Since last summer, the Norwegian economy has been in a clear cyclical upturn, but general resource use is still lower than what is normal in a cyclically neutral situation. Over the last three quarters of 2003, seasonally adjusted GDP growth for mainland Norway was 3.6 per cent annualized, according to preliminary quarterly national accounts figures (QNR). Strong monetary policy stimulus and a moderate international cyclical upswing have been important driving forces behind the recovery.

The interest rate reductions fed through rapidly to household demand and to household investment towards the end of 2003, which has in particular stimulated activity in so-called sheltered enterprises. Consumption for households and non-profit institutions grew by 4.6 per cent, annualized, over the last three quarters. During the same three quarters, output for mainland enterprises, excluding manufacturing, grew at an annual rate of 5 per cent, of which 3 per cent for goods producing enterprises and as much as 5.4 per cent for service enterprises.

The interest rate reductions also contributed to a marked depreciation of the krone which, combined with stronger demand impulses internationally, reversed the cyclical downturn in internationally exposed industries. In addition, production in the metal industry increased as a result of new capacity. Traditional goods exports has expanded by an annual rate of as a high as 8.5 per cent over the past three quarters. Nevertheless, manufacturing output did not show any clear growth as a result of cost problems, combined with a steady fall in business fixed investment and a marked reduction in stock accumulation. Nor does the production index for January show any signs of an upturn for manufacturing as a whole.

The krone depreciation has still not fed through to consumer prices, and inflation has continued to fall. The fall in inflation is attributable to several factors: Lagged effects of the earlier krone appreciation, the fall in prices for imports of manufactured goods – partly reflecting the shift in imports towards low-cost imports from China, lower house rent inflation and not least the fall in electricity prices. Lower capacity utilization is also pushing down inflation somewhat. In addition, relatively high productivity growth has contributed to weak employment growth and continued high unemployment. The high level of productivity growth has thus contributed to an increase in real wages through lower inflation rather than through higher nominal wage growth. During the previous cyclical upturn, when unemployment was lower and capacity utilization higher, the effect of increased productivity growth came primarily through higher nominal wage growth. Otherwise, an unusually low interest rate level, a moderate upturn driven by growth in private consumption, high productivity growth and low inflation are features that Norway shares with the US economy.

With prospects of continued low inflationary impulses, we expect interest rates in Norway to remain relatively low in the years ahead, albeit with some increase in inflation towards the end of 2004 from the current very low level. Both as measured by the overall consumer price index (CPI) and the CPI adjusted for tax changes and excluding energy products (CPI-ATE), inflation will run close to 2 per cent in 2005 and close to 2½ per cent in 2006. However, real interest rates after tax for households will show a pronounced fall, with a fall in the household saving ratio from 7.5 per cent in 2003 to 2.2 per cent in 2006, a level that has not been observed since the cyclical upturn in 1996-1997.

Household net lending, which is estimated at NOK 30 billion in 2003, is now estimated to be negative in 2005 and 2006, albeit considerably higher as a share of disposable income than the level from the end of the 1980s.

The corollary to the fall in the saving ratio and net lending is strong growth in consumption and housing investment, at 4-5 per cent in the years ahead. Mainland GDP growth is projected at 3.6 per cent in 2004 and 2.8 per cent in 2005, or well above trend growth, against the background of an upswing in exports in 2004, partly fuelled by the current global cyclical upturn, and an upswing in business investment in 2005. For 2006, a slowdown in the global economy is expected have a dampening impact on export growth, with moderating domestic demand growth, which will bring mainland output into line with trend growth at 2.3 per cent. For the period as a whole, Norwegian enterprises domestic and foreign market shares are expected to continue to shrink.

As the cyclical upturn continues, productivity growth will slow somewhat, and employment is projected to grow by about 1 per cent both in 2005 and 2006, after close to zero growth this year. As a result, unemployment will fall from 4.4 per cent in 2004 to 4.0 per cent in 2005 and 3.8 per cent in 2006. Growth in wages per normal man-year is projected to be close to 4 per cent throughout the period. The output gap – measured as the gap between the actual level and estimated trend level for mainland GDP – is projected to close in the course of 2004 so that the Norwegian economy will generally be in a cyclically neutral situation in 2005 and 2006.

Preliminary QNR figures show growth in general government consumption of 2.2 per cent in 2003. This is somewhat higher than growth in the previous year. Gross general government investment increased by close to 3 per cent in 2003, which was also slightly higher than growth in 2002. We assume that growth in general government consumption and gross investment will continue to be moderate in the coming years. The estimates imply that government purchases of goods and services will grow at a slight faster pace than employment, as has been the case in recent years. The estimates for taxes and excise duties in 2004 are based on approved policy.

