Higher unemployment, lower interest rates

Two factors in particular are influencing Norway's current economic trend. One is Norway's more expansionary fiscal policy resulting from the new rule concerning expected returns on Norways petroleum assets. The other is the weak global economy. This expansionary fiscal policy has helped boost the possibility for a demand-driven inflation rate increase in Norway. As a result, Norges Bank has maintained a high interest rate while our trading partners have lowered theirs. In spite of a significant drop in oil prices this autumn, the high Norwegian interest rate has helped keep the Norwegian krone strong. Last year's international recession was worsened by the dramatic events in New York on 11 September and the subsequent war in Afghanistan. This has resulted in a decline in both the volume and the price of traditional Norwegian exports.

Rate drop

Now more than earlier, the global economic outlook is considered much more uncertain, and possibilities for stimulating the economy through a more expansionary monetary policy are being put to the test in many countries. Hence theres no guarantee of an upswing in 2002. Recently weve also seen rising unemployment in Norway as well. This, together with weak profitability trends in competitive businesses and an imported low price inflation, tends to reduce the underlying wage and price inflation in the future. With the shift in the global economy and the prospect of lower domestic inflation, theres now greater reason to expect that the contractionary monetary policy in Norway will be changed and that, in the near future, Norwegian interest rates may fall even further than previously assumed. Although its still the case that Norways fiscal policy will also be directed at stabilizing the economy, it is reasonable to assume – in view of the agreed fiscal-policy stimulus and high Norwegian interest rate – that future economic stimuli will commence with lower interest rates.

Growth prospect adjusted downward

With a stronger growth in consumption by Norwegian households next year and a virtually unchanged level of investments, the aggregate demand from households and mainland companies may increase somewhat in the future compared with the growth rate in 2001. However, we have downwardly adjusted the growth in domestic demand significantly since our last report on the economy. The same applies to manufacturing and employment. Some of the downward revision is attributed to weaker international economies, which affect exports as well as domestic activity and demand. Moreover, Norways fiscal policy has changed from what we assumed in our September report, when we had to presume how politicians would balance the more expansionary fiscal-policy between reduced taxes and increased public demand. The ratified arrangement by the current Government clearly provides less stimulus toward domestic demand than we had assumed. That is because a policy stressing lower taxes and government fees is less conducive toward boosting demand in the short and medium-long term than one that places greater emphasis on public spending on goods and services.