Rising commodity prices and buoyant activity in markets that are important for Norway have fuelled growth in the Norwegian economy. We assume that the upturn will continue for our trading partners as a whole. Growth is projected to be somewhat stronger in 2006 than in 2005. Nevertheless, there will still be idle resources, especially in a number of European countries, implying continued low inflation. In recent years, investment in the petroleum sector has increased sharply. Investment growth has generated substantial impulses to the mainland economy. The large development projects relating to Snøhvit outside of Hammerfest and Ormen Lange at Aukra have made a large contribution to the high level of investment. Both these projects also involve considerable onshore development, which may have generated stronger impulses to the business sector locally than pure offshore projects. Investment activity associated with Snøhvit and Ormen Lange will probably decline in the period to completion in 2007. High oil prices have led to a strong increase in activity on the Norwegian continental shelf. Many projects have been launched to increase recovery from fields in operation. A number of oil companies have revised upwards the long-term oil prices that are used as a basis for investment decisions, although they are still moderate compared with futures prices. Further out in the projection period, developments in petroleum-related investment are highly uncertain.
Excess domestic demand combined with low productivity growth should be reflected in rising prices, and domestic measures of price and wage inflation in the catchingup economies were indeed running considerably higher than the euro area average on a cumulative basis. Average annual inflation differentials in the 2002 to 2008 period were in the range of 0.5 to 1.5 percentage points. However, these developments were not considered especially alarming by some observers as they were interpreted as reinforcing the theory of Balassa-Samuelson equalisation. Some also saw inflation differentials as being more reflective of low inflation in Germany as it went through a phase of wage adjustment. Overall, this may have led to less concern about the lack of real convergence in productivity levels than was warranted. 8  European Commission, “EMU@10: Successes and challenges after ten years of Economic and Monetary Union”, European Economy 2, 2008. 9  See for example Minsky, H (1982), “Can ‘it’ happen again?”, Essays on Instability and Finance. 10  Drehmann et al (2012), “Characterising the financial cycle: don’t lose sight of the medium term!”, BIS Working Papers No 380, June 2012. 11  For a detailed explanation see Borio et al (2013), “Rethinking potential output: Embedding information about the financial cycle”, BIS Working Papers No 404, February 2013. 4  BIS central bankers’ speeches  Achieving sustainable convergence It was only when the financial cycle turned that the unsustainability of economic convergence became apparent.