Activity in the economy will be boosted by strong growth in government spending. The projections are based on the assumption that Norges Bank’s interest rate changes will translate into lower lending rates for households and businesses. At the same time, owing to tighter credit standards in banks, monetary policy appears to be somewhat less effective than normal. Inflation is projected to fall below 2 per cent in 2010, before gradually moving up towards the target towards the end of the projection period as the output gap gradually closes. There is a risk that the structural changes brought about by the crisis may result in persistently lower productivity growth and perhaps higher unemployment. It appears that inflation will remain considerably lower in the years ahead than we expected in December. Both the objective of stabilising inflation around the target and the objective of ensuring stable developments in the real economy suggest that the interest rate should be low. Financial architecture In many countries, banks’ share of GDP has increased considerably over the past few years. This share is smaller in Norway than in other countries and, as a result, the Norwegian economy has been less exposed to the financial crisis. Although banks in Norway have not been as oversized as in many other countries, banking still contributes to fluctuations in our real economy. 4  BIS Review 42/2009  Banking is procyclical. In upturns, loan losses are low, increasing banks’ profits. Access to equity capital is ample, providing the basis for strong lending growth.
Private consumption fell markedly, the decline in housing investment accelerated and mainland business investment started to fall. The downturn in the world economy and the abnormal conditions in financial markets are expected to continue to mark the Norwegian economy ahead. Mainland GDP is projected to contract by 1 per cent between 2008 and 2009. Norwegian government finances are sound, with substantial net wealth, although the surplus will be reduced by the fall in oil prices. The automatic stabilisers in the national budget together with discretionary fiscal policy will stimulate the mainland economy by the equivalent of 5 per cent of GDP from 2008 to 2009. Fiscal policy is assumed to become less  BIS Review 42/2009  3  expansionary between 2010 and 2012. Government oil revenue spending is expected to be brought back into line with the fiscal rule when cyclical conditions eventually normalise. We assume that prospects for higher unemployment, a fall in house prices and a high level of debt will induce households to build up financial buffers and reduce debt. The saving ratio is expected to increase considerably. Net lending is projected to be positive this year after being negative since 2004. As household borrowing has been considerable in recent years, deleveraging in the household sector is important to long-term stability in the economy. The outlook ahead and monetary policy assessments Inflation will be curbed by lower capacity utilisation. The marked increase in unemployment now envisaged will result in lower pay increases this year and next.