Wage growth is expected to come down this year from a high level in 2008. Lower corporate profitability,  8  BIS Review 37/2009  rising unemployment and lower consumer price inflation will probably result in low negotiated pay increases this year. The export sector has been particularly hard hit by the global downturn. Traditional exports have fallen markedly since autumn last year. A contraction in the world economy will result in a substantial decline in Norwegian exports ahead. Moreover, due to the marked fall in commodity prices, export prices are now very low. Expensive and reduced access to credit, high interest expenses and uncertainty about developments ahead amplified the downturn towards the end of 2008. Private consumption fell markedly, the decline in housing investment accelerated and mainland business investment started to fall. The downturn in the world economy and the abnormal conditions in  BIS Review 37/2009  9  financial markets are expected to continue to mark the Norwegian economy ahead. Mainland GDP is projected to contract by 1 per cent between 2008 and 2009. Norwegian government finances are sound with substantial net wealth, although the surplus will be reduced by the fall in oil prices. The automatic stabilisers in the national budget together with discretionary fiscal policy will stimulate the mainland economy by the equivalent of 5 per cent of GDP from 2008 to 2009. Fiscal policy is assumed to become less expansionary between 2010 and 2012.
The projections for the key rate, inflation, output and other variables are based on our assessment of the economic situation and our perception of the functioning of the economy and monetary policy. If economic developments are broadly in line with our projections,  5  See Staff Memo 2008/3 from Norges Bank. BIS Review 37/2009  13  economic agents can expect that the interest rate path will also be approximately in line with that projected. On the other hand, the interest rate path may shift if the economic prospects change, or if the effect of interest rate changes on inflation, output and employment differs from that assumed. In the Monetary Policy Report, we present two alternative scenarios where demand is higher or lower than presented in the baseline scenario. The yellow lines in the chart illustrate a scenario where growth in private consumption is stronger than expected and the turnaround occurs more rapidly. In this scenario, interest rates may decrease to a lesser extent and move up more quickly. The red lines in the chart illustrate a scenario where the global downturn is deeper and more prolonged, with more pronounced effects than assumed. It will then be appropriate to set a lower interest rate in order to stimulate the economy and thereby prevent inflation from becoming too low. The primary effect of a key rate close to zero will probably come via a weaker krone. It will then be appropriate to consider instruments other than the interest rate.