Slow growth in Norwegian economy

Preliminary figures from the quarterly national accounts indicate that the growth in production in Norwegian economy came close to a halt throughout 2002. GDP for Mainland Norway increased on an annual basis by 1.3 per cent from 2001 to 2002, but calculated as growth throughout the year, the increase in 2002 was a modest 0.5 per cent. The economic slowdown throughout recent years hence led the Norwegian economy into an evident cyclical growth recession in 2002.

Unemployment increasing

Low economic growth internationally – together with a strict monetary policy topping several years of impaired competitive strength for Norwegian establishments due to strong growth in salaries, are important factors behind the weak growth. The ongoing decrease in investments in Norwegian mainland establishments – after the period of strong economic expansion in the end of the 1990s, contributed to the downturn. Oil investments went down as well. Employment decreased throughout the year, and albeit the growth in the labour force came to a stop, unemployment increased considerably.

Monetary policy changed

During recent months the monetary policy is markedly changed. Interest rates have been lowered considerably and the NOK value is down. The outlook is for further decline in interests and the NOK value – without jeopardizing the inflation goal for the monetary policy. Isolated seen – this may increase growth, as will a strong increase in oil investments. Still – the economic growth will most likely remain low. Neither the contractionary effects of weakened competitive power from earlier years, nor the decline in mainland establishments' investments are yet exhausted. High electricity prices throughout the winter this year are reducing the purchasing power for the households. Furthermore, the growth in wages will definitely be lower than last year's.

Upswing in 2004

First in 2004 there is reason to believe that the expansive factors from this year, together with an expected upswing in international economy – will influence the activity level. The assumption is that a possible Iraq war will remain a local conflict, with small real economic consequences for international economy. GDP growth for Mainland Norway is expected to increase from 0.5 per cent in 2003 to close to 2.5 per cent in 2004 and 2005. To begin with the employment effect of increased production is modest, a decrease in employment is expected and continued increased unemployment throughout 2003 and 2004. At the end of 2004, however, the cyclical trough will be passed, and in 2005 unemployment is expected to come slightly down.

Competitiveness matters

Because interest rates in the Euro area are expected to increase toward the end of this period, the differential in interest rates against the NOK will be reduced, and this will contribute to weaken the NOK further. It is assumed that the Euro in 2005 will cost NOK 8.15 kroner, not far from the target zone for the Euro during the previous stable exchange rate regime. This must be seen in view of the expectations about the amount of oil money to be spent in the Norwegian economy – and with that the necessity of weakening Norwegian establishments' competitive power – have been exaggerated. The strong NOK and the fall in international stock markets have reduced the value of the Petroleum Fund, and room for an expansive fiscal policy is reduced in the short run. Nor in the long run is the policy rule for the fiscal policy conducive to a shopping party, and any possible fiscal counter-cyclical policy must therefore be reversed within few years. A lesson to learn from 2002 is that securing the competitiveness of exposed industries should be a central political consideration in a small, open economy like the Norwegian one.