Excise duties on tobacco were raised from the beginning of the year, which led to an immediate increase in prices. The contribution to consumer price inflation from the tax increase was 0.2 percentage point. From 1 March, the VAT system for transport services was changed. VAT was introduced for previously exempt services, but the rate was set at such a low level that when deductions for ingoing VAT payments are taken into account, these services will be implicitly subsidized. Some observations seem, however, to indicate that these service prices will still increase, rather than fall. When the consumer price index at 15 March is published in April, we will have a better basis for estimating the impact of this. The fiscal policy programme for 2004, and to some extent measures in 2003, also concern rates for day-care places. The consumer prices index at 15 February, which will be published on 10 March (not included in the data basis for Economic Survey), will provide a good indication of the impact of the changes in these rates on overall inflation in 2004. Reference is also made to the section on consumer price developments.

For 2005 and 2006, we have assumed unchanged real taxes and excise duties. The Government will present a report to the Storting on the tax system this spring. Changes in the system for direct personal and company taxation will probably be proposed. As it is difficult to guess what the result of the parliamentary deliberations will be, we have not incorporated possible changes into our calculations. There is no room for tax reductions in connection with the tax reform (as was the case in connection with the reform in 1992) if the fiscal rule is adhered to in 2005, unless the expenditure side of the budget is reduced. Already in 2004, the spending increase is clearly higher than implied by the fiscal rule. If our estimates for real economic developments are more or less on the mark, the Norwegian economy can hardly be said to be in a cyclical downturn in 2005. With the expansionary impulses that are being generated by a continued low interest rate level with a view to reaching the inflation target, there are no cyclical reasons for an expansionary contribution from fiscal policy in 2005.

Norges Bank has cut the key interest rate by 0.5 percentage point since the December Economic Survey. Since December 2002, the interest rate has been reduced by a total of 5 percentage points. The key interest rate stands at 2 per cent ahead of the monetary policy meeting on 11 March, and the three-month money market rate is about 1.8 per cent. The krone has depreciated markedly against most currencies since January last year, with the exception of the US dollar and dollar-linked currencies.

Measured against both the import-weighted exchange rate index and the effective exchange rate index (trade-weighted index), the krone has depreciated by around 15 per cent since January 2003. This must bee seen in connection to the substantial narrowing of the interest rate differential against other countries. Norwegian three-month money market rates were about 0.3 percentage point lower at the beginning of March than the corresponding interest rates for the euro area. One year earlier, Norwegian three-month money market rates were 3 percentage points higher.

The krone appreciated for a period last autumn, but since Norges Bank reduced the key interest rate in December last year, the krone has depreciated by about 6 per cent measured by the import-weighted exchange rate index. The krone has depreciated by 20 per cent against the euro and the Swedish krona since January 2003. At the beginning of March, the krone stood at NOK 8.70 against the euro and 94 øre against the Swedish krona. The krone remained virtually unchanged against USD on the level one year earlier, at about NOK 7 against USD. Measured against the import-weighted exchange rate index, the krone is now about 3 per cent stronger than the average for the 1990s, while it is about 4 per cent weaker than in the corresponding period against the trade-weighted index.

According to our calculations, the krone will appreciate by about 2 per cent through 2004, both against the import-weighted index and the euro. This implies an exchange rate of NOK 8.50 against the euro from end-2004, and that the krone will remain fairly steady at this level to the end of the projection period. This implies a somewhat weaker appreciation than the average estimate from Consensus Forecasts in February.

Developments in the krone exchange rate are of considerable importance for inflation in Norway, and are thus of importance for the interest rate level ahead. The underlying rise in prices (CPI-ATE) has been lower than Norges Banks target of 2.5 per cent since August 2002, and was down to 0.1 per cent in January 2004. The sharp krone depreciation over the past year will gradually push up inflation, which means that interest rates may rise again from autumn. Some improvement in the labour market, high credit growth in the household sector, rising house prices and the global economic upturn will also exert upward pressure on prices. Several supply-side factors are exerting downward pressure on prices, for example higher imports from low-cost countries and intensified competition in industries such as the airline industry. Lower house rent inflation is also pushing down prices. Long-term interest rates have also fallen markedly since the end of last year, which may reflect lower inflation expectations.

In response to low inflation in recent months and the risk of a krone appreciation, a further cut in Norges Banks key rate by about 0.5 percentage point to 1.5 per cent in spring was priced into the FRA market at the beginning of March. Thereafter, the key rate is expected to move up gradually from autumn. In line with market expectations, we assume that three-month money market rates will remain steady at todays level in the period to autumn. Thereafter, the projections are based on a gradual rise to 2.5 per cent in the second quarter of 2005. In the latter half of 2006, the interest rate edges down in pace with interest rates in the euro area.

