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Economic trends for Norway and abroad

Tightening of the economy

Published:

The strong growth in the economy continued at a steady pace throughout 2006. The sharp growth in employment last year is the strongest Norway has ever experienced. The combination of higher interest rates, reduced growth in petroleum investments and somewhat lower growth among our trading partners will contribute to dampen the upswing, but we anticipate further reduction in unemployment. Inflation will increase, but at a moderate pace.

For the third consecutive year, GDP for mainland Norway increased by around 4.5 per cent in 2006. The economic upswing materialised in record high employment growth in 2006, with an unprecedented increase in number of employees. Unemployment fell sharply and is now on par with the cyclical peak of the late 1990s. Despite the tightening labour market, there have been few indications of increased inflation or wage growth, although there are exceptions. In response, Norges Bank has raised the benchmark rate by 2 percentage points in the last one and a half years.

Based on a somewhat higher estimate for demand abroad and in mainland Norway, our growth outlook for 2007 has been revised upwards in relation to our last report on economic trends. In addition, we anticipate slightly higher interest rates in the euro zone. This leads us to believe that Norges Bank will raise the interest rate more than we previously anticipated. We expect the key interest rate to be increased by a further 1 percentage point and that the money market rate will thus reach 5 per cent at the end of 2007, but it will remain at this level for some time. This means that the interest rate difference between Norway and the euro zone will reach 1 percentage point in the course of the year, which will probably result in a strengthening of the NOK in the time ahead. Given the outlook of increased pressure in the economy, the forecast for 2008-2010 is now based on a somewhat less expansionary fiscal policy than a mechanic application of the fiscal rule would imply. These are some of the factors behind our anticipation of unchanged interest rates after 2007.

The lack of spare capacity is now hampering growth ahead in several areas. The combination of higher interest rates, a stronger NOK, reduced growth internationally and moderate growth impetus from the fiscal policy also point in the direction of a more moderate growth after 2007. Despite this, we believe that the Norwegian economy will be characterised by a boom and that unemployment will remain below 3 per cent in the period to 2010.

We anticipate that the tightening of the labour market combined with high profitability in business and industry will contribute to an increase in wage growth in the time ahead. A pronounced decline in electricity prices from 2006 to 2007, together with a relatively strong NOK may push CPI growth down to below 0.5 per cent this year. Thus, real wage growth may reach record levels. Despite anticipated nominal wage growth of 5 per cent in the following years, we anticipate that the stronger NOK and negative price impulses from low cost countries will contribute to an inflation rate which is clearly below 2.5 per cent. We estimate that real wages will grow by a total of 15 per cent during the next four years.

Main economic indicators 1998-2010. Accounts and forecasts. Percentage change from previous year unless otherwise noted
 
