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Economic trends for Norway and abroad
Low unemployment and high wage growth
Unstable international financial markets bring risk of a weaker cyclical development internationally. The strong growth in the Norwegian economy has continued, but the development ahead is expected to be more moderate. Unemployment has fallen considerably and is likely to stay low for a long time. This will contribute to increased wage growth.
International financial markets have been unstable since this summer, triggered by the slump in the US housing market. Increased uncertainty and reduced liquidity have contributed to push money market rates higher in Norway and abroad. Our prognosis is based on lower growth internationally, but we expect the decline to be very moderate. In Norway, we expect lower growth in production and employment in the time ahead. This is due to a combination of interest rate hikes, lack of spare capacity, weaker cost competitiveness and slower growth in Norwegian export markets. Continued high income growth, considerable growth in investments in several mainland industries and the petroleum industry, and increasing demand from general government all contribute to extend the current boom in the Norwegian economy.
Highest growth for more than 20 years
The strong output growth in the Norwegian economy has continued in the current year and it is plausible that growth in GDP for mainland Norway will be more than 5.5 per cent from 2006 to 2007. Annual GDP growth has not been at this level since 1985. Most mainland industries are experiencing output growth, a fact which reflects the strong demand side growth in most areas of the economy.
No further interest hikes?
Healthy growth in Norwegian export markets, strong investment growth, increased public sector demand and low interest rates are the key drivers behind almost five years of prosperity. However, since the summer of 2005, Norges Bank has dampened the growth by gradually raising interest rates. At the end of September, the key interest rate was raised to 5 per cent. However, the interest rate mark-up is very high at the moment, and the money market rate has reached 5.9 per cent. This combined with a relatively strong krone, anticipated low interest rates abroad and stable pressure in the economy in the time ahead, means that we anticipate no further key interest rate rises at the time being. The interest rate difference between the euro and the krone has increased, and combined with continued high oil prices we assume that this will contribute to a strengthening of the krone in the time ahead.
Strong consumption growth
Household consumption has increased considerably. Despite clearly lower growth throughout 2007, consumption is expected to rise by more than 7 per cent annualised. This will be the strongest annual growth since 1985. A marked increase in electricity prices next year will contribute to somewhat lower growth in household real disposable income (excluding dividends). Together with higher interest rates, this will contribute to lower growth in household consumption, which is expected to be around 4 per cent in the years ahead. This is still somewhat higher than the average for the past ten years. There was a considerable increase in housing investments at the beginning of the current boom. This increase has continued, albeit at a slower pace. We anticipate that the growth in housing investments will be modest ahead; however the level of housing construction remains high. We further believe that the growth in house prices will be on a par with the general price growth.
Tight labour market
The cyclical upturn has resulted in considerable employment growth since spring 2005. This led to falling unemployment, which at the start of 2007 had reached its lowest level since the mid 1980s. So far in 2007, however, the growth in labour supply has been almost identical to growth in labour demand, and the decline in unemployment as measured by the Labour Force Survey (LFS) has come to a halt. Strong profitability in trade and industry and the very tight labour market have contributed to higher wage growth. We assume that the wage growth will remain at a high level in the time ahead. Measured by the twelve-month growth in the CPI adjusted for tax changes and excluding energy products (CPI-ATE), inflation has risen slightly in the past year, but was still only 1.4 per cent in October. We expect inflation to rise to 1.9 per cent on average for 2008. We then anticipate that a stronger krone and slightly lower wage growth will have a downward effect on inflation. We anticipate that a marked growth in electricity prices will result in an increase in the CPI from 0.6 per cent this year to 2.7 per cent next year.
