The boom is over

Weak developments throughout last year

According to the preliminary national accounts, the GDP for Mainland Norway increased by 1.8 per cent last year following 0.8 per cent growth the year before. Nearly 1/3 of the growth in the activity level of the mainland economy last year can be attributed to surging power-supply production resulting from the unusually heavy precipitation that year. The mainland economy showed a generally weak trend throughout the year, with a virtual standstill in both production and demand. Employment, too, showed signs of levelling out, but went up nearly ½ per cent for the year as a whole, about the same as in 1999. For the first time in eight years there was rising unemployment on an annual basis, though very moderate. Labour force participation nevertheless maintained the high level from 1998 and 1999. The preliminary figures also indicate rising growth in labour productivity following a weak trend the two preceding years.

Wage growth declined in 2000 for the second year in a row. However, a result of 4.3 per cent per normal man-year is still higher than the wage growth of Norways most important trading partners. With a 3.1 per cent growth in the consumer price index, real wages also declined, dipping below the productivity rate in the mainland economy for the first time in six years. The powerful growth in oil prices over the past two years helped bring the current external balance surplus to nearly NOK 200 billion last year, almost NOK 150 billion more than in 1999.

Stable unemployment and diminishing inflation ahead

In the same way that power production last year bolstered GDP growth in Mainland Norway, it is expected to hamper growth in 2001. The growth in GDP for Mainland Norway excluding the gross product in the power sector, is expect to increase gradually from 0.7 per cent in 1999 and 1.3 per cent in 2000 to nearly 2 per cent in 2002. Unemployment is expected to remain stable those two years.

Our estimates are based on the approved financial policy for 2001 and a slightly expansionary fiscal policy in 2002. The money market interest rate is expected to decline a bit in the latter half of this year and to keep declining somewhat from the next turn of the year. We believe the krone will gain slightly against an import-weighted currency basket both this year and next. Moreover, we estimate that oil prices will decrease a bit compared to the level in 2000, but the current external balance surplus nevertheless appears to be well over 10 per cent of GDP both this year and next.

 

The growth in Norwegian export markets is expected to decline this year and next year. Market growth will thus be clearly lower than in the past five years, but will still be above the average for the past 20 years. A relatively strong rise in Norwegian costs has contributed toward a loss of market share, a trend we expect will continue this year. In 2002 we expect that a period of more even cost trends at home and abroad can contribute toward an somewhat more parallel trend between Norwegian exports of traditional export goods and demand in the export markets.

In spite of the estimated higher growth in households real disposable income, we expect lower growth in households' consumption and rate of saving this year than last. The main reason is the high real interest rate. This trend must also be seen in light of the fact that household consumption declined through the latter half of last year. In 2002 we estimate that an even higher growth in household incomes will contribute toward both greater consumption and higher saving.

On the whole, the investment trend is not expected to have a strong impact on the mainland economy either this year or next. Investments in public administration and in mainland businesses will apparently decline somewhat in both years, while investments in homes may show a relatively strong increase. Oil investments are expected, though with much uncertainty, to remain at last years level in 2001, and then increase a bit next year, as a result of the high oil prices after 1998.

The adopted tax arrangement will contribute toward a high 12-month growth in the consumer price index in the first six months this year. In the latter six months the slashing of food VAT in half as of 1 July, lower oil prices and a stronger krone exchange rate will probably contribute toward an appreciable drop in the inflation rate, bringing the annual growth down to 2.5 per cent. In 2002 a continuation of the tax programme for 2001 will further lower the inflation rate in the first half-year, before the direct effects of the food VAT reform wear off in the second half of 2002.

The wage growth calculated per normal man-year is expected to remain somewhat above 4 per cent this year and then fall a bit next year. Because of the increase in holiday days, the hourly wage cost increase will be higher. At the same time, growth in labour productivity in mainland business and industries is expected to remain high the next two years, as opposed to what it was at the end of the economic boom in the 1990s.