  1998 1999 2000 2001 2002 2003 2004 2005* Forecasts
  2006* 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 4.3 3.8 3.1 3.5 3.3
General government consumption 3.4 3.1 1.9 4.6 3.1 1.7 1.5 1.8 2.2 2.8 3.0 2.6 3.0
Gross fixed investment 13.6 -5.4 -3.5 -1.1 -1.1 0.2 10.2 11.2 8.9 5.8 2.3 2.5 3.3
Extraction and transport via pipelines 22.2 -13.0 -22.9 -4.6 -5.4 15.9 10.2 19.1 9.1 3.8 2.9 4.4 3.6
Mainland Norway 9.4 0.2 -1.4 3.9 2.3 -3.6 9.3 9.1 8.9 5.7 2.3 2.1 3.5
Industries 10.4 -1.0 -0.4 2.5 4.0 -11.6 8.4 10.2 10.5 6.6 3.1 2.3 2.5
Housing 7.7 3.0 5.6 8.1 -0.7 1.9 16.3 14.5 6.4 4.4 0.3 0.9 3.5
General government 8.5 0.4 -11.2 2.7 1.7 10.4 2.5 -0.5 8.9 5.8 3.4 3.5 5.9
Demand from Mainland Norway 1 4.2 2.9 2.6 3.0 3.0 1.4 5.0 3.9 4.5 3.9 3.0 3.0 3.2
Stockbuilding 2 0.4 -1.0 1.2 -1.3 0.1 -0.2 1.2 0.4 0.6 0.0 0.0 0.0 0.0
Exports 0.7 2.8 3.2 4.3 -0.3 -0.2 1.1 0.7 1.5 3.6 3.4 0.5 3.4
Crude oil and natural gas -5.8 0.4 3.8 6.6 2.4 -0.6 -0.5 -5.0 -5.4 3.8 3.7 -2.9 2.3
Traditional goods 5.5 2.3 3.3 1.8 0.6 2.9 3.4 5.2 6.5 3.1 3.1 3.6 5.0
Imports 8.8 -1.6 2.0 1.7 1.0 1.4 8.8 8.6 9.1 5.2 4.1 4.2 4.7
Traditional goods 9.3 -1.9 2.5 4.5 3.0 5.2 10.9 8.2 10.6 5.6 3.4 4.2 5.0
Gross domestic product 2.7 2.0 3.3 2.0 1.5 1.0 3.9 2.7 2.9 3.3 2.6 1.5 2.7
Mainland Norway 4.1 2.6 2.9 2.0 1.4 1.3 4.4 4.5 4.6 3.3 2.3 2.4 2.7
Manufacturing -0.9 0.1 -0.6 -0.5 -0.4 3.0 5.7 3.4 4.6 1.8 0.2 1.4 1.8
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 2.0 1.5 1.1 1.4
Employed persons 2.7 0.9 0.6 0.4 0.4 -1.0 0.5 1.0 3.1 2.0 1.0 1.2 0.8
Labor force 3 1.7 0.9 0.9 0.5 0.7 -0.4 0.5 1.1 1.9 1.3 1.1 1.2 0.9
Participation rate (level) 4 73.9 74.2 74.4 74.5 74.6 73.8 73.6 73.8 74.4 74.7 74.8 74.9 74.9
Unemployment rate (level) 3.2 3.2 3.4 3.6 3.9 4.5 4.5 4.6 3.4 2.7 2.8 2.7 2.8
Prices and wages                          
Wages per standard man-year 6.5 5.4 4.6 5.3 5.4 3.7 4.6 4.0 4.1 5.5 4.8 5.4 4.6
Consumer price index (CPI) 2.2 2.3 3.1 3.0 1.3 2.5 0.4 1.6 2.3 0.3 1.9 1.7 1.7
CPI-ATE 5 .. .. .. 2.6 2.3 1.1 0.3 1.0 0.8 1.3 1.6 1.7 1.7
Export prices, traditional goods 1.9 -0.5 11.8 -1.8 -9.1 -0.9 8.5 4.0 11.1 -0.1 -3.1 0.4 1.2
Import prices, traditional goods 0.7 -2.9 6.5 -1.6 -7.2 -0.4 4.0 0.4 4.1 2.6 -1.9 -1.4 -1.1
Housing prices 6 9.7 9.4 14.1 7.1 4.0 1.6 10.1 7.9 12.9 10.7 6.0 4.8 5.6
Income, interest rates and excange rate                          
Household real income .. .. 3.4 -0.3 7.9 4.2 3.8 5.2 -3.5 5.4 3.7 3.7 3.8
Household saving ratio (level) .. 5.0 4.5 3.1 8.4 9.1 7.6 8.9 1.4 4.3 4.9 5.1 5.6
Money market rate (level) 5.8 6.5 6.8 7.2 6.9 4.1 2.0 2.2 3.1 4.6 5.0 5.0 5.0
Lending rate, banks (level) 7 7.9 8.1 8.2 8.8 8.5 6.0 4.1 3.9 4.3 5.6 6.3 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 0.8 3.7 2.6 2.9 2.9
Import weighted krone exchange rate (44 countries) 8 2.5 -1.2 2.9 -3.1 -8.5 1.3 3.0 -3.9 0.6 -0.1 -1.4 -1.0 -0.9
Current account                          
Current balance (bill. NOK) -3.6 69.5  222.4  247.5  192.3  195.9  221.6  300.8  365.7  297.6  288.8  264.2  271.6
Current balance (per cent of GDP) -0.3 5.6 15.0 16.1 12.6 12.3 12.7 15.5 17.0 13.8 13.0 11.5 11.2
International indicators                          
Exports markets indicator 8.5 6.7 11.6 0.7 1.2 3.0 7.0 6.7 9.4 6.5 3.7 4.2 6.5
Consumer price index, euro-area 1.1 1.1 2.1 2.3 2.3 2.1 2.1 2.2 2.2 2.2 2.0 2.0 2.0
3 mths. interest rate, euro 4.2 2.9 4.4 4.2 3.3 2.3 2.1 2.2 3.1 4.0 4.0 4.0 4.0
Crude oil price NOK (level) 9 96  142  252  219  197  205  257  351  414  338  332  329  326
 
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 20 Februar 2007. Published 22 Februar 2007.