jarle bergo : the outlook for the norwegian economy and the challenges ahead speech by mr jarle bergo, deputy governor of norges bank ( central bank of norway ), at norges bank, bodø, 25 august 2005. please note that the text below may differ slightly from the actual presentation. the address is based on the assessments presented at norges bank ’ s press conference following the executive board ’ s monetary policy meeting on 11 august, inflation report 2 / 05 and on previous speeches. the references and the charts in pdf - format can also be found on the website of the norges bank. * * * the economic situation the norwegian economy is in an upturn and is now expanding at a brisk pace. inflation remains low, but has edged up since last year. the risk of a fall in the level of prices and markedly lower inflation expectations has diminished. at the same time, there appears to be little risk that inflation will rapidly move up to a level that is too high. the reduction in the interest rate through 2003 and into 2004 has resulted in low real interest rates. for a period, the real interest rate has been considerably lower than normal. the low level of interest rates is supporting the high activity level in the norwegian economy. the economic upturn is broad - based. at the beginning of the recovery, activity was primarily fuelled by private consumption, traditional exports and petroleum investment. in addition, growth in mainland fixed investment has gradually gained considerable momentum. 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

. blanchard, “ the medium run ”, brookings papers on economic activity, no. 2, 1997, pp. 89 - 141. market. in particular, setting minimum wages at levels which are not in line with productivity reduces the employment chances of less skilled workers and of the unemployed. as seen in germany following unification, the period of adjustment can be painful, but reforms and unit labour cost moderation are finally paying off and they are contributing to robust growth. i remember some observers arguing several years ago that much stronger wage increases were needed in germany for higher growth. the recent evidence does not confirm this view. on the contrary, the increased competitiveness seen in the german economy – thanks to moderate unit labour cost developments – has been an important prerequisite for the very strong job creation observed in recent years. not only in germany, but also in the euro area as a whole, employment growth has been impressive in the eight and a half years since the euro changeover. employment growth amounts to 14. 9 million persons in the euro area, as opposed to only 3. 8 million in the previous eight and a half years. reforms are also needed in product markets. let me first stress the importance of fully completing the single market, particularly in services and network industries. a deeper integration of markets would stimulate price flexibility by fostering competition and open product markets. greater cross - border competition and the integration of markets across the euro area countries would contribute to lower prices. it could also enhance the adjustment processes in the individual countries in the event of asymmetric shocks or differing cyclical developments. it is also important to promote further financial market integration and the development of readily available opportunities for portfolio diversification. this would help to attenuate the impact of country - specific shocks, as i mentioned earlier. national authorities can make a substantial contribution to ensuring the proper functioning of adjustment mechanisms within the euro area by conducting a well - designed fiscal policy. as i have stressed on many occasions, the best contribution fiscal policy can make to the proper functioning of the euro area is by being sustainable and medium - term oriented, fully in line with the orientations of the stability and growth pact. moreover, fiscal policy can and should also focus on increasing the effectiveness and efficiency of the public sector itself through high quality expenditure and tax policies. large and inefficient public sectors are putting a brake on growth by imposing a high tax burden on the economy and channelling resources into unproductive uses. in this