Preliminary national accounts figures show a decline in oil production of a good 2 per cent from 2002 to 2003, or somewhat less than the decline from 2001 to 2002. In the same period, gas production increased by a good 9 per cent, clearly lower than growth from 2001 to 2002. Total production of oil and gas (incl. NGL and condensates) fell by a half percentage point. For the projection period 2004 to 2006, we assume a further decline in oil production, but expected growth in gas production will still result in weak growth in total production.

In 2003, oil prices showed fairly wide variations, ranging between USD 23 and 35 per barrel. An annual average price of close to USD 29 implies a clear increase from USD 25 in 2002. In spite of the price increase, the depreciation of USD meant that oil prices measured in NOK were only 3.6 per cent higher than in 2002, at NOK 205 per barrel. So far this year, oil prices have been higher than the average for 2003, and we assume that oil prices will average USD 31 per barrel in the first quarter of 2004. Oil prices are then assumed to level off at about USD 29 in the course of the summer, and remain at this level in the period to end-2006. Given the assumptions concerning the exchange rate for USD, this implies an oil price of about NOK 200 per barrel.

Investment in exploration and pipeline transport picked up markedly from 2002 to 2003, with volume growth at close to 16 per cent. Investments in onshore installations in Melkøya and Kårstø made a particularly strong contribution to the increase, but investments in platforms and pipelines were also higher than in the previous year. Growth has nevertheless been revised downwards somewhat in relation to our previous report because the investment level was lower than assumed in the fourth quarter.

Our investment estimates for the coming years are based on Statistics Norways investment intentions survey. Our estimates are based on the assumption that about 80 per cent of these investments will be made in the course of the projection period to 2006. The investment level in the petroleum sector is expected to increase by about 4 per cent in 2004, and it would appear that investments relating to onshore installations, pipelines and exploration will increase further, while investments relating to fields in operation will decline. The investment level is assumed to rise further in 2005, and then decline by about 4 per cent in 2006. In the same period, the level of pipeline and onshore investments is expected to contribute to a high overall investment level, while other investments are expected to fall.

For households and non-profit institutions, real disposable income increased by 1.7 per cent from 2002 and 2003. This is low by historical standards, but must be seen in the light of the exceptionally high growth rate of 8.8 per cent in the previous year. Transfers made the largest positive contribution to income growth in 2003, while the contribution from wage income was modest. At the same time, net capital income made a considerable negative contribution to growth in real disposable income, primarily reflecting a fall in close to 18 per cent in dividend payments to households compared with the previous year. Consumption rose by 3.7 per cent in volume terms, and the saving ratio fell from 9.4 per cent in 2002 to 7.5 per cent in 2003. The fall in the saving ratio must be seen in the light of the unusually high level in 2002; the average in recent decades has been 5.3 per cent. Moreover, the average real interest rate after tax was about 2.7 per cent lower in 2003 than in 2002. Lower real interest rates stimulated consumption and pushed down saving.

In 2004, wage income is expected to be somewhat stronger than in 2003. Combined with low consumer price inflation from 2003 to 2004, growth in real disposable income will be markedly higher this year. This will stimulate consumption growth. Even if the nominal interest rate level is assumed to be lower in 2004 than in 2003, the real interest rate after tax will still increase as a result of low inflation. In isolation, this will dampen consumption somewhat. Overall, we expect real disposable income to grow by 3.7 per cent in 2004, while consumption growth is projected at as high as 5.2 per cent in volume terms. These projections imply that the saving ratio will fall to about 5.7 per cent.

In 2005, consumption is expected to continue to growth at about the same pace as in 2004. Lower real interest rates after tax and continued growth in real disposable will contribute to this. Growth in real disposable income is projected at 2.6 per cent, i.e. markedly lower than in 2004, which to a large extent can be explained by higher inflation in 2005. The saving ratio is projected at 3.4 per cent in 2005. For 2006, income and consumption growth are projected at 2.9 per cent and 4.2 per cent, respectively, with the saving ratio moving down to 2.2 per cent. This is the lowest level recorded since the cyclical upturn in 1996-1997, which is primarily the result of low real interest rates after tax. Steadily rising real house prices, which increase real household wealth, also explain some of the decline in the saving ratio.

The fall in the saving ratio, in conjunction with growth in housing investment, will be reflected in a sharp fall in household net lending. In nominal terms, household net lending is assumed to fall from a little less than NOK 30 billion in 2003 to about -16 billion in 2006. Measured as a share of disposable income, household net lending has not been that low since 1989, although the level is still considerably higher than the level prevailing at the end of the 1980s.

