National Budget 2003

National Budget 2003

Economic Prospects

Chart 4.1 GDP for Mainland-Norway. Percentage change from the previous year

Source: Statistics Norway and Ministry of Finance.

After strong expansion for much of the 1990s, the Norwegian economy has shown relatively moderate growth in the past couple of years. Preliminary national accounts figures suggest relatively weak growth in the mainland economy in the first half of the current year as well. However, a continued rise in household demand and higher oil investment are expected to push up growth somewhat ahead. The unemployment rate has risen slightly over the past year, especially in a number of private service industries. However, other parts of the labour market remains tight, contributing to the sizeable wage increases agreed upon in this year's wage round. Several years of high wage growth and a marked appreciation of the krone have impaired earnings in the exposed industries.

The growth prospects internationally have deteriorated somewhat in recent months. In the US, recent figures suggest that the upturn is weaker than previously anticipated. Moreover, declining confidence in accounting routines in major US corporations has kindled renewed disquiet in financial and foreign exchange markets. In Europe too, there are signs that growth is long in coming. Economic developments in Japan, however, have proved better than expected, thanks to higher growth in exports. All in all, international growth prospects appear to have weakened somewhat in recent months.

Chart 4.2 Relative wage costs in manufacturing. Indicies 1980=100.

Source: The Technical Reporting Committee for the Income Settlements and Ministry of Finance.

The Norwegian economy is affected by weaker international growth prospects, partly through lower export demand, falling share prices and increased uncertainty about the future. Moreover, the appreciation of the Norwegian currency has contributed to weak traditional merchandise exports in the first half-year, and a reduction in manufacturing output in the exposed sector. The number of bankruptcies rose substantially in the first half-year, particularly in ICT industries. The rise in house prices appears to be levelling off, and household consumption proved weak in the second quarter. However, buoyant income growth indicates that household consumption will pick up ahead. At the same time, oil investments look likely to exceed previous estimates, both this year and next. This has contributed to a pick up in overall manufacturing production in recent months, despite the decline in export-oriented industries. In addition, Statistics Norway's investment survey suggests substantial growth in investments in manufacturing and electricity supply this year. All in all, Mainland Norway GDP is projected to expand by 1.7 per cent this year and 1.8 per cent next year.

Norges Bank raised its key rate by 0.5 percentage points to 7 per cent in July this year, having lowered it by the same margin in December last year. Three-month money market rates have picked up somewhat so far this year to 7.0 per cent, while short rates in international markets have marginally declined, resulting in a wider interest rate differential. The yield on Norwegian 10-year government bonds is at about the same level as at year-end.

Box 3 Strong productivity growth in the Norwegian economy in the 1990s
According to new national accounts figures, Mainland-Norway's GDP rose by an average of 3.3 per cent annually in the 1990s, which is 0.4 percentage points higher than previously estimated. The main factor explaining the stronger rise in GDP is stronger growth in service trades.

The trend in employment in terms of man-hours worked is little changed by the revision. Hence growth in labour productivity is increased substantially. For private business activity in Mainland-Norway apart from housing services, primary industries and electricity production, productivity growth is revised upwards by an average of 0.7 percentage points annually, to 2.9 per cent for the period 1991-2001.

The upward revision of the Norwegian national accounts figures, and a substantial downward adjustment of the US figures, mean that productivity growth in the Norwegian economy in the 1990s is now seen to be far stronger than in the US.

The upward revision of productivity growth in the 1990s suggests that the growth potential in the Norwegian economy is higher than previously assumed. On the other hand, the main contributors to higher overall productivity growth were strong productivity growth in retail trade and financial services. These sectors have been through a far-reaching evolution in technological and market terms, and it is not certain that this trend will continue in the years to come or spread to other areas.

Chart 4.3 Labour productivity 1). Index 1991=100

1) Figures for Norway refer to private mainland sectors apart from housing, primary industries and electricity production, while the figures for the USA refer to the non-farm business sector.

Source: Statistics Norway and the Bureau of Labour Statistics.

