Chapter 7

Economic Prospects

In spite of moderate growth over the past few years, the Norwegian economy is still characterised by high capacity utilisation, labour shortages in many sectors and relatively high cost inflation. This is also reflected in a high interest rate level. Since the upswing in the Norwegian economy started in 1993, employment has increased by almost 260 000 persons, corresponding to an average annual growth of 1 3/4 per cent. At the same time, unemployment has declined to a low level. Low unemployment and record-high labour force participation rates are setting limits to the potential increase in labour supply. The increase in the number of vacation days this year and next will further restrict the supply of labour. The growth potential of the economy over the next few years is therefore limited compared with the strong growth through the 1990s.

Chart 17. Employment

Per cent of labour force

Source: Statistics Norway and Ministry of Finance.

Economic growth internationally has slowed markedly over the past year, and the world economy may grow at the lowest rate recorded since the beginning of the 1990s. At the same time the outlook is more uncertain than it has been for a long time. Growth in the US economy has slowed substantially since the summer of 2000. The terror attacks on the US in September 2001 resulted in the loss of several thousands human lives and severe material damages. The impact on consumer and business confidence in the future is highly uncertain as a result of these events, and has intensified the uncertainty regarding the timing of a rebound in economic growth.

In the first six months of 2001, growth in Norway's mainland economy picked up moderately after a seasonally adjusted decline towards the end of last year. Increased consumption in the household and public sector has made a positive contribution to growth so far this year. However, mainland investment showed a seasonally adjusted decline both in the first and second quarter, primarily as a result of lower business investment. In the first half of 2001, mainland GDP expanded by only 0.8 per cent compared to the same period last year. Current economic data suggest that the economy has continued to expand at a moderate pace in the third quarter. The value of traditional merchandise exports fell, seasonally adjusted, both in July and August. Consumer spending has exhibited moderate growth over the last few months, and Norway, like most other countries, has seen a dramatic decline in equity prices. On the other hand, activity in the housing market is high, which is reflected in strong credit growth. New orders in the construction industry indicate that residential construction will remain at a high level in the period ahead.

Norges Bank has left the key rate unchanged at 7 per cent since September of last year, after increases totalling 1 1/2 percentage points in 2000. Three-month money market rates have been reduced to 7.1 per cent following the terrorist attacks on the USA 11 September, after remaining fairly stable at around 7.4 per cent over the past year. In response to signs of weaker growth in the global economy, many central banks have reduced their key rates. As a result, the interest rate differential between Norway and abroad has widened.

The effective krone exchange rate has appreciated over the last year, and is now about 4 per cent stronger than at the beginning of the year. The strengthening of the krone must be seen in the light of the marked depreciation of the Swedish krona. The krone has remained fairly stable against the euro at around 8.0.

Mainland GDP growth is now projected at 1.2 per cent in 2001 and 1.9 per cent in 2002, compared with 1.8 per cent in 2000. The growth estimate for this year must be seen in connection with developments in electricity production. As a result of heavy rainfall, electricity production rose to a very high level in 2000. Excluding electricity, mainland economic growth is projected to pick up between 1999 and 2002 (see chart 18).

Chart 18. GDP for Mainland-Norway

Growth in per cent from previous year

Source: Statistics Norway and Ministry of Finance.

The labour market is tight. In 2000, the labour force participation rate for the age group 16-64 was 80.7 per cent. On an international scale, only Switzerland and Iceland have a higher labour force participation rate than Norway. All in all, there is probably limited room for further growth in the labour force other than the potential implied by demographic changes. Total employment has increased moderately so far this year. Employment has continued to rise in the service sector and in the construction industry. On an annual basis, growth in the number of employed is now projected at about 1/2 per cent both in 2001 and 2002.

Unemployment (Labour force survey) remained stable at 3.4 per cent of the labour force both in the first and second quarter of this year. In the three months to end-July, unemployment rose to 3.6 per cent, but this must be seen against the background of the considerable uncertainty associated with the seasonally adjusted monthly LFS figures. Unemployment is projected at 3.4 per cent in 2001 and 2002.

After peaking in 1998, growth in labour costs has slowed somewhat over the last few years. Average annual wage growth is estimated at 4 1/2 per cent in 2001 and 4 1/4 per cent annually in the period 2002-2005. The estimate for this year is based on the assumption that wage drift will be approximately the same as the average for the 1990s. The contractual increase in the number of vacation days this year and next entails increased provisions for holiday pay for enterprises in 2000 and 2001. As a result, the increase in enterprises' labour costs will be approximately 3/4 percentage points higher than the annual wage growth in 2001.

