Economic trends for Norway and abroad

Moderate activity growth – lower unemployment

Published:

Two years of economic upswing are now starting to show in the form of increased employment levels and lower unemployment. The driving forces behind the economic upswing in Norway are, however, expected to be weakened in the future whereby the increase in production is gradually reduced during the next two years. The downturn in housing investments is a sign that such a development is brewing. A strong NOK gives prospects for a continued low rate of inflation. The interest rates are expected to remain low for several years to come, but will increase slightly in relation to the current level.

The relatively high growth in the Norwegian economy continued in the third quarter of 2005, and is expected to last for another few quarters. The economic upswing has to a large extent been driven by expansive monetary and fiscal policies, as well as increased oil investments. This has contributed to high growth in households’ consumption and housing investments. The most recent figures from the quarterly national accounts, however, indicate that the housing investments may have reached their peak and the underlying trend for housing starts has been falling for almost a year. The purchase of durable consumer goods is now showing low growth and overall this could suggest that we are entering a period of lower growth in the households’ demands.

Suppressed economic upswing, housing investments falling

We now anticipate that the moderate international economic upswing will continue into 2006. The oil investments are also positioned to increase somewhat from 2005 to 2006 and both are pulling in the direction of somewhat higher activity growth in Norway. Stronger growth abroad also implies somewhat higher international interest rates, which in turn form the basis for higher Norwegian interest rates, without affecting the strength of the NOK considerably. We expect Norges Bank to put up the benchmark rates by 0.5 percentage points during the first half of 2006, which will reinforce the trends for a slowdown in the households’ demands. The growth on an annual basis in the households’ consumption, however, is estimated to be reduced by only 0.3 percentage points from 2005 to 2006. The housing investments are expected to fall from a growth of 9.3 per cent this year to a reduction of 2 per cent in 2006.

Main economic indicators 1997-2009. Accounts and forecasts. Percentage change from previous year unless otherwise noted
 
