Economic trends for Norway and abroad
Low interest rate speeds up Norwegian economy
Continued interest rates reduction will speed up growth in the Norwegian economy. Unemployment will, however, still continue to increase next year. In a two-year term perspective the price increase will still be below the inflation target of 2.5 per cent, whereas the interest rates may increase towards the end of next year in order to prevent inflation to overshoot the target further on.
During the last years Norwegian economy experienced a period of relatively moderate growth in domestic demands. Production has developed still more slightly due to weak international development and loss of market shares as a result of high domestic growth in costs and a strong Norwegian krone (NOK). Financial policies have not stimulated growth beyond the impairment of the budget balance, which normally follows an economic downturn. Monetary policy has curbed growth through both high real interest rates and high interest rate differentials towards other countries, which contributed to the strong krone.
Throughout the last year production seems to have come to a complete stop. The strict monetary policy has at the same time contributed to the fact that inflation has dropped considerably. The underlying inflation – measured by the 12 month change in the consumer price index adjusted for changes in taxes and without energy goods (CPI-JAE) – was in May 1.2 per cent, well below the target of 2.5 per cent. Unemployment has continued to increase, and the profitability in manufacturing is still extremely weak. These factors have contributed to the clear decline of increase of wages and salaries.
Lower interest rates and weaker value of the NOK
During the last six months the monetary policy has been considerably altered. The Central Bank has reduced its key interest rates by 2 percentage points, and the money market interest rates have fallen still more. Further reductions are expected, resulting in a reduced interest rate differential between Norway and other countries. At the same time the NOK has been weakened markedly, and measured against the euro the krone is now approaching the level from the days of fixed exchange rate policy. The dollar has however gone down considerably against the euro, and the effective exchange rate is therefore still stronger than before the strength of the NOK started to take place.
Increased growth in private consumption throughout the coming year
For the development in the real economy so far in 2003 – the change in monetary policies has not had noticeable effects. But looking outwards in 2003 and 2004 in total – the change may contribute to a marked increase in growth in Norwegian economy, both because the reduction of interest rates stimulates domestic demands, and because the value of the NOK -– together with lower increase in wages and salaries – contributes to subdue Norwegian establishments' loss of market shares. The growth in households' consumption is expected to recover throughout the coming year, but then drop off in 2005. The growth in private consumption in 2004 is expected to reach 4.0 per cent on an annual basis. In addition it is assumed that international growth gathers headway. Finally, increased oil investments may offer strong stimulus to growth in 2004.
Recovering, but still slightly depressed
All things considered – this contributes to an upswing in Norwegian economy in the coming years. But even if growth in the GDP recovers considerably, it will not be stronger than that Norwegian economy will continue to operate well below full capacity. Employment will fall this year, be stabilized in 2004 and eventually increase in 2005. Hence, unemployment will increase the coming year, albeit to a lesser degree than previously assumed. On a yearly basis unemployment is expected to be 4.7 per cent next year, but to be reduced in 2005.
Low, but increasing inflation
The underlying rate of inflation will in the short run continue to remain low, but in the next two years it will gradually reach the inflation target, first and foremost due to increase in import prices as a result of the reduced value of the NOK. A 1.5 per cent decline in key interest rates to the 4. quarter this year, so that the 3- month market rate reaches 3.7 per cent – is therefore assumed to be reversed throughout the winter 2004-2005, incidentally in trend with an assumed reversing of interest rates internationally. The NOK is assumed to remain on the level it is today throughout the period.
