Thus, it can be said that slow export growth is as much the cause of the current account deficit as the expansion of domestic demand. Business Profitability and the Labour Market The external conditions of the economy in 1997 were largely unchanged from 1996, and were on the whole favourable. Business profitability seems to have been fairly good, although not as favourable as in 1996, because of the wage increases at the beginning of the year BIS Review 42/1998  -2-  and large depreciation and interest charges related to the high levels of investment in recent years, especially in the fisheries. The labour market situation improved further and unemployment declined to 3.9 percent on average, having come down from a peak of 5 percent in 1995. Real wages grew by 5.7 percent in the course of 1997, and were at year-end at their highest level since 1989. Prices Inflation remained subdued in 1997, or 2.2 percent in the course of the year, and 1.8 percent on average between 1996 and 1997. The Central Bank had, in the wake of the wage settlements, forecast somewhat higher inflation but wage increases did not translate into price increases to the extent shown by past experience. Productivity growth was higher than expected and the rise in import prices lower. In addition, the Central Bank’s measures restrained price increases, as I will discuss in greater detail shortly.
Total turnover on the foreign exchange market was 162 billion kronur in 1997, and had doubled since 1996. In addition, the participation of the Central Bank in foreign exchange market transactions fell from 82 percent of turnover in 1996 to 37 percent in 1997. So far this year turnover has continued to increase and the share of the Central Bank has declined to 13.2 percent. Average daily turnover has been about 2 billion kronur this year. Daily fluctuations in the exchange rate increased as a result of last year’s change, but not much when compared to what is common among other countries. Since mid-1993, or for almost 5 years, the exchange rate of the krona has never deviated more than 2.1 percent from the central rate. Yields on Domestic Markets Money market yields declined in the course of the year until the Central Bank raised its rates in November after which they rose. Yields on 3-month Treasury bills rose to 7.22 percent where they stood at year-end. A low Treasury borrowing requirement at times caused a shortage of Treasury bills. Demand for Treasury bills was also boosted because of increased interest in them for liquidity management. Yields on indexed bonds changed little during the first half of 1997 but during the second half the yield on government bonds and housing bonds fell sharply, albeit unevenly. This decline was partly the result of the low Treasury borrowing requirement. The yield on non-indexed government bonds also declined sharply in 1997, although also unevenly, to 8.3 percent at year-end.