The boom continues

The trend in the Norwegian economy so far this year supports the impression that the pause in growth in the second half of 1998 and the first half of 1999 is over. The activity in the mainland economy increased somewhat more rapidly in the first quarter of this year than in the three previous quarters. Employment also appears to have increased somewhat from the relatively stable level during the previous year, and unemployment now lies at about the same level as in the first half of last year. A marked increase in energy prices and a relatively rapid growth in import prices have meant that the increase in consumer prices so far this year has been greater than last year. Measured with the harmonised consumer price index, inflation is now one percentage point higher in Norway than in the area where the Euro is the currency. In the past half year, Norges Bank (the Central Bank of Norway) has increased its benchmark rates to the banks by 1 1/4 percentage points. The interest rate level in the money market has undergone a corresponding increase, and the financial institutions lending and deposit rates are also on the way up. The combination of a strong dollar and a high oil price measured in dollars helped increase the surplus in the current account balance by NOK 79 billion in the first half, over NOK 30 billion higher than the result for all of 1999.

Stronger demand stimuli this year than last

When it comes to demand, several factors are now contributing to greater growth in the level of activity in the present year than in the past year. A stronger increase in the activity of Norways most important trading partners contributes to a somewhat faster growth in the export of traditional commodities. A higher growth in incomes and a somewhat lower real interest rate than last year indicate that household consumption will increase somewhat faster. In addition, it looks as if the mainland investments will increase slightly again after a decline in 1999. However, the rapid decline in petroleum investments throughout the past year and into the present year will help moderate the growth of aggregate demand and bring about a decrease in industrial production for the second year in a row.

In the next two years, a clear recovery in the real interest rate level can help reduce this years growth in household consumption and mainland investments, while the growth in the export of traditional commodities will remain relatively unaltered. With prospects for further decline in petroleum investments next year, this indicates that the GDP for Mainland Norway may increase somewhat less next year than this year. In 2002 an increase in petroleum investments can help pick up the growth in activity. The historically relatively moderate growth in the mainland economy in 2001 and 2002 must be seen in relation to the isolated effect of the longer holidays and normal calendar variations, which will entail a decline in the number of working days of nearly 1 1/2 per cent in each of those years. Despite an expected increase in the growth in productivity in the coming years, the reduction in the number of working days will help increase the demand for manpower in a situation with few available manpower resources. Even with a growth in the labour supply in excess of that indicated by the demographic trend, it seems likely that unemployment will remain at the current low level.

Lower price increases in the coming years

The results of the wage settlements so far this year, the situation in the labour market and the trend in corporate profitability all tend to support a growth in wages per full-time equivalent man-year of about 4.5 per cent this year compared with 5.2 per cent last year. In 2001 and 2002 the growth in wages measured in this way may decrease somewhat. However, the extension of the annual holiday in the next two years will help maintain the growth in hourly wages. The decline in the oil price in the coming years and a slight strengthening of the kroner relative to the currencies of our trading partners will tend to reduce the price increases in the next two years.

Record high balance of payments surplus

The combination of a strong dollar and a high oil price measured in dollars helped increase the surplus in the current account balance by NOK 79 billion in the first half, over NOK 30 billion higher than the results for all of 1999. Even with a slight decline in the oil price, the surpluses in the current account balance and in the official budgets will be very high in the coming years.