Chart 19. Hourly wage costs and unemployment

Growth in per cent from previous year and per cent

Source: Statistics Norway and Ministry of Finance.

Consumer price inflation has been heavily influenced by changes in indirect taxes and the increase in electricity prices this year. Electricity prices rose in the first six months of this year, while they normally fall during the spring. Electricity prices have thus contributed to pushing up consumer price inflation, and in August the year-on-year rise in electricity prices was higher than 40 per cent. Even though the indirect tax programme for this year will only have a limited impact on average price inflation from 2000 to 2001, the impact over the year will be considerable. While the average rise in prices in the first half of the year was 3.8 per cent, the halving of VAT on food as from 1 July will push down the year-on-year rise in consumer prices markedly in the latter half of the year. Consumer price inflation fell in line with this to 2.7 per cent in July and August. Excluding changes in excise duties and energy prices, consumer price inflation has slowed somewhat in recent months. Consumer price inflation is now projected at 3.1 per cent from 2000 to 2001 and about 2 per cent in 2002. This is based on the assumption that the halving of VAT on food as from 1 July this year will contribute to reducing price inflation by about 1/2 percentage point from 2001 to 2002. Excluding changes in excise duties and energy prices, consumer price inflation is projected at 2 1/2 per cent both in 2001 and 2002.

Chart 20. Consumer price inflation

Growth in per cent from previous year

Source: Statistics Norway and Ministry of Finance.

Table 6 provides a summary of the macroeconomic projections for 2001 and 2002. The estimates are based on the following assessments:

The main element of uncertainty surrounding the macroeconomic projections relates to developments in the international economy. The terrorist attacks on the USA 11 September have increased the risk of a more severe international setback. A more pronounced downturn will result in weaker growth for Norwegian export industries and other industries exposed to international competition. This may have spillover effects on domestic demand and activity. Even if world economic growth turns out to be weaker than assumed, the risk of a pronounced downturn in Norway remains limited. The Norwegian economy is well balanced. Unlike the situation following the upswing in the mid-1980s, the financial position of households is solid. As a result, a strong financial consolidation of the household sector will not be required to the same extent as at that time, should the economy weaken. Moreover, the high activity level in the North Sea will not be influenced by the first-round effects of the international slowdown. However, if oil prices fall and remain at a substantially lower level, the effects on the Norwegian economy may be stronger.

Chart 24. Household savings rate

Per cent of disposable income
Source: OECD, Statistics Norway and Ministry of Finance.

On the other hand, with a continued tight labour market, nominal wage growth may be higher than assumed in the years ahead. Household consumption may then increase further, particularly in the light of the historically high saving ratio recorded in recent years.

Table 6. Key figures
  NOK
billion
Change from
previous year, pct.
 
2000
2001
2002
Private consumption 608.0 2.0 2.7
Public consumption 271.0 2.1 1.5
Gross fixed capital formation 282.1 -1.0 1.4
    Oil activities 58.9 -5.9 -5.0
    Shipping 16.9 9.3 4.7
    Mainland business sector 128.8 -2.5 2.8
    Residential construction 37.1 7.6 0.8
    Public sector 40.4 -1.6 4.8
Total domestic demand, incl. stockbuilding 1193.8 1.1 2.1
Exports 663.6 4.4 5.4
    Of which: Traditional goods 212.1 4.0 3.6
Imports 433.5 3.3 3.0
    Of which: Traditional goods 274.4 4.5 3.4
Gross Domestic Product 1423.9 1.7 3.2
    Of which: Mainland Norway 1054.5 1.2 1.9
Memorandum items:
Gross product manufacturing sector 130.2 1.2 1.1
Consumer price inflation .. 3.1 1.9
Wage growth .. 4 1/2 4 1/4
Employment (persons) .. 0.5 0.6
Unemployment rate (per cent of labour force) .. 3.4 3.4
Current account surplus, NOK billion 203.6 196.3 180.7
Per cent of GDP 14.3 13.3 12.0
Net external assets, NOK billion 327.6 510.1 690.9
Per cent of GDP 23.0 34.6 45.8

Source: Statistics Norway and Ministry of Finance.