The decline in housing construction in 2002 came to halt in 2003. According to preliminary QNR figures, housing investment sank by 4.3 per cent annually, but showed an upward tendency towards the end of last year. Housing starts came to a little less than 22 500 in 2003, approximately the same as in the previous year. Measured in terms of floor space, however, the figure showed a decline of 4 per cent. The turnaround in housing starts began last summer, whereas the turnaround in terms of floor space did not start before early autumn. The sharp fall in real interest rates through last year has probability contributed to the turnaround in housing construction. The rise in prices for resale homes in 2003, which was bout 1.5 per cent, can also be attributed primarily to the decline in real interest rates in addition to income growth. For purposes of comparison, building costs increased by around 3 per cent from 2002 to 2003.

Against the background of falling unemployment and prospects of stronger income growth, we expect a clear rise in prices for resale homes this year, and the rise is expected to be higher than the rise in consumer prices. Higher growth in household income and rising prices for resale homes imply higher activity in housing construction in 2004. Lower nominal interest rates will also contribute to this. Against this backdrop, we expect housing investment to show renewed growth through 2004, with annual growth projected at about 5 per cent. In 2005 and 2006, housing investment is expected to expand by about 4 per cent. Resale home prices are projected to rise by about 4 per cent in 2006 and 4.5 per cent in 2006. Housing market developments in the period ahead must primarily be seen in the light of prospects of strong real income growth, lower real interest rates and a projected fall in unemployment.

According to preliminary national accounts figures, mainland gross business investment fell by a good 8 per cent from 2002 to 2003. Investment was about 20 per cent lower in 2003 than in 2001. In 2003, manufacturing investment showed the strongest fall, at a good 16 per cent. This primarily reflected the phasing out of a few large investment projects in the metal industry.

There are growing signs of a reversal in the decline in mainland business investment and a possible upswing towards the end of 2004 and thereafter. Statistics Norways investment intentions survey for the manufacturing and the electricity sectors reflects plans to increase investment activity in the period ahead. The expected increase in investment is fairly modest for manufacturing, but can be higher for the electricity sector if the plans for building gas plants are realized. There are also signs of an upturn in investment in service industries. There are still many vacant office buildings and office building starts are not expected to increase to any considerable extent in the coming years. On the other hand, investment in machinery in the service sector is rising. Evidence suggests that the low interest rate level, which is expected to prevail ahead, will also stimulate business investment even though experience shows that it is difficult to demonstrate any clear impact of interest rates on business investment, as we have for household consumption and housing investment. Thus, it is primarily a rising level of activity in the Norwegian economy that is fuelling business investment, typically with some lag compared with growth in household demand.

In the US and Japan, economic growth showed a clear recovery in autumn 2003. In the euro area, growth is still relatively weak, but the economy seems to be improving thanks to the impetus from the international upswing. The Chinese economy has been expanding sharply for a long period, but we assume that the cyclical peak will be passed in the course of summer 2005. The euro area is lagging behind, and growth is still moderate. Euro-area growth is expected to show a moderate increase in 2004 and 2005, and we assume that a cyclical turnaround will take place towards the end of 2005 in the wake of a slowdown on the other side of the Atlantic. For the US and the euro area, growth forecasts are about the same as in the December 2003 Economic Survey, while they have been revised upwards somewhat for Japan as a result of strong growth at the end of last year.

Conditions for Norwegian exports improved through 2003 and into 2004. The krone exchange rate has depreciated gradually, particularly against European currencies, and the global economy has picked up. As a result, traditional goods exports have exhibited rising growth. Growth is particularly strong for exports to our European trading partners, with exports rising in value terms by 8.6 per cent from January 2003 to January 2004.

While seasonally adjusted quarterly growth in exports was negative in the first quarter of 2003, positive growth rates have been recorded for the last three quarters. For 2003 as a whole, traditional goods exports, excluding refined petroleum products, increased by 1.9 per cent at constant prices from 2002. Growth is rising, and from the third to the fourth quarter, exports expanded by a seasonally adjusted 1.6 per cent, compared with 0.3 per cent from the second to the third quarter. Crude oil and natural gas exports showed a decline towards the end of the year.

The strongest contribution to export growth in 2003 came from commodity-based manufacturing. At constant prices, metal exports grew by 7.9 per cent and exports of industrial chemicals by 7.5 per cent from 2002 to 2003. For the fourth quarter, exports of engineering products showed accelerating growth, with an increase of 3.4 per cent from the third to the fourth quarter, while exports of other manufactured goods grew by 3.8 per cent from the third to the fourth quarter.

Exports of services also showed a positive tendency. From the third to the fourth quarter, exports of travel services rose by 6.6 per cent at constant prices, and exports of financial and commercial services by 11.8 per cent. For the year as a whole, exports of financial and commercial services grew by 4.9 per cent, after falling sharply in the two preceding years.

A weaker krone exchange rate and positive cyclical developments among our trading partners point to a continued upswing in exports. Growth is expected to be particularly strong in 2004. Our projections show growth in traditional goods exports of 6.1 per cent, at constant prices, or about in pace with market growth. Growth is primarily being driven by exports of metals and industrial chemicals. Metal exports normally show a strong increase in the early phase of a cyclical upturn. In addition, capacity in this industry has increased owing to investments in recent years. As the global economy starts to slow again, growth in these exports will level off. We also expect marked growth in exports of travel services in the years ahead.

