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Economic trends for Norway and abroad

Protracted Norwegian boom

Published:

The boom in the Norwegian economy continues for the fourth year, and production and employment continued to increase markedly in the first quarter of 2007. While growth in domestic demand is expected to stay at a high level, a period of weaker demand impulses from abroad is expected in the time ahead. The cyclical upturn is therefore expected to level out, although activity levels will remain high. Unemployment has fallen to a low level, and any further reductions will only be moderate. We anticipate higher wage growth, but an appreciation of the NOK will dampen the effects on inflation.

Strong international growth, considerable growth in petroleum investments, fiscal stimuli, increased labour immigration and low interest rates have been important drivers behind the upturn in the Norwegian economy. The growth in petroleum investments is likely to continue in the time ahead, but we predict that the implementation of the monetary policy and cyclical developments internationally will have a dampening effect on the activity growth in Norway for some years to come. Due to increased labour immigration, the strong production growth has been followed by moderate wage growth and low interest levels.

For several years, Norwegian business and industry have enjoyed higher profitability. Combined with a tight labour market, this will result in higher wage growth in the time ahead. Measured by the growth in the CPI adjusted for tax changes and excluding energy products (CPI-ATE), inflation has risen slightly in the past six months, but was still below Norges Bank's target zone in April. We anticipate inflation rising towards 2 per cent in 2008, however the appreciation of the NOK may subsequently contribute to reduced inflation. As a response to the high activity, Norges Bank has lifted the key interest rate by a total of 2.5 percentage points over the past two years, with the last 0.25 percentage point increase on 30 May. We expect the key interest rate to increase by a further 0.75 percentage points during the next twelve months. The three-month money market rate will then reach 5.25 percentage points and stay unchanged for the rest of the projection period to 2010. Weaker international cyclical conditions are expected to result in lower interest rates internationally and thus contribute to an appreciation of the NOK, although lower prices of oil are pulling in the opposite direction. We anticipate an appreciation of the NOK in the range of 1-2 percentage points per year in the next three years.

High prices of electricity last year and lower prices this year contribute to a very slow growth in consumer prices this year. Combined with increasing wage growth and employment, this will contribute to the strong growth in household real disposable income this year, also if we disregard the expected increase in dividend payments. This implies that household consumption will increase markedly despite higher interest rates.

Main economic indicators 1998-2010. Accounts and forecasts. Percentage change from previous year
unless otherwise noted
 
