Economic trends for Norway and abroad

Stronger cyclical upturn

Published:

The Norwegian economy is about to enter a small boom, but the international economy may be facing a modest cyclical downturn in the course of the next year. If this happens, Norwegian interest rates may be left unchanged in the next years. If the recovery in the industrialised countries continues, however, Norwegian interest rates will increase.

Following the cyclical trough in the spring of 2003, the Norwegian economy has experienced a marked cyclical upturn. The underlying annualised growth rate in GDP for mainland Norway has been 3.4 per cent. In the same period, the US economy has grown at a rate of 4.5 per cent, compared with a modest 1.5 per cent in the euro zone. In line with previous analyses, estimates suggest that the Norwegian output gap will become positive in early 2005. We must go back to the 1970s to find a slump as mild as the one the Norwegian economy then will have been through.

Continued production growth

The growth in production is expected to accelerate next year, as oil investment is expected to increase by a substantial 23 per cent. This comes on top of the effects of low interest rates and a somewhat expansionary fiscal policy. As a result, the recovery in 2005 will be stronger than previously anticipated and the period of prosperity extended to after 2007. On the other hand it is expected that the international economy will peak next year and that this development – together with an expected reduction in oil investment – will contribute to weaker production growth through 2006 and 2007. This means that the forthcoming period of prosperity not will be as strong as it was at the end of the 1990s.

Lower unemployment

Norway's unemployment – which is expected to average 4.4 per cent in 2004 – will fall to 3.7 per cent in 2006. Inflation will remain low, however, and there will be no need or room for increased interest rates to keep inflation in check, provided that the cyclical development internationally remains weak and increased interest rates in the euro zone are avoided. The 2½ inflation target is within reach in 2007 if nominal interest rates are left unchanged. Given that this happens, a continued strong growth in consumption and housing investment is expected, parallel with an equal fall in household saving and net financial investment, resulting in increased financial vulnerability.

Potential rise in interest rates

If the cyclical upturn internationally continues into 2006 and 2007 and results in increased interest rates, there will be both need and room for increased Norwegian interest rates. In general, stronger growth abroad will generate inflation impulses in the Norwegian economy, because higher international price growth and improved profitability in Norwegian manufacturing will result in higher wage growth. It is therefore unlikely that the inflation target will be reached in 2007 unless Norges Bank increases the key rate. Given that this happens, the Norwegian money market rate may double compared with the current low nominal rates. This will contribute to curb growth in consumption and investement, with a strong effect on the housing market in particular. Nevertheless, GDP growth for mainland Norway will remain unaffected, although a larger part of the growth will take place within manufacturing industries at the expense of sheltered industries. Such a development will not change the prospects of a period characterised by a positive output gap in the Norwegian economy from 2005 to 2007.

Main economic indicators 1997-2007. Accounts and forecasts. Percentage change from previous year unless
otherwise noted
 
  1997 1998 1999 2000 2001 2002 2003* Forecasts
  2004 2005 2006 2007
 
Demand and output                      
Consumption in households and non-profit organizations 3.2 2.7     3.3 3.9 1.8 3.0 3.0 4.3 4.6 4.6 4.6
General government consumption 2.5 3.3 3.2 1.3 5.8 3.7 1.4 1.7 1.9 1.4 1.7
Gross fixed investment 15.5 13.1 -5.6 -3.6 -0.7 -1.0 -2.0 7.8 10.7 1.9 -2.3
Extraction and transport via pipelines 24.9 22.2 -13.1 -23.0 -4.1 -5.3 16.9 9.7 23.1 -2.6 -14.2
Mainland Norway 11.8 8.6 -0.1 -1.2 4.3 2.5 -2.2 5.0 5.2 3.4 2.0
Firms 9.3 8.9 -1.6 0.1 2.5 4.7 -4.9 5.0 4.2 3.6 1.5
Housing 12.1 7.8 3.0 5.6 8.2 -0.6 -5.3 11.6 11.1 5.4 4.1
General government 18.0 8.6 0.5 -11.4 4.2 1.0 9.2 -2.4 0.0 0.0 0.0
Demand from Mainland Norway 1 4.5 3.9 2.6 2.3 3.2 3.1 1.6 3.7 4.0 3.5 3.4
Stockbuilding 2 0.8 0.4 -0.5 0.8 -1.2 -0.2 -0.8 0.8 0.0 0.0 0.0
Exports 7.7 0.6 2.8 4.0 5.0 -0.8 1.6 1.2 3.6 2.9 2.9
Crude oil and natural gas 4.1 -5.8 0.4 4.1 8.8 1.9 -0.6 0.6 3.0 1.7 2.7
Traditional goods 7.6 5.4 2.2 5.1 1.5 0.4 5.1 3.0 5.0 2.5 0.6
Imports 12.4 8.5 -1.8 2.7 0.9 0.7 2.2 8.4 7.4 4.8 3.0
Traditional goods 8.5 9.0 -1.9 3.8 3.6 3.4 4.3 10.3 7.2 5.4 3.9
Gross domestic product 5.2 2.6 2.1 2.8 2.7 1.1 0.4 2.8 3.9 2.5 2.4
Mainland Norway 4.9 4.1 2.7 2.5 2.1 1.4 0.7 3.5 3.6 2.3 2.0
Manufacturing 3.6 -0.7 0.1 -0.8 -0.1 -0.1 -3.9 1.5 3.0 1.4 -0.9
                       
