In the first half of the year, annualised growth was close to 6 per cent, and even if GDP growth in the third and fourth quarters should be zero, annual growth will be well over 4 per cent. As the chart shows, a four-year period of such strong growth has not been seen since 1971. The strong rate of growth has only to a limited extent fed through to a higher rise in prices for consumer goods and services. Consumer price inflation adjusted for tax changes and excluding energy products (CPI-ATE) has admittedly picked up gradually since late summer 2006, but in relation to the economic situation, underlying inflation remains low. After hovering around 1-1½ per cent over a longer period, the year-on-year rise in the CPI-ATE was 1.8 per cent in August. Other measures of underlying inflation show approximately the same rise in prices. The year-on-year rise in the total consumer price index (CPI) has been just under ½ per cent in recent months. This is because electricity prices have been substantially lower this year than last year. There are a number of reasons why inflation has been low in an environment of high economic growth. First: Norway’s terms of trade have improved. Prices for export goods such as oil and gas, freight, fish, industrial commodities and engineering products have increased considerably. In addition, market growth abroad has provided market opportunities for Norwegian export goods.
Risk factors related to domestic conditions Events that have taken place abroad are actually more a liquidity crisis rooted in uncertainty about the valuation of assets and the distribution of losses among institutions than a crisis due to the size of the losses themselves. The credit risk for the more senior tranches of subprime CDOs is probably manageable. But we should not forget credit risk in the traditional sense when we assess risk elements. Loans to Norwegian households and enterprises account for approximately 70 per cent of banks’ balance sheets. Risk factors related to these customer groups are therefore very important to financial stability in Norway. Households Strong household debt growth and the sharp rise in house prices constitute a risk factor with regard to financial stability in Norway. Household debt growth has been high since 2000, primarily driven by low interest rates and a sharp rise in house prices and income. Loans secured on dwellings have shown high and increasing growth. Strong competition between banks has pushed down lending margins. The new capital adequacy rules (Basel II), which involve a substantial reduction in risk weights for mortgages, may also have contributed to the rise in mortgage growth and the decline in lending margins. Real house prices, deflated by consumer prices, building costs and house rents, are historically high. Deflated by disposable income, however, house prices have only risen moderately over the past ten years. In recent months, there have been signs of a slackening in the housing market. The rise in house prices has slowed.