Growth in traditional goods exports is projected at 3.7 per cent in 2005 and 2.6 per cent in 2006, i.e. somewhat weaker than market growth. This implies a continued loss of market shares for the export industry in the coming years. Oil and gas exports are expected to remain virtually unchanged in the years ahead, with a continued shift away from oil exports towards gas exports.

Imports showed strong growth through 2003. Growth was particularly strong at the beginning of the year. For the year as a whole, traditional goods imports, excluding refined oil products, grew by 4.7 per cent at constant prices. The strongest contribution came from textiles, clothing and footwear, which grew by 6.3 per cent, from food and beverages at 6 per cent and from engineering products at 5.3 per cent from 2002 to 2003.

A particular feature in 2003 compared with 2002 was that while the krone depreciated markedly against European currencies, it appreciated somewhat against USD and currencies that are tied to the dollar. This also led to a shift in Norwegian imports. While imports from Europe shrank by 6.8 per cent from January 2003 to January 2004, imports from Asia increased by 18.3 per cent. Asia now accounts for a larger share of Norwegian imports than North America.

However, the strong rate of growth in imports appears to have edged down. From the third to the fourth quarter, seasonally adjusted growth in imports of traditional goods was 1.5 per cent. At current prices, growth was 2.7 per cent. As a result of the krone depreciation, prices for many import products are still rising.

A weaker exchange rate should, in isolation, push down imports. However, the domestic cyclical upturn, combined with a high Norwegian cost level, will contribute to sustaining import growth in the years ahead. As a result, imports as a share of domestic production will continue to rise. Our projections show 5 per cent growth in traditional goods imports in 2004. Growth will accelerate further in 2005, with growth projected at 6.4 per cent. In 2006, growth is projected at 4.9 per cent.

After falling by 1.2 per cent from the third quarter of 2002 to the first quarter of 2003, according to seasonally adjusted QNR figures, i.e. by an annual rate of 2.4 per cent - mainland output has shown clear growth in recent quarters. From the first quarter to the fourth quarter of 2003, output growth was 3.6 per cent, annualized. However, the cyclical trough, the point in time when GDP growth shifts from weaker-than-trend towards higher-than-trend growth, was not passed until the summer of last year. In the last two quarters of 2003, output growth was as high as 4.3 per cent, annualized. If we exclude supply-determined industries such as agriculture, forestry, fisheries, electricity, household services and public sector activity, growth was even stronger in the last six months of 2003, as strong as 5.1 per cent, annualized. Even when we include the somewhat weaker second quarter of 2003 in the average, output showed an annual growth rate of 4.3 per cent.

There were wide differences within the group non-supply determined industries, however. For service industries, where the cyclical downturn through the winter of 2002/2003 restrained growth, the growth rate has hovered around an annual rate of 6 per cent in the last three quarters. There has also been an upswing in the construction sector, albeit considerably weaker. For manufacturing, on the other hand, which experienced a sharp fall in production during the downturn, the cyclical turnaround last year only stopped the sharp contraction. Growth has subsequently been meagre. The main exceptions are industrial commodities and semi-finished goods (metals, industrial chemicals, refined products and paper and pulp) and food etc, i.e. production that is either not particularly labour-intensive or partly sheltered from foreign competition. Industries that supply the expanding construction industry seem to have fared well in terms of production. For other industries that compete on the domestic market, production has generally been weak, however, and has also declined considerably for some industries such as the engineering, shipbuilding, textile and clothing industries.

These developments must be seen against the background of several years of high cost inflation in the Norwegian economy. The krone appreciation through 2002 probably contributed to accelerating closures in exposed industries with weak profitability, with an attendant fall in production. The krone depreciation that followed the interest rate decline through last year reversed the sharp decline, but has in no way laid the conditions for renewed growth. The underlying, general costs problems are too substantial for this to occur. It is true that exports are again expanding sharply, but this partly reflects the international cyclical upswing and partly special conditions such as increased capacity in metal production. The general tendency of losing market shares both in foreign and domestic markets seems to be continuing. Service production has picked up, however. Even though the krone appreciation led to a sharp deterioration in competitiveness that also had an adverse impact on service production, the cost disadvantage in relation to other countries was smaller (or was even a cost advantage) so that there were conditions for renewed growth when the krone depreciated. In addition, the interest rate decline stimulated domestic demand, which has benefited service production in particular, since the domestic market is more important for this industry than for goods production. The same applies to the construction industry, which is also highly interest-rate sensitive.

