The output gap is a measure that expresses our assessment of total capacity utilisation in the economy. The output gap is defined as the percentage difference between actual output and potential output. Potential output indicates the level of output that is consistent with price and cost stability. The estimate for the output gap is uncertain, partly because the level of potential output is unobservable and must be estimated. Since official statistics on overall activity in the economy are not available immediately and are subsequently revised, the level of actual output will be uncertain. Our overall assessment is that capacity utilisation has picked up over the past two years and is now slightly higher than normal. In our estimation of the output gap, the result of technical calculations is compared with other sources of information about capacity utilisation in the economy. Information from Norges Bank’s regional network may indicate that overall mainland capacity utilisation is close to a normal level. However, there are signs of bottlenecks in production in some sectors of the economy. For example, capacity utilisation in the construction sector is very high, particularly in the southwest  BIS Review 79/2005  1  region of the country. There are signs of some skills shortages in the construction industry, in manufacturing and in some service industries. Even though growth in the Norwegian economy has been high for a long period, substantial labour shortages have not yet emerged in the economy as a whole.
These effects can be achieved at the zero lower bound8 and in conditions of a debt overhang9. The key issue is therefore which set of forces dominates. And what matters here is not whether structural reforms are implemented, but how. This is where two further lessons of the crisis come in, which relate to our experience in Europe during the crisis: both the pace and the composition of reforms matter crucially for achieving positive effects in the shortterm. Why the pace of reforms matters Before the crisis there was an active debate about the appropriate pace of reform implementation, which had its origins in the liberalisation of Central and Eastern European economies in the 1990s. Some argued that reform was best conducted through a “big bang” approach, while others argued for more gradual reform implementation.10 More recently, studies of reform implementation had suggested that outcomes might be better if reforms were sequenced, with product market reforms preceding labour market reforms, so that lower mark-ups can support the purchasing power of households.11 There was also a political economy argument in favour of gradualism: as governments have a fixed amount of political capital, they would be most effective if they allocated their scarce resources to one set of reforms at a time. These arguments were however not always applicable to the euro area as, again, they lacked our specific context.