The value of the Norwegian krone has risen substantially in the past two years. In terms of the trade-weighted index, the krone appreciated by 4 per cent in 2001 and by a further 8.6 per cent up to mid-September this year. The krone is now at its strongest since the mid-1980s.

Although the labour market has weakened somewhat in the past year, labour remains in short supply in several sectors, including the construction industry and the health care sector. In some service industries, above all the ICT sector, unemployment has risen. Employment rates have been fairly stable so far this year according to figures from Statistics Norway's labour force survey (LFS). Between the second quarter of last year and the same quarter this year employment rose by 0.3 per cent, according to preliminary national accounts figures. Employment growth remains buoyant in health and social services, while in transport and hotels and restaurants the number of employed persons has edged down in the past year. Overall employment is now projected to rise by 0.5 per cent this year and 0.4 per cent next year. As a result of increased sickness leave, a rising proportion of part-time employment and two additional vacation days this year, total hours worked are estimated to fall by ¾ per cent from 2001 to 2002.

Registered unemployment has increased somewhat in the past year, also when corrected for the reorganisation of the unemployment statistics, while the supply of vacancies advertised in the media has declined markedly. The increase in registered unemployment is most pronounced in service industries located in central areas of south-east Norway, while recently there has also been signs of a more general rise in unemployment. According to the LFS, unemployment has remained at 3¾ per cent over the past three quarters. Compared with the second quarter of last year, unemployment has risen by 0.4 percentage points. Unemployment is projected to increase to 4 per cent next year.

Annual wage growth from 2001 to 2002 is now estimated at 5½ per cent. For employees in the hospital and municipal sectors, wages are likely to increase by about 6 per cent this year. In manufacturing and other enterprises facing foreign competition, wage growth is set to be somewhat lower due to the marked impairment of cost competitiveness. Wage costs for workers in Norwegian manufacturing were about 22 per cent above that of our trading partners last year. In view of this year's wage settlement and the appreciation of the Norwegian currency, the differential is likely to widen further this year. An annual wage growth of 5 per cent is projected in 2003.

Chart 4.4 Wage costs and unemployment. Percentage change from previous year

Source: Statistics Norway and Ministry of Finance.

Year-on-year growth in consumer prices measured 1.4 per cent in August this year. In the past year a sharp increase in housing rents has been a main contributor to higher price growth, while price developments of energy commodities and imported consumer goods have worked in the opposite direction. The marked appreciation of the krone over the past couple of years is expected to contribute to low growth in prices of imported goods ahead. On the other hand, the rapid rise in wages may fuel growth in prices of domestically manufactured goods and services. All in all, consumer prices are expected to rise by 1¼ per cent this year and 2¼ per cent next year. Adjusted for tax changes, and excluding energy prices, consumer price inflation is projected at 2½ per cent this year and 2¼ per cent next year.

Table 4.1 summarises the macroeconomic projections for 2002 and 2003. The figures are based on the following assessments:

Chart 4.5 Consumer prices. Percentage change from previous year

Source: Statistics Norway and Ministry of Finance.


 Chart 4.6 Household indebtedness and credit growth. Per cent

Source: Norges Bank.


 Chart 4.7 Current account of the balance of payment. Per cent of GDP

Source: Statistics Norway and Ministry of Finance.