For 2004 and 2005, strong growth in household consumption and housing investment, combined with the upswing in exports in 2004 and business investment in 2005, are expected to sustain the pace of mainland GDP growth, but the rate of growth is projected to be somewhat slower after a period. Growth is projected at 3.6 per cent in 2004 and 2.8 per cent in 2005. A slowdown in the international economy in 2006 is expected to curb export growth, bringing mainland output into line with trend growth of 2.3 per cent.

The upswing in export growth in 2004 will be accompanied by marked growth in production in the manufacturing sector as a whole, but growth will subsequently slow in 2005 and come to a halt in 2006, when an international cyclical downturn is expected to occur. For service sectors and the construction industry, production growth is expected to hold up throughout the period.

With the path of mainland GDP growth presented above, the current negative output gap is expected to close in the course of 2004 so that the Norwegian economy will largely be in a cyclically neutral situation in 2005 and 2006. As the upturn continues, productivity should grow at a slower pace. If developments are in line with our projections, the recent cyclical downturn can be described as unusually mild compared with previous downturns in the 1980s and 1990s.

According to preliminary national accounts figures, total employment fell by 0.6 per cent, or 14 000, from 2002 to 2003. LFS unemployment showed an increase of 20 000. In 2003, the unemployment rate was 4.5 per cent against 3.9 per cent in 2002.

Owing in particular to the strong krone exchange rate in 2002, manufacturing unemployment exhibited the sharpest increase. On average, close to 16 000 manufacturing workers were registered as unemployed last year. The national accounts show that manufacturing employment fell by 13 000. Manufacturing employment also declined in 2002. From the second quarter of 2002 to the second quarter of 2003, the number of employed in manufacturing decreased by more than 17 000, or 5.8 per cent.

Since last autumn, labour market conditions have shown some signs of improving. Seasonally adjusted LFS figures show that unemployment has been stable since the second quarter of 2003. In the fourth quarter of 2003, the number of unemployed stood at 109 000. The decline in employment now seems to have come to a halt, and registered unemployment has moved down in recent months. At the end of February 2004, registered unemployment was 3.9 per cent. Although this is an increase from 3.8 per cent at the end of January, the Directorate of Labour has pointed out that this figure is low because registration took place 6 days later than normal. Nevertheless, the impression is that the unemployment peak has been reached, but that there are still no signs of a clear improvement in labour market conditions.

The sharp fall in interest rates since December 2002 will contribute to rising employment in the years ahead. The krone depreciation will boost profitability in manufacturing, which will restrain the decline in employment in that sector. Consumption will continue to grow at a brisk pace, which will fuel production growth in many service sectors. Although high productivity growth will curb employment growth, productivity growth will slow and employment growth pick up as the upswing in production continues.

On the other hand, the central and local government sectors are not expected to make an equally large contribution to overall employment growth. Continued low growth in public services, in conjunction with re-organization and privatisation in the local government sector, will limit growth in the number of new employees. All in all, employment growth is projected at a moderate 0.2 per cent in 2004, rising to 0.9 per cent in 2005 and 1.0 per cent in 2006.

It will thus take time for the turnaround in the economy to have a pronounced impact on employment, and an even longer time for unemployment to be influenced. Improved labour market conditions will draw more of those who have been outside of the workforce into the labour market. Job-seeking activity is lower among the long-term unemployed than among those who have recently become unemployed. When many unemployed have remained so for a long period now that unemployment is high, it will be more difficult to bring this group back to the workplace. Against this background, unemployment is expected to show only a moderate decline in the years ahead, from an average 4.5 per cent in 2003 to 4.4 per cent in 2004 and 4.0 per cent and 3.8 per cent in 2005 and 2006, respectively.

In the preliminary national accounts, total growth in wages per normal man-year is estimated at 3.8 per cent in 2003, against 5.3 per cent in 2002. Slower wage growth is ascribed to deteriorating profitability in the business sector and rising unemployment. No pay increases at all were awarded to the large negotiating groups in the central and local government sector. In addition, the use of overtime fell sharply in virtually all sectors of the economy. In the manufacturing sector, this reduced growth in wages per normal man-year by about one percentage point. Wage growth in 2003 was also pushed down by negative wage growth in the fisheries and fish farming sectors due to low landed values as well as for seamen in the shipping sector as a result of the weak US dollar exchange rate.

National accounts figures for 2001 and 2002 have now been revised and the figures for 2001 are final. The revision shows that profitability in Norwegian manufacturing enterprises was particularly solid in 2001 and far better than indicated by earlier figures. Manufacturing enterprises product prices relative to prices for their material inputs exhibited a positive trend in 2001 and 2002, a period when the krone appreciated by 15 per cent. At the same time, productivity growth in manufacturing was revised upwards by 2.8 percentage points to 5.7 per cent in 2001. Solid profitability in the business sector in the period 1999 to 2001 contributed to high wage growth in all sectors of the economy up to the end of 2002. Through 2002, the situation deteriorated substantially for manufacturing enterprises, and unemployment rose to an average 4.5 per cent in 2003, against 3.9 per cent in 2002. Pay increases in 2003 were therefore very moderate.

