Continued tight labour market

Weak developments in third quarter

Seasonally adjusted figures from the quarterly national accounts (QNA) show a levelling out of production and demand in the mainland economy following virtually trend-like growth through the previous year. The number of employees has risen moderately so far this year, in the third quarter being a good ½ percentage point above the average for last year. Also unemployment has gone up slightly from the bottom level around the turn of 1998/99. Consumer prices went up 3.1 per cent from the period January-October last year to the same period this year. This is nearly one percentage point higher than in the euro area and hence clearly above the target figure that Norges Bank (the central bank of Norway) is aiming at.

Monetary policy tightening this year ...

To prevent a higher growth in prices and costs in Norway than those of our trading partners from weakening the krone in the medium term, Norges Bank has raised its benchmark rates for the banks by a total of 1.5 percentage points this year. This has resulted in a money market interest rate of well over 7 per cent and an interest rate differential to the euro area of almost 2 ¼ percentage points. Along with the developments in oil prices and the dollar rate, the interest differential may have helped strengthen the Norwegian krone over the euro this year. The high oil price has also contributed significantly towards bringing the balance of payments surplus up to as much as NOK 126 billion in the first nine months this year.

...curbs activity in the mainland economy

Norges Banks monetary policy tightening probably helped slow down the mainland economy in the 3rd quarter. Experience has shown that households react the most readily to changes in interest rates, and consumption developed weakly in the 3rd quarter. On an annual basis, indications are that consumption in households will not be rising faster this year than last. In spite of the economic upswing experienced by our most important trading partners, also our export of traditional goods will probably not show a stronger increase than in 1999, which is attributable in part to the weakening of the cost-related competitiveness the past few years. The development of petroleum investment is tending to reduce growth in the activity level this year. When the growth in the GDP for Mainland Norway nevertheless appears to increase a bit more in 2000 than in 1999, it is due in part to a certain rise in mainland investments and in part to very strong growth in the production of electric power. Neither employment nor unemployment will change much from 1999 to 2000.

Higher price increases in 2000 than in 1999

With a clearly lower wage carry-over this year than last, the results of the wage settlement and available quarterly information indicate a trend toward lower wage growth on an annual basis. The strong rise in oil prices and certain other raw-materials prices, and a weakening of the krone against an import-weighted curve of our trading partners currencies, have contributed toward a clearly higher price increase this year than in 1999. However, continued high oil prices throughout this year will also help bring the balance of payments surplus up to around NOK 190 billion, corresponding to 13 ½ per cent of the GDP.

Temporary lower GDP growth in mainland economy in 2001

For next year we expect a somewhat weaker development in the GDP for Mainland Norway, before growth again rises somewhat in 2002. This development must be viewed in light of the fact that production in the power sector will probably tend toward a more normal level. Moreover, a clear increase in the real interest rate will in itself help curb growth in demand from Mainland Norway in both years. However, in 2002 this effect will be countered by the fact that low price growth will mean relatively strong growth in the households disposable income. On the other hand, the trend in oil-investments is expected to have a significantly weaker negative impact next year than this year before it again stimulates higher growth in 2002. Seen in isolation, longer holidays will induce companies to want to employ more people in a situation of scarce available resources. With moderate production growth, an expected increase in productivity and growth in labour supply in pace with demographic developments, indications are nevertheless that unemployment may increase slightly. The labour market will remain tight, though, and an additional surge in demand can quickly lead to stronger wage growth and further loss of market share for Norwegian manufacturers.

Lower price increase the next two years

With a relatively stable labour market, wage growth may decline a bit in the next two years. Price increases will also be lower than in 2000. This is due in part to an expected decline in the price of crude oil and a few other raw materials, in part to an expected import-weighted strengthening of the Norwegian krone and, for 2002, also the readjustment of the Norwegian tax system. In all, the tax readjustment will tend to raise price increases on a 12-month basis from January 2001 and then lower price increases again from July. As of January 2002, an inflation-adjusted continuation of the legislated system will tend toward a further decline in price growth before the effects of the tax readjustment wear off as of July 2002. We estimate price increases of 2.5 and 1.4 per cent in 2001 and 2002, respectively.

High surpluses in the balance of payments and government budgets

Even with a clear decline in oil prices in the near future, there are indications of historically high surpluses in the balance of payments and government budgets in the next two years. Considerable parts of these surpluses must be regarded as a transfer of wealth from the North Sea to international securities, though some parts also represent financial saving.