  • As a technical assumption, the krone's trade-weighted index value in the forecasting period is assumed to equal the average rate for the last six months. In addition, short interest rates are assumed to shadow the implied forward rates. The projections are also based on the fiscal policy programme set out in the National Budget.
  • Mainland business investment is estimated to fall by 3¾ per cent this year and 1 per cent next year. Investment in transport and other private services is the main factor pushing down investment this year, while manufacturing investment pulls in the opposite direction. This year's growth in manufacturing investment is related to major investment projects in the metals industry.
  • Petroleum investment is projected to expand by just under 5 per cent this year and by 12 per cent next year, before falling markedly again thereafter. The growth in oil investment this year and next points to higher activity in manufacturing segments that supply the petroleum industry.
  • The appreciation of the krone and increased international uncertainty have weakened the outlook for export-oriented industries. Compared with the Revised National Budget, projections for traditional merchandise exports are revised downwards both this year and next, to 1½ and 2¾ per cent respectively. The projection for 2003 should be viewed in conjunction with the higher exports resulting from higher production capacity.
  • Household demand has risen moderately in the first half of the current year, and the growth in house prices has levelled off. Credit growth has, however, remained high, and gross debt as a share of disposable income has increased, although the level is clearly lower than in the end of the 1980s, cf. chart 4.6. In addition, the households' overall financial assets is still at a high level, and with prospects for continued high wage growth, low unemployment and high house prices the household sector's financial standing still seems relatively robust. The sizeable nominal income growth following this year's wage negotiations and the low consumer price growth is likely to lead to a strong growth in real disposable income for the household sector. On this background, consumption growth is expected to pick up markedly in the second half of this year. All in all, private consumption is estimated to rise by 3 per cent this year and 3½ per cent in 2003. This implies that the saving rate will rise appreciably this year and remain more or less at the same level in 2003.
  • The oil price has averaged NOK 197 per barrel so far this year, compared with NOK 220 per barrel for last year as a whole. An average oil price of NOK 200 per barrel is now projected for 2002, falling to NOK 180 in 2003.
  • Overall petroleum production on the Norwegian continental shelf is expected to rise by 5½ per cent from 2001 to 2002, and to remain more or less unchanged in 2003. This, together with the other assumptions, entails a surplus on the current account of the balance of payments of NOK 206 billion in 2002 and NOK 179 billion in 2003, or 13½ and 11½ per cent of GDP respectively.

Uncertainty about the further development of the international economy has increased in recent months. Lower international growth, and/or turbulent international financial markets, may result in lower growth impulses in the Norwegian economy. With a sustained strong krone exchange rate, there is a risk that activity levels and investment in industries facing foreign competition will be weaker than anticipated. On the other hand, the petroleum activity and associated revenues entail that the Norwegian economy is to some extent shielded from slower international growth, at least as long as oil prices hold up well.

The further trend in the exchange rate, and the effect of the krone's appreciation since mid 2000 on domestic prices, represent a substantial factor of uncertainty for price projections. For the time being, the buoyant krone has made only a small contribution to lower inflation. This is probably because each stage in the distribution chain essentially allows changes in the exchange rate to be reflected in operating margins in the short term. However, over time competition in commodity markets must be expected to normalise margins. This could suggest that the impact on consumer prices of the appreciation of the krone since the summer of 2000 will gradually increase if the exchange rate remains approximately at the current level.

 

NOK billion

Volume change from
previous year, per cent

 

2001

2002

2003

Private consumption

651.5

3.1

3.5

Public consumption

306.1

1.7

0.5

Gross fixed capital formation

280.0

-0.2

3.2

Oil activities

56.2

5.1

12.2

Oil activities

12.5

-6.2

19.1

Mainland business sector

115.5

-3.8

-1.0

Residential construction

55.7

-1.5

2.2

Public sector

40.1

6.0

0.3

Total domestic demand, incl. stock building

1253.9

2.0

2.7

Exports

698.9

1.3

0.8

Of which: Traditional goods

215.9

1.5

2.7

Imports

441.9

0.9

2.9

Of which: Traditional goods

287.0

2.1

3.2

Gross Domestic Product

1510.9

2.0

1.9

Of which: Mainland Norway

1152.0

1.7

1.8

Memorandum items:

 

 

 

Gross product manufacturing sector

131.4

-0.1

-0.2

Consumer price inflation

..

1.2

Wage growth

..

5

Employment (persons)

..

0.5

0.4

Unemployment rate, level

..

3.9

4

Current account surplus, NOK billion.

233.4

206.2

178.9

Per cent of GDP

15.4

13.6

11.5

Net external assets, NOK billion.

587.8

689.1

885.5

Per cent of GDP

38.9

45.4

56.7