Wages per normal man-year in manufacturing rose by 3.3 per cent in 2003, against 5.3 per cent in 2002. Lower wage growth was partly due to a decline of almost 17 per cent in the use of overtime. Taking into account that overtime pay accounted for 5.8 per cent of total wage payments in 2002, a decline of this magnitude has a considerable impact on wage growth in the manufacturing sector.

The figure for average wage growth in manufacturing is also influenced by the considerable structural changes that took place in 2003, resulting among other things in a reduction of 13 000 in the number employed. Structural changes have the effect of both increasing and reducing wage growth in manufacturing. It is often those with the lowest seniority and wages who are dismissed first. This pushes up average wages. At the same time, it has often been the case that dismissals have largely affected industries with a high wage level. This contributes to pushing down average wages. Developments in the construction of ships and oil platforms illustrate both effects. This industry recorded the largest decline in the number employed among all manufacturing sectors, but with wage growth at 5.5 per cent this was nevertheless the industry with the highest wage growth. Since wages in the shipbuilding sector are among the highest in manufacturing as a whole, it is reasonable to assume that workforce cuts in this sector contributed to reducing the average wage level.

There are signs of improvement in the labour market and the depreciation of the krone has reduced pessimism in manufacturing. However, wage determination functions in such a way that it takes time before changes in the economy have an impact on actual wage growth. There is therefore little reason to expect any imminent increase in wage growth. The labour market will continue to be marked by higher unemployment than employee organizations would like to see. This will moderate pay demands in the wage-leading manufacturing sector, and most likely in other sectors of the economy as well.

The low pay increases awarded in last years wage settlement as well as the reduced use of overtime through 2003 resulted in a low carry-over into 2004. As an average for the economy as a whole, the carry-over probably amounted to less than one percentage point of the growth in wages per normal man-year from 2003 to 2004. However, an increased use of overtime in 2004 compared with 2003 may offset part of the contribution from the low carry-over. Growth in wages per normal man-year is projected at 3.7 per cent in 2004, which would then be the lowest annual wage growth since 1995. A subdued rise in consumer prices will nevertheless ensure that employees record solid growth in real wages this year.

A gradual fall in unemployment and a normalization of profitability in manufacturing enterprises will lead to somewhat higher wage growth in the years ahead. In 2005 and 2005, wage growth is projected at 3.8 and 4.0 per cent respectively.

Movements in electricity prices largely determined the rate of inflation through 2003. Record-high prices in January 2003 contributed 3.2 percentage points to the year-on-year rise in the consumer price index (CPI) of 5.0 per cent. Electricity prices fell sharply in the period to July, and towards the end of the year rose at a far slower pace than in the previous year. In December, electricity prices contributed to the year-on-year rise in prices only to a negligible extent. On an annual basis, the CPI rose by 2.5 per cent in 2003, of which electricity prices contributed a good half.

Underlying inflation, measured by the year-on-year rise in the CPI adjusted for tax changes and excluding energy products (CPI-ATE), peaked in February 2003 at 2.0 per cent, fell thereafter swiftly through the spring and then declined somewhat more modestly towards the end of the year to 0.4 per cent in December. On an annual basis, the increase was 1.1 per cent. The fall in the rate of inflation through the first half of the year may largely be ascribed to developments for imported consumer goods. Towards the end of the year the rate of price increases for services, excluding house rents, was also steadily lower. The value of the Norwegian krone was reduced sharply through 2003, and at the same time there were no underlying impulses to generate a higher rise in prices for imported consumer goods. Developments for these goods must therefore be ascribed to reduced margins in retail trade (after probably increasing when the krone appreciated), low international inflation and a shift in imports to low-cost countries. The generally low rise in prices for domestically produced goods and services must be seen against the background of moderate growth in labour costs and an economy characterized by a moderate cyclical downturn.

In January 2004, the CPI was 1.8 per cent lower than 12 months earlier. A lower inflation rate has not been seen since December 1947. The extremely low rate of inflation may largely be ascribed to record-high electricity prices for households in January 2003, and thus has little bearing on 2004. In isolation, the sharp rise in excise duties on rolling tobacco contributed to pushing up the CPI by 0.2 percentage point.

Underlying inflation fell further from the already low level in December, and in January the CPI-ATE was only 0.1 per cent higher than 12 months earlier. House rents normally rise markedly from December to January, but this year they remained unchanged, a factor that may largely explain the latest reduction in the rate of inflation.

