The high-inflation economy with recurring cost crises and high interest rates is a thing of the past. Inflation has instead been low and stable. GDP growth has on average been higher and also more stable than in the 1970s and 1980s. Real wage growth has also been considerably more favourable. Productivity growth has been surprisingly strong – stronger than in almost all of the other EU countries. Most people seem to be in agreement now that the potential growth in the economy has been increased. Employment has not developed as well, but the situation today is much better than it was in the mid1990s. It is also interesting to study inflation expectations. Although inflation has on average remained fairly close to 2 per cent, there have been both shorter and longer periods when inflation has deviated significantly from the target. The past few years are such an example. Inflation has been below target, which is largely due to productivity having developed much more strongly than we had expected. How has confidence in monetary policy been affected by the deviations we have experienced? Even though inflation expectations can be measured in different ways, I think that the overall picture is clear. From around 1996-97 expectations have been in line with the target a couple of years ahead. This is of course pleasing, and a much better development than many people expected when the new monetary policy regime was introduced in the early 1990s. However, the stabilization policy change in regime was not only about monetary policy.
Therefore, it was forecast that inflation would fall below 2% as 2011 progressed and then rise back to target by the end of 2013. As always, it was emphasised that the outlook was uncertain – which indeed proved to be the case. So where do we stand now, a year later? I think the big picture is this: economic recovery has materialised, while stability has proven more elusive. GDP growth this year will be slightly over 3%, which is above the forecasts from a year ago, largely due to changes in inventories and a smaller-than-forecasted contraction in public consumption. GDP growth is projected at 2½% annually for the next three years. I wouldn’t be surprised if it proves higher for 2011, once final figures are in a few years from now. The most recent Monetary Bulletin contains a discussion of forecasts and forecasting errors, which shows that final figures on investment and GDP growth tend to lie above the first figures. Employment has been increasing, and unemployment has fallen. It is cause for relief that the Directorate of Labour’s analysis indicates that most people leaving the unemployment register at present are going back to work. On the other hand, my concerns from last year concerning the low investment level and relatively weak export growth have not disappeared.