The farmers maintained contact with the outside world by sending and receiving letters placed under a stone at the entrance to the valley. This past year, the letter stone has been replaced by the internet. 2  A HISTORICALLY DEEP DECLINE  NORGES BANK  Eleven months after the first lockdown, daily life has yet to return to normal. Norway has been quite successful in keeping down infection rates, although we have seen regular flare-ups. The country’s borders are now closed. ECONOMIC PERSPECTIVES 18 FEBRUARY 2021  The measures to contain infection are necessary, but they do have side effects, both economic and social. People in risk groups have been isolating. Young people have been following courses online – many alone in a bedsit. Socialising with friends has been put on hold Chart 1 Historically deep decline GDP for mainland Norway. Annual growth. Percent 0  1921  1931  1940  1944  1989  0  2009  2020  Sources: Statistics Norway and Norges Bank  For Norway, the economic downturn will stand as one of the deepest in history (Chart 1). Not since the Second World War has activity in the Norwegian economy shown such a steep decline. The crisis has had uneven effects. Containment measures and fear of infection have resulted in a sharp decline in spending on services. During the lockdown last year, unemployment increased fourfold over a few weeks, reaching 400 000 persons, or close to 15 percent of the labour force.
This does not mean that we should revise up expected future returns – perhaps the opposite. 13  NORGES BANK  Chart 12 Low long-term interest rates Ten-year US Treasury yield. Percent 16  16  14  14  12  12  10  10  8  8  6  6  4  4  2  2  0 1960  ECONOMIC PERSPECTIVES 18 FEBRUARY 2021  0 1970  1980  1990  2000  2010  2020  Source: Bloomberg  The expected annual real return is estimated at 3 percent. The estimate was most recently updated in connection with the decision to increase the allocation to equities. Two key variables were used in the calculation. One was the expected return on the fixed income portfolio, and the other the size of the equity risk premium, which is the extra compensation we expect when taking risk in the equity market. The bulk of the fixed income portfolio is invested in long-dated sovereign bonds. When interest rates fall, bond prices rise. The return on the fixed income portfolio therefore held steady through the period of falling interest rates. But this is a one-off gain (Chart 12). Interest rates have now fallen to historic lows, and the expected return on the fixed income portfolio going forward has fallen. Equity prices have risen sharply in recent years. Taking risk in the equity market has paid handsomely. But we cannot assume that the gains will be as high in the future.