Threats to financial stability in the current environment Having described the potential costs of financial crisis and why financial stability matters, I want to turn to my second question, why it matters now. By this I do not mean that we have detected any unusually marked amount of stress or weakness in the financial system. Indeed, I cannot resist at this point expressing some thankfulness that we are managing to hold this discussion in relatively calm times (although this is the sort of comment that might be better saved for the closing address at a conference rather than the opening one). The last international conference the Bank sponsored on a financial stability topic, back in September 1998, followed closely on considerable turbulence in global bond markets and in fact managed to coincide with the incipient collapse of LTCM. As we found out shortly afterwards, we were lucky to have any American colleagues at all at that event! Rather, I mean that the financial system, and in particular the banking system, is undergoing substantial change, both in its external environment and in the way it manages its risks and is regulated. Globalisation, consolidation, conglomeration within and across sectors, technological change: these are not new developments, but they are continuing and intensifying. These developments present new opportunities to banks, as financial markets open up and mature. But they also present challenges.
4) The Norwegian economy at a turning point The Norwegian economy continued to expand at a relatively strong pace in 1998, albeit somewhat more moderately than in previous years. In Norges Bank’s December Inflation Report, the central bank projected a period of slower growth. Several years of robust growth have contributed to high capacity utilisation. Labour shortages and high wage growth will have a dampening impact on growth in the years ahead. Forecasting is a challenging enterprise at a stage when the economy is nearing a turnaround. It is difficult to pinpoint the timing and the amplitude of the turnaround. However, evidence now suggests that Norway is entering a period of slightly weaker growth. The international environment has led to slower growth in demand and lower prices on the world market. This is weakening profitability in the export sector in Norway. In addition, the wage settlements have increased business costs, which will increase the need for enhancing the efficiency of enterprises. Reduced earnings and higher interest rates will have a dampening effect on business investment. The extraordinarily high level of oil investment recorded in recent years has been expected to fall for some time. The drop in oil prices may lead to more pronounced cyclical fluctuations. Restructuring, streamlining and cost cuts in the oil industry will also affect employment. The local government sector, where employment has increased sharply during this cyclical upturn, placed itself in a very difficult situation during the last income settlement.