Stable inflation expectations can also have a stabilising effect on exchange rate expectations, but growth in public expenditure and prices for Norwegian exports goods also have an influence on exchange rate expectations. Surveys conducted by TNS Gallup show that inflation expectations two and five years ahead have remained virtually unchanged over the past year. A selection of economists expect annual inflation to be about 2½ per cent five years ahead and somewhat lower two years ahead. Norges Bank has sought to counter a fall in inflation expectations. Through the first half of 2004, we stated: “With the current low level of inflation, it is appropriate to be particularly vigilant as regards developments in consumer prices.”1 At the monetary policy meetings between September and November, the Executive Board stated that “particular weight must be given to factors that may delay an increase in inflation.”2 Inflation picked up towards the end of the last year. When we became more confident that inflation would not continue to fall, but appeared instead to be picking up, we refrained from repeating this statement. 1  See Norges Bank press releases of 21 April and 26 May. The press releases following the monetary policy meeting of 17 December 2003, 28 January, 11 March and 1 July 2004 included similar formulations. 2  See Norges Bank press releases of 22 September and 3 November. 2  BIS Review 38/2005  Output and employment After slowing around the beginning of 2003, growth in the Norwegian economy picked up markedly through 2004.
The recovery has been broad-based. The easing of monetary policy contributed to a sharp rise in private consumption and housing investment. Activity has picked up considerably in service industries and the construction sector. High petroleum investment, the global economic recovery, a weaker krone and lower wage growth contributed to boosting activity in manufacturing industry. Profitability has improved for mainland enterprises. Mainland fixed investment has also gradually increased. Thus, it may appear that growth in the Norwegian economy has become more self-driven. Even with a pronounced upswing in output, the increase in the number employed has been limited so far in this cyclical upturn. Measured in terms of the number of person-hours worked, however, employment growth was high last year. Registered unemployment has shown a small decline over the past year. Productivity probably increased more than normally in some industries in the early phase of the recovery. A marked fall in sickness absence may have reduced the need for new employees. Capacity utilisation in the Norwegian economy has increased, notwithstanding the decline in sickness absence and efficiency gains in the business sector. The output gap is a measure of capacity utilisation in the economy. We interpret a positive output gap to mean that output and capacity utilisation are higher than the level consistent with stable inflation over time. High domestic interest rates in 2002 and fiscal policy management contributed to substantially lower cost inflation in the private and public sectors over the past two years.