  1997 1998 1999 2000 2001 2002 2003* 2004* Forecasts
  2005 2006 2007 2008 2009
 
Demand and output                          
Consumption in households etc. 3.2     2.7     3.3     3.9     1.8     3.0     2.9     4.7     4.2     3.9     3.4     2.5     2.7
General government consumption 2.5 3.3 3.2 1.3 5.8 3.7 1.3 2.2 1.7 1.9 2.4 4.0 3.4
Gross fixed investment 15.5 13.1 -5.6 -3.6 -0.7 -1.0 0.2 7.8 8.8 6.2 -2.8 -0.6 0.2
Extraction and transport via pipelines 24.9 22.2 -13.1 -23.0 -4.1 -5.3 16.1 7.8 19.5 5.1 -2.8 -2.0 -3.0
Mainland Norway 11.8 8.6 -0.1 -1.2 4.3 2.5 -3.7 7.2 5.3 6.5 -2.1 -0.1 1.3
Industries 9.5 8.9 -1.5 0.1 2.6 4.6 -11.7 6.7 6.8 7.7 1.3 0.4 2.5
Housing 12.1 7.8 3.0 5.6 8.2 -0.6 2.0 12.3 9.3 -2.0 -4.8 -4.3 -3.0
General government 18.0 8.6 0.5 -11.4 4.2 1.0 10.5 1.9 -3.5 16.6 -6.3 3.9 3.8
Demand from Mainland Norway 1 4.5 3.9 2.6 2.3 3.2 3.1 1.4 4.4 3.7 3.8 2.2 2.5 2.7
Stockbuilding 2 0.8 0.4 -0.5 0.8 -1.2 -0.2 -0.3 0.7 0.3 0.0 0.0 0.0 0.0
Exports 7.7 0.6 2.8 4.0 5.0 -0.8 0.2 0.8 0.4 2.5 3.1 2.6 3.8
Crude oil and natural gas 4.1 -5.8 0.4 4.1 8.8 1.9 -0.7 -0.7 -2.2 1.0 2.7 2.8 3.0
Traditional goods 7.6 5.4 2.2 5.1 1.5 0.4 4.4 3.4 5.5 2.4 2.1 1.5 4.4
Imports 12.4 8.5 -1.8 2.7 0.9 0.7 1.1 8.9 7.0 7.8 2.8 2.7 3.9
Traditional goods 8.5 9.0 -1.9 3.8 3.6 3.4 5.1 10.2 8.0 5.6 2.8 2.0 3.7
Gross domestic product 5.2 2.6 2.1 2.8 2.7 1.1 1.1 2.8 2.4 2.1 1.9 2.2 2.4
Mainland Norway 4.9 4.1 2.7 2.5 2.1 1.4 1.4 3.4 3.4 2.4 1.7 2.1 2.4
Manufacturing 3.6 -0.7 0.1 -0.8 -0.1 -0.1 2.9 2.0 1.8 2.3 -0.3 0.2 1.7
Labour market                          
Total hours worked, Mainland Norway 2.5 2.3 0.6 -0.7 -1.2 -1.2 -1.7 2.0 1.6 1.0 0.6 1.0 0.8
Employed persons 2.9 2.5 0.8 0.4 0.2 0.0 -1.1 0.4 0.6 1.6 0.6 0.5 1.1
Labor force 3 2.1 1.6 0.8 0.7 0.3 0.4 -0.5 0.3 0.8 0.8 0.7 0.5 0.7
Participation rate (level) 4 72.7 73.6 73.8 74.0 73.9 73.8 73.0 72.7 72.6 72.6 72.4 72.1 71.9
Unemployment rate (level) 4.0 3.2 3.2 3.4 3.6 3.9 4.5 4.5 4.6 3.9 3.9 3.8 3.5
Prices and wages                          
Wages per standard man-year 4.8 6.6 5.3 4.5 5.1 5.3 3.9 4.3 3.9 3.7 3.9 3.9 3.7
Consumer price index (CPI) 2.6 2.3 2.3 3.1 3.0 1.3 2.5 0.4 1.6 2.3 2.0 1.9 1.9
CPI-ATE 5 .. .. .. .. 2.6 2.3 1.1 0.3 1.1 1.7 2.0 1.9 1.9
Export prices, traditional goods -0.6 2.0 -0.4 9.9 -1.6 -8.9 -2.3 8.4 2.5 0.3 -0.7 -0.5 2.5
Import prices, traditional goods -1.2 1.1 -2.9 5.1 -0.7 -7.5 -0.3 4.5 0.2 0.1 0.1 -1.0 0.3
Housing prices 6 10.9 9.7 9.4 14.1 7.2 4.0 1.6 10.1 7.8 1.2 0.4 -1.1 -0.6
Income, interest rates and excange rate                          
Household real income 3.8 5.6 2.7 3.5 -0.2 7.3 4.3 5.1 5.2 -5.7 2.0 2.7 2.8
Household saving ratio (level) 2.9 5.9 5.6 5.2 4.2 9.0 9.7 10.1 10.7 2.4 1.1 1.4 1.5
Money market rate (level) 3.7 5.8 6.5 6.8 7.2 6.9 4.1 2.0 2.2 2.9 3.0 3.0 3.2
Lending rate, banks (level) 7 6.0 7.4 8.4 8.1 8.9 8.5 6.6 4.2 4.0 4.4 4.7 4.7 4.8
Real after-tax lending rate, banks (level) 1.7 3.0 3.7 2.6 3.3 4.8 2.3 2.6 1.3 0.9 1.4 1.5 1.6
Importweighted krone exchange rate (44 countries) 8 -0.4 2.5 -1.2 2.9 -3.1 -8.5 1.3 3.0 -3.9 -0.6 0.6 -0.5 -0.2
Current account                          
Current balance (NOK billion) 70.5 0.5 66.4  228.9  235.2  193.9  204.3  231.5  290.8  275.1  283.1  288.0  297.9
Current balance (per cent of GDP) 6.3 0.0 5.4 15.6 15.4 12.8 13.0 13.5 15.3 13.8 13.8 13.5 13.4
International indicators                          
Exports markets indicator 9.4 8.6 7.0 11.7 0.8 1.3 2.6 6.1 4.1 3.6 1.9 2.2 5.6
Consumer price index, euro-area 1.6 1.1 1.1 2.3 2.1 2.3 2.1 2.1 2.3 2.1 1.9 1.9 1.9
3 mths. interest rate, euro 4.2 4.2 2.9 4.4 4.2 3.3 2.3 2.1 2.2 2.6 2.8 2.8 3.1
Crude oil price NOK (level) 9  135 96  142  252  219  197  205  257  351  340  334  332  332
 
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.
6   Freeholder.
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 13 December 2005. Published 15 December 2005.

Two years with modest impulses from the fiscal policy

We take our basis for the next two years from the unchanged structural, oil adjusted budget deficit, and thus extremely modest impulses from the fiscal policy. On an annual basis we estimate that petroleum investments will fall slightly after 2006, by 2-3 per cent per annum throughout the prognosis period. In 2007, we take our basis from a poorer development in Norwegian export markets. The activity growth in the Norwegian economy will thereby be relatively low in 2007. Further into the future we believe that a continued high level of the oil price will lead to a clear increase in the Petroleum Fund, which in turn may result in new impulses from the fiscal policy in line with a strict interpretation of the fiscal rule. The next international economic upswing will also stimulate the activity, and the GDP growth will be hiked up but will gradually stabilize under new modest interest rate increases in Norway and internationally.

Employment growth and lower unemployment

Employment is now showing signs of growth and we estimate that the recovery in the labour market will continue in the future whereby unemployment will reduce clearly from 2005 to 2006. Subsequently, we expect a relatively stable development in the labour market until employment increases in the next economic upswing at the end of the calculation period.

NOK remains strong, inflation low

As long as the oil price remains reasonably high, and the interest rates in Norway are at least the same level as the Euro area, we believe that the NOK will remain strong. There are prospects that we will have inflation in line with the measure of inflation in the Euro area which will probably return to around 2 per cent when the effect of the autumn’s high oil prices are exhausted during the summer of 2006.