Labour market                      
Total hours worked, Mainland Norway 2.5 2.3 0.6 -0.7 -1.2 -1.2 -1.2 1.6 1.4 0.5 0.1
Employed persons 2.9 2.5 0.8 0.4 0.2 0.1 -0.6 0.1 1.1 0.8 0.2
Labor force 3 2.1 1.6 0.8 0.7 0.3 0.4 0.0 0.0 0.6 0.6 0.5
Participation rate (level) 4 72.7 73.6 73.8 74.0 73.9 73.8 73.3 72.8 72.6 72.4 72.1
Unemployment rate (level) 4.0 3.2 3.2 3.4 3.6 3.9 4.5 4.4 4.0 3.7 4.0
                       
Prices and wages                      
Wages per standard man-year 4.8 6.5 5.3 4.5 5.1 5.3 3.9 3.8 3.7 3.8 4.0
Consumer price index (CPI) 2.6 2.3 2.3 3.1 3.0 1.3 2.5 0.5 1.2 2.0 2.5
CPI adjusted for tax changes and excluding energy products (CPI-ATE) .. .. .. .. 2.6 2.3 1.1 0.3 1.1 2.1 2.5
Export prices, traditional goods -0.6 2.0 -0.4 9.9 -1.6 -8.9 -2.2 8.2 -0.4 -2.1 0.7
Import prices, traditional goods -1.2 1.1 -2.9 5.1 -0.7 -7.5 0.4 3.6 -2.1 -0.4 1.8
Housing prices 5 10.9 9.7 9.4 14.1 7.2 4.0 1.6 10.0 4.3 4.8 3.3
                       
Income, interest rates and excange rate                      
Household real income 4.0 5.9 2.8 3.7 -0.2 7.3 4.7 4.9 3.9 -0.5 2.0
Household saving ratio (level) 2.9 5.9 5.6 5.2 4.2 9.0 10.1 10.2 9.7 5.1 2.6
Money market rate (level) 3.7 5.8 6.5 6.8 7.2 6.9 4.1 2.0 2.0 2.0 2.0
Lending rate, banks (level) 6 6.0 7.4 8.4 8.1 8.9 8.5 6.6 4.3 4.2 4.2 4.2
Real after-tax lending rate, banks (level) 1.7 3.0 3.7 2.6 3.3 4.8 2.3 2.6 1.7 1.0 0.5
Importweighted krone exchange rate
(44 countries) 7		 -0.4 2.5 -1.2 2.9 -3.1 -8.5 1.3 3.0 -2.9 1.3 1.5
                       
Current account                      
Current balance (NOK billion) 70.5 0.5 66.4  228.9  235.2  193.9  200.3  237.8  246.8  212.3  212.2
Current balance (per cent of GDP) 6.3 0.0 5.4 15.6 15.4 12.8 12.8 14.1 14.0 11.8 11.3
                       
International indicators                      
Exports markets indicator 9.8 7.8 7.5 11.8 -1.2 2.4 3.9 4.8 5.1 2.8 0.5
Consumer price index, euro-area 1.6 1.1 1.1 2.3 2.1 2.3 2.1 2.2 1.8 1.6 1.6
3 months interest rate, euro 4.2 4.2 2.9 4.4 4.2 3.3 2.3 2.1 2.1 2.1 2.1
Crude oil price NOK (level) 8  135 96  142  252  219  197  205  257  229  211  218
 
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   Freeholder.
6   Households' borrowing rate in private financial institutions. Yearly average.
7   Increasing index implies depreciation.
8   Average spot price Brent Blend.
Source:  Statistics Norway. The cut-off date for information was 14 December 2004. Published 16 December 2004.