There are prospects that house prices may show a fairly sharp rise between 2003 and 2004. Buoyant activity in the housing market and high house prices are contributing to strong growth in credit to households. The household debt burden has shown a considerable increase and is expected to rise further in the period ahead. A high debt burden means that an increase in interest rates to a more normal level may have a relatively pronounced impact on household income and hence consumption growth. The difference in growth in credit to households and non-financial enterprises is a good illustration of Norway’s dual economy. Over the past few years, credit growth has been far higher for households than for enterprises. The level of household credit growth has remained high recently. An important reason is the sharp rise in house prices in recent years. Low investment demand is reflected in credit to non-financial enterprises, which has declined to a very low level. Developments in prices for commercial property compared with house prices also indicate that the situation is better for households. Developments in mainland enterprises have been characterised by low output growth, falling investment and declining profitability in many industries. In order to boost returns on invested capital, enterprises have taken steps to reduce costs, primarily by reducing their workforce or relocating parts of their production abroad. By way of conclusion, I would like to present a summary of the economic outlook for the Norwegian economy.
Basle II is a step in the right direction in many ways, particularly in its treatment of off-balance sheet vehicles and in stimulating improved risk management systems, but it still has known pro-cyclical features which we need to address. If we cannot do so effectively an alternative may be to require larger capital and liquidity buffers across the whole cycle. The past seven months have been testimony to Mark Twain’s comment that “history doesn’t repeat itself but it does sometimes rhyme.” The structured credit markets and the growth of “originate and distribute” banking have amplified the turmoil in credit markets in recent months. But under the new clothes, the old credit cycle is still recognisable. It is important we learn the lessons about the new credit instruments and markets. But we also need to address again the roots of the credit cycle.