Output has increased more rapidly than potential output for 2-3 years. Much of the available capacity has now been put to use. We estimate that capacity utilisation was approximately ½ per cent above normal at end-2005. Despite strong economic growth, inflation is still low. As the recovery became more broadly based, inflation gradually began to edge higher. In the second half of 2005, the 12-month rise in consumer prices adjusted for tax changes and excluding energy products (CPI-ATE) varied between 1 and 1½ per cent, before surprising on the downside in December and January. In February, inflation edged up again. Monthly variations in this measure of core inflation have been fairly pronounced recently. The trend in prices for consumer goods over the past two or three years is a result of favourable developments in the Norwegian and global economies. Low inflation is being accompanied by real income growth and a rise in production. In other words, low inflation is not the result of declining demand, activity or employment. Growth among our trading partners is still solid, and appears on the whole to be somewhat stronger than assumed a few months ago. High commodity prices have contributed to somewhat higher  BIS Review 30/2006  3  inflation, but so far underlying inflation has not been pushed up. Key rates remain low among many of our trading partners. Market participants expect a gradual increase in key rates in the period ahead, both in Sweden and the euro area.
However, it is important to remember that for each successful investor earning high returns, there are many others with the same ambition and risk willingness, but with a record of poorer performance and bankruptcies. The Government Pension Fund cannot run the risk of ending up among the worst performers. The globalisation of financial markets provides the Fund with good opportunities for investing and diversifying risk. However, we cannot insulate the Fund from wide annual swings in the value of the investments. We invest in international equity markets where prices fluctuate widely. These fluctuations are the reason why equity investments generate a higher return over time. The best year in the Fund’s history so far was 2003, when it posted a real return of 11 per cent. This stood in sharp contrast to the previous year’s result, which was -6 per cent. Globalization and cyclical developments have been kind to the Norwegian economy. Few countries are benefiting as much as Norway – and losing as little – in the current environment of freer trade in goods and services and cross-border labour mobility. Economic developments and prospects Let me now turn to the current economic situation and the outlook for the years ahead. Economic growth in Norway has generally been strong over the past 15 years, although with some cyclical variations. A clear upturn in the years from 1993 to 1998 was followed by a period of more moderate growth and a mild downturn in 2002 and into 2003. Wage developments reflect and influence business cycles.