|Demand and output|
|Consumption in households etc.||2.8||3.7||4.2||2.1||3.1||2.8||5.6||4.0||4.2||7.1||4.1||4.1||3.9|
|General government consumption||3.4||3.1||1.9||4.6||3.1||1.7||1.5||0.7||3.0||3.1||3.0||2.8||3.0|
|Gross fixed investment||13.6||-5.4||-3.5||-1.1||-1.1||0.2||10.2||13.3||6.5||7.6||5.7||4.2||3.9|
|Extraction and transport via pipelines||22.2||-13.0||-22.9||-4.6||-5.4||15.9||10.2||18.8||3.4||6.3||5.9||7.0||7.0|
|Demand from Mainland Norway 1||4.2||2.9||2.6||3.0||3.0||1.4||5.0||4.6||4.4||6.2||3.8||3.7||3.5|
|Crude oil and natural gas||-5.8||0.4||3.8||6.6||2.4||-0.6||-0.5||-5.0||-6.6||-2.8||4.5||0.0||0.0|
|Gross domestic product||2.7||2.0||3.3||2.0||1.5||1.0||3.9||2.7||2.2||3.3||3.6||2.4||2.6|
|Total hours worked, Mainland Norway||2.5||0.8||-0.7||-0.9||-0.9||-2.1||1.7||1.4||2.4||3.7||2.2||1.5||1.8|
|Labor force 3||1.7||0.9||0.9||0.5||0.7||-0.4||0.5||1.4||2.1||2.7||2.0||1.8||1.5|
|Participation rate (level) 4||73.9||74.2||74.4||74.5||74.6||73.8||73.6||74.0||74.6||75.8||76.2||76.6||76.8|
|Unemployment rate (level)||3.2||3.2||3.4||3.6||3.9||4.5||4.5||4.6||3.4||2.6||2.6||2.6||2.6|
|Prices and wages|
|Wages per standard man-year||6.5||5.4||4.6||5.3||5.4||3.7||4.6||3.8||4.3||5.7||6.2||5.3||5.2|
|Consumer price index (CPI)||2.2||2.3||3.1||3.0||1.3||2.5||0.4||1.6||2.3||0.6||2.9||1.6||1.7|
|Export prices, traditional goods||1.9||-0.5||11.8||-1.8||-9.1||-0.9||8.5||4.1||11.4||2.3||-3.2||-1.6||2.5|
|Import prices, traditional goods||0.7||-2.9||6.5||-1.6||-7.2||-0.4||4.0||0.5||4.7||4.0||-1.7||-1.3||1.2|
|Housing prices 6||9.7||9.4||14.1||7.1||4.0||1.6||10.1||7.9||12.9||12.9||7.1||3.3||1.3|
|Income, interest rates and excange rate|
|Household real income||5.4||2.4||3.4||-0.3||7.9||4.2||3.5||7.5||-7.0||5.3||6.1||4.5||4.5|
|Household saving ratio (level)||5.8||4.8||4.3||3.2||8.4||9.1||7.5||10.3||0.1||-2.0||0.3||0.8||1.6|
|Money market rate (level)||5.8||6.5||6.8||7.2||6.9||4.1||2.0||2.2||3.1||4.9||5.4||5.3||5.3|
|Lending rate, banks (level) 7||7.4||8.4||8.0||8.8||8.4||6.5||4.2||3.9||4.3||5.6||6.2||6.2||6.2|
|Real after-tax lending rate, banks (level)||3.1||3.7||2.7||3.3||4.8||2.2||2.5||1.3||0.7||3.4||1.5||2.8||2.8|
|Importweighted krone exchange rate (44 countries) 8||2.5||-1.2||2.9||-3.1||-8.5||1.3||3.0||-3.9||0.6||-1.6||-2.0||-1.7||-0.9|
|NOK per euro (level)||8.5||8.3||8.1||8.1||7.5||8.0||8.4||8.0||8.1||8.0||8.0||7.8||7.8|
|Current balance (bill. NOK)||-3.6||69.5||222.4||247.5||192.3||195.9||221.6||300.8||353.5||338.8||419.3||383.8||377.1|
|Current balance (per cent of GDP)||-0.3||5.6||15.0||16.1||12.6||12.3||12.7||15.5||16.4||14.9||17.1||15.1||14.3|
|Exports markets indicator||8.3||6.9||11.7||0.8||1.5||3.5||7.5||6.9||8.4||7.7||6.1||5.6||7.6|
|Consumer price index, euro-area||1.1||1.1||2.1||2.3||2.3||2.1||2.1||2.2||2.2||2.1||1.9||1.9||1.9|
|3 mths. interest rate, euro||4.2||2.9||4.4||4.2||3.3||2.3||2.1||2.2||3.1||4.3||4.4||4.2||4.2|
|Crude oil price NOK (level) 9||96||142||252||219||197||205||257||351||414||421||456||426||423|
|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||Unemployed (Labour Force Survey) and employment (NA) exclusive of foreigners in foreign shipping.|
|4||Unemployed (Labour Force Survey) and employment (NA) exclusive of foreigners in foreign shipping as a share of the average population.|
|5||CPI adjusted for tax changes and excluding energy products.|
|7||Households' borrowing rate in private financial institutions. Yearly average.|
|8||Increasing index implies depreciation.|
|9||Average spot price Brent Blend.|
|Source: Statistics Norway. The cut-off date for information was 27 November 2007. Published 29 November 2007.|