The new day-care rates will be incorporated in the CPI for February for the first time since August last year. Against the background of increased government support from August 2003, which perhaps did not have an immediate impact on prices for all day-care centres, lower prices must now be expected. We will probably see a further decline in prices in May when a maximum price is introduced. With effect from 1 March, public transport is subject to a VAT rate of 6 per cent. This entails, however, tax-deductibility for VAT for factor inputs. All in all, it is assumed that the reform will result in a slight subsidization of the activity, which in isolation may marginally push down the rise in prices. Even though there have been many observations of price increases since 1 March, it must still be expected that the reform will gradually contribute to somewhat lower prices than would otherwise have been the case.

Developments in the krone exchange rate are clearly reflected in import prices. After the appreciation of the krone in the first three years of the decade contributed to a fall in import prices, the depreciation of the krone through 2003 has now resulted in a rise in import prices for most goods and services. According to the quarterly national accounts, prices for traditional imported goods were 4.0 per cent higher in the fourth quarter of 2003 compared with the same quarter one year earlier and 0.6 per cent higher on an annual basis. However, there are exceptions: Import prices for aviation and postal and telecom services were reduced through the second half of 2003. The same applies to office machinery and computers, but here the decline was considerably less than through the previous year. Higher import prices will gradually entail positive inflationary impulses, directly for imported consumer goods and indirectly through prices for material inputs in Norwegian production. On an annual basis, the rise in import prices for traditional imported goods is projected at 3.6 per cent in 2004. Here, however, the rise in prices for imported raw materials for the manufacturing sector also makes a contribution. External inflationary impulses are expected to increase from 2004 to 2005, with the result that Norwegian import prices will not fall despite some appreciation of the krone.

Moderate wage growth, relatively high productivity growth, particularly in 2004, and low house rents point to low underlying inflation in the period ahead. Measured by the CPI-ATE, developments in day-care rates and VAT on transport will probably also push down underlying inflation. In our calculations, however, the dominating factors are the effects of a weaker Norwegian krone through higher import prices and higher margins in retail trade, with the result that the year-on-year rise in the CPI-ATE picks up. Through the first half of 2004, the increase in inflation is fairly modest, picking up somewhat through the second half of the year. Over the next two years, lower productivity growth and slightly higher wage growth will contribute to a further pick-up in underlying inflation. On an annual basis, the increase in the CPI-ATE is projected at 1.0 per cent in 2004, 1.9 per cent in 2005 and 2.3 per cent in 2006.

Electricity prices are assumed to fall by about 10 per cent this year. The decline may in its entirety be traced back to the high prices recorded in the first quarter of 2003. The path has thereafter been relatively normal, with low prices in spring and summer and higher prices during winter. It is therefore likely that the year-on-year rise in the CPI will swiftly reach the same level as the underlying inflation rate later this year. As a result of somewhat lower oil prices, measured in krone terms, and a further decline in electricity prices, the calculations indicate that the year-on-year rise in the CPI is a little less than underlying inflation in 2005. In 2006, the two CPI indices are assumed to rise at the same pace.

Preliminary figures from the national accounts show that Norway recorded a current account surplus of almost NOK 203 billion in 2003, equivalent to about 13 per cent of GDP. According to our calculations, the value of traditional merchandise exports will increase substantially in 2004, but petroleum exports will increase more moderately if oil prices fall somewhat from the current high level, as we have assumed. Imports will also show a considerable increase this year as a result of higher domestic demand and a somewhat weaker krone, which increases import prices in NOK. Our projections indicate that the surplus on the goods and services balance as a whole may be somewhat lower in 2004 than in 2003. However, this decline in the surplus will be approximately offset by an improvement in the interest and transfers balance as a result of the large surpluses that are accumulated from steadily higher net foreign assets. All in all, the current account surplus is therefore projected at about NOK 200 billion in 2004, or a good 12 per cent of nominal GDP.

In 2005 and 2006, our projections show that the surplus on the goods and services balance will be reduced to a greater extent than in 2004. This is ascribable to continued low or zero volume growth in total oil and gas exports, combined with unchanged nominal prices for these goods. Traditional merchandise exports will also grow at a slower pace these two years compared with 2004 as a result of a projected slowdown in the global economy and a moderate cyclical downturn in 2006. On the other hand, relatively strong growth in the Norwegian economy will be accompanied by strong growth in imports both these years. Even though the rise in import prices, measured in NOK, will be far more modest in the same period, the value of imports will nevertheless increase at a noticeably faster pace than the value of exports. The surplus on the goods and services balance is projected at NOK 177 billion in 2006. Higher net foreign assets will contribute to a projected surplus on the interest and transfers balance, with the result that the current account shows a surplus of a good NOK 190 billion that year, or a little less than 11 per cent of GDP in 2006. Net foreign assets are projected to be equivalent to 78 per cent of GDP at the end of 2006, compared with about 50 per cent at the end of 2003.