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

measures to enhance the availability of collateral, were pivotal in preventing a disorderly process of lenders ’ deleveraging and a large - scale credit crunch. this action was instrumental in maintaining price stability. later in 2012, a renewed confidence crisis, in part reflecting unwarranted investor fears about the reversibility of the euro, caused a severe deterioration in financial markets. sovereign bond and bank lending rates in some countries increased dramatically, thereby impairing access to financing of the real economy. bis central bankers ’ speeches to safeguard the singleness of monetary policy and to ensure an effective transmission of the ecb ’ s policy intentions to the broad economy, in august, the governing council announced its readiness to undertake outright monetary transactions ( omt ). omts have proven to be an effective backstop against unfounded fears of reversibility. strict conditionality contains moral hazard on the side of governments. it ensures that they will adopt the reforms that are necessary to secure their solvency and to foster conditions of steady growth for their economies. as i said before, the repair of the transmission channel cannot be done by the central bank alone, governments need to do their part. let me therefore turn to the on - going adjustment in member states, and the euro area more generally. 2. the adjustment in the euro area during the past five years, a number of euro area countries have seen a significant correction of their external and domestic imbalances. in ireland, greece and portugal current account balances improved by more than 7 per cent of gdp between 2008 and 2012. a large part of this adjustment has been driven by a contraction in domestic demand, triggered by the unwinding of long accumulated unsustainable developments and by the cyclical downturn. at the same time, in ireland, spain and portugal export performance has been very strong compared with the pre - crisis period. this is a sign that a genuine structural correction is taking place and resources are being moved from the non - tradable sector to the production of traded goods. we have also seen some improvement in cost competitiveness, which has contributed to the external adjustment. between 2008 and 2012, in the three programme countries the cumulated unit labour cost growth was about 10pp below the euro area average. the adjustment has been mainly driven by an increase in average productivity, largely reflecting labour shedding, rather than by a reduction in nominal wages. the latter adjustment has been much more limited so far. this has contributed to increasing the