|Main economic indicators 1996-2005. Accounts and forecasts. Percentage change from previous year unless otherwise noted|
|Demand and output|
|Consumption in households and non-profit organizations||6.5||3.2||2.7||3.3||3.9||2.6||3.6||3.4||4.0||2.9|
|General government consumption||3.1||2.5||3.3||3.2||1.3||2.7||3.2||1.3||1.7||1.0|
|Gross fixed investment||10.3||15.5||13.1||-5.6||-3.6||-4.2||-3.6||0.9||0.2||0.8|
|Extraction and transport via pipelines||-5.7||24.9||22.2||-13.1||-23.0||-1.0||-4.6||16.4||-0.9||-10.0|
|Demand from Mainland Norway 1||6.5||4.5||3.9||2.6||2.3||2.3||2.1||1.9||2.9||2.7|
|Crude oil and natural gas||13.7||2.9||-4.4||-0.8||5.0||5.2||0.2||1.0||3.3||1.0|
|Gross domestic product||5.3||5.2||2.6||2.1||2.8||1.9||1.0||0.4||2.9||1.9|
|Total hours worked, Mainland Norway||1.6||2.5||2.3||0.6||-0.7||-0.9||-0.9||-0.5||0.9||0.3|
|Participation rate (level) 6||71.4||72.7||73.6||73.8||74.0||74.1||74.1||73.4||73.0||72.8|
|Unemployment rate (level)||4.8||4.0||3.2||3.2||3.4||3.6||3.9||4.4||4.7||4.4|
|Prices and wages|
|Wages per standard man-year||4.4||4.8||6.5||5.4||4.5||5.0||5.4||4.5||4.0||4.0|
|Consumer price index (CPI)||1.2||2.6||2.3||2.3||3.1||3.0||1.3||2.8||1.0||2.2|
|CPI adjusted for tax changes and excluding energy products (CPI-ATE)||..||..||..||..||..||2.6||2.3||1.5||1.7||2.3|
|Export prices, traditional goods||-1.6||0.0||1.1||0.5||12.6||-2.9||-8.7||-0.4||6.6||2.2|
|Import prices, traditional goods||-0.1||-1.2||1.2||-2.6||5.2||-0.1||-8.0||2.4||4.0||0.1|
|Income, interest and foreign currency|
|Household real income||3.4||3.9||5.7||2.7||3.6||0.5||6.7||1.4||4.5||2.2|
|Household saving ratio (level)||2.3||2.9||5.9||5.6||5.2||4.0||7.2||5.4||6.0||5.4|
|Money market rate (level)||4.9||3.7||5.8||6.5||6.8||7.2||6.9||4.6||3.8||5.1|
|Lending rate, banks (level) 3||7.2||6.0||7.4||8.4||8.1||8.9||8.5||6.6||5.4||6.6|
|Lending rate, banks (level)||3.8||1.7||2.8||3.4||2.6||3.0||4.6||2.0||3.0||2.5|
|Importweighted krone exchange rate (44 countries) 4||-0.4||-0.4||2.5||-1.2||2.9||-3.1||-8.6||1.1||2.4||0.0|
|Current balance (bill. NOK)||70.7||70.5||0.5||66.4||228.9||238.5||200.6||147.6||145.9||155.3|
|Current balance (per cent of GDP)||6.9||6.3||0.0||5.4||15.6||15.6||13.2||9.6||9.3||9.5|
|Exports markets indicator||4.7||8.3||10.3||6.7||11.2||0.1||0.2||4.1||5.8||5.0|
|Consumer price index, euro-area||2.1||2.0||1.5||1.2||2.3||2.1||2.3||2.0||1.5||1.7|
|3 months' interest rate, euro||4.4||4.2||4.2||2.9||4.4||4.2||3.3||2.3||2.1||3.4|
|Crude oil price NOK (level) 5||133.0||135.0||96.0||141.0||252.0||220.0||197.0||187.0||174.0||174.0|
|1||Consumption in households and non-profit organizations + general government consumption + gross fixed capital formation in Mainland Norway.|
|2||Change in stockbuilding. Per cent of GDP.|
|3||Households' borrowing rate in private financial institutions.|
|4||Increasing index implies depreciation.|
|5||Average spot price Brent Blend.|
|6||Unemployed (Labour Force Survey) and employment (NA) as a share of the population.|
|Source: Statistics Norway.|