to experience considerable volatility in their exchange rate. australia is one example. fluctuations in commodity prices entail changes in countries ’ terms of trade, which measures the ratio of export to import prices. changes in the terms of trade have an impact on the exchange rate, which in turn dampens the impact on profitability. the exchange rate acts as a buffer. in the 1990s, the fluctuations in norway ’ s terms of trade were especially wide. changes in oil prices were an important reason for this. the krone exchange rate has not fluctuated much compared with other countries. the petroleum fund acts as a buffer against fluctuations in the oil price, because the fund ’ s capital is invested abroad. this

’ inflation targets. in the long run, this will be offset by a corresponding depreciation of the krone. the international rise in prices for manufactured goods is lower than for services – around 1 per cent. the inflation target of 2½ per cent implies a depreciation of the norwegian krone of around ½ per cent in the long term, because the target has been set somewhat higher than our trading partners ’ inflation target. this means that goods prices measured in norwegian krone must be expected to rise by about 1½ per cent in the long term. with wage growth of 4 - 4½ per cent, productivity growth in manufacturing must be about 2½ - 3 per cent to maintain profitability. for services, price inflation can be somewhat higher, about 3 – 3½ per cent, and productivity gains correspondingly lower. the size of the exposed sector will be affected by the portion of petroleum revenues that is absorbed into the norwegian economy. in the long run, monetary policy cannot influence overall employment or its distribution across industries. historically, employment in the internationally exposed sector has declined in waves. the sharpest declines in manufacturing employment were observed in the years between 1977 and 1984 and from 1987 to 1992. both periods were preceded by a considerable deterioration in cost competitiveness in manufacturing. there is a risk of a new period of decline in manufacturing. the restructuring in manufacturing may take place rapidly. competitiveness has deteriorated by about 10 per cent since 1996. we do not know how long this development will continue. the long - term requirements for improving the balance between wage growth and productivity growth may become apparent at an early stage. developments for norwegian enterprises do not, however, have to be negative. some enterprises could be at the forefront of technological developments and increase efficiency more rapidly than the relatively high rate of growth in real wages in norway. many enterprises move large portions of their production abroad. norwegian manufacturing companies could still be profitable even if the significance of the manufacturing sector in the norwegian economy is reduced. however, scaling back manufacturing involves a risk. it makes the economy more vulnerable. the growth potential of the economy – the basis for learning, innovation and development – may be impaired when less of the business sector is exposed to intense foreign competition. akram, q. f. ( 2000 ) : ppp despite real shocks : an empirical analysis of the norwegian real exchange rate. working paper 2000 / 7, norges bank, oslo.