  1998 1999 2000 2001 2002 2003 2004 2005* 2006* Forecasts
  2007 2008 2009 2010
 
Demand and output                          
Consumption in households etc. 2.8 3.7 4.2 2.1 3.1 2.8 5.6 3.3 4.4 4.7 3.9 3.6 3.8
General government consumption 3.4 3.1 1.9 4.6 3.1 1.7 1.5 1.8 3.3 3.2 3.2 2.7 3.0
Gross fixed investment 13.6 -5.4 -3.5 -1.1 -1.1 0.2 10.2 11.2 7.4 7.3 4.4 3.9 4.1
Extraction and transport via pipelines 22.2 -13.0 -22.9 -4.6 -5.4 15.9 10.2 19.1 4.4 6.5 9.7 9.3 10.3
mainland Norway 9.4 0.2 -1.4 3.9 2.3 -3.6 9.3 9.1 8.0 7.1 2.7 2.3 2.0
Industries 10.4 -1.0 -0.4 2.5 4.0 -11.6 8.4 10.2 8.5 8.1 3.4 2.3 2.5
Housing 7.7 3.0 5.6 8.1 -0.7 1.9 16.3 14.5 6.5 5.3 1.5 1.4 0.8
General government 8.5 0.4 -11.2 2.7 1.7 10.4 2.5 -0.5 9.1 7.5 3.0 3.5 2.9
Demand from Mainland Norway 1 4.2 2.9 2.6 3.0 3.0 1.4 5.0 3.9 4.7 4.8 3.5 3.1 3.3
Stockbuilding 2 0.4 -1.0 1.2 -1.3 0.1 -0.2 1.2 0.4 0.2 -0.4 0.0 0.0 0.0
Exports 0.7 2.8 3.2 4.3 -0.3 -0.2 1.1 0.7 1.6 2.7 4.9 2.0 2.6
Crude oil and natural gas -5.8 0.4 3.8 6.6 2.4 -0.6 -0.5 -5.0 -6.5 -2.4 6.8 -0.4 -0.3
Traditional goods 5.5 2.3 3.3 1.8 0.6 2.9 3.4 5.2 5.9 6.7 3.9 4.4 5.7
Imports 8.8 -1.6 2.0 1.7 1.0 1.4 8.8 8.6 8.2 6.8 4.4 5.2 5.2
Traditional goods 9.3 -1.9 2.5 4.5 3.0 5.2 10.9 8.2 9.7 8.1 3.9 5.6 6.0
Gross domestic product 2.7 2.0 3.3 2.0 1.5 1.0 3.9 2.7 2.8 2.9 4.0 2.2 2.6
Mainland Norway 4.1 2.6 2.9 2.0 1.4 1.3 4.4 4.5 4.6 4.1 3.4 2.7 3.0
Manufacturing -0.9 0.1 -0.6 -0.5 -0.4 3.0 5.7 3.4 4.1 1.9 2.6 0.8 2.7
Labour market                          
Total hours worked, Mainland Norway 2.5 0.8 -0.7 -0.9 -0.9 -2.1 1.7 1.2 2.1 2.2 1.4 0.7 1.3
Employed persons 2.7 0.9 0.6 0.4 0.4 -1.0 0.5 1.0 3.1 2.5 1.2 1.1 1.0
Labor force 3 1.7 0.9 0.9 0.5 0.7 -0.4 0.5 1.1 1.8 1.9 1.1 1.1 1.0
Participation rate (level) 4 73.9 74.2 74.4 74.5 74.6 73.8 73.6 73.8 74.3 75.0 75.1 75.1 75.2
Unemployment rate (level) 3.2 3.2 3.4 3.6 3.9 4.5 4.5 4.6 3.4 2.7 2.6 2.6 2.5
Prices and wages                          
Wages per standard man-year 6.5 5.4 4.6 5.3 5.4 3.7 4.6 4.0 4.3 5.5 5.5 5.0 4.7
Consumer price index (CPI) 2.2 2.3 3.1 3.0 1.3 2.5 0.4 1.6 2.3 0.7 2.5 1.7 1.8
CPI-ATE 5 .. .. .. 2.6 2.3 1.1 0.3 1.0 0.8 1.6 1.9 1.7 1.8
Export prices, traditional goods 1.9 -0.5 11.8 -1.8 -9.1 -0.9 8.5 4.0 11.7 2.0 -6.0 -2.6 4.1
Import prices, traditional goods 0.7 -2.9 6.5 -1.6 -7.2 -0.4 4.0 0.4 4.7 2.6 -3.2 -1.8 0.5
Housing prices 6 9.7 9.4 14.1 7.1 4.0 1.6 10.1 7.9 12.9 14.1 7.2 3.0 2.7
Income, interest rates and excange rate                          
Household real income .. .. 3.4 -0.3 7.9 4.2 3.8 5.2 -4.3 8.3 4.3 3.7 3.7
Household saving ratio (level) .. 5.0 4.5 3.1 8.4 9.1 7.6 8.9 1.3 4.8 5.2 5.4 5.3
Money market rate (level) 5.8 6.5 6.8 7.2 6.9 4.1 2.0 2.2 3.1 4.6 5.3 5.3 5.3
Lending rate, banks (level) 7 7.9 8.1 8.2 8.8 8.5 6.0 4.1 3.9 4.3 5.4 6.2 6.3 6.3
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 3.2 2.0 2.9 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 0.3 -1.2 -2.1 -1.1
Current account                          
Current balance (bill. NOK) -3.6 69.5  222.4  247.5  192.3  195.9  221.6  300.8  359.2  311.3  315.6  293.6  291.2
Current balance (per cent of GDP) -0.3 5.6 15.0 16.1 12.6 12.3 12.7 15.5 16.7 14.2 13.7 12.4 11.8
International indicators                          
Exports markets indicator 8.5 6.7 11.6 0.8 1.3 3.0 6.9 6.7 8.7 6.6 3.8 4.3 6.6
Consumer price index, euro-area 1.1 1.1 2.1 2.3 2.3 2.1 2.1 2.2 2.2 1.9 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 4.1 3.9 3.8 3.8
Crude oil price NOK (level) 9 96  142  252  219  197  205  257  351  414  385  360  354  350
 
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 29 May 2007. Published 31 May 2007.