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  Developments in individual OECD countries: Norway

Growth, which was already subdued since 1998, slowed further in 2002 as wages and the exchange rate soared, squeezing mainland industry. Activity will remain subdued this year, but should pick up in 2004 as monetary policy easing feeds through and the global economy recovers. The unemployment rate is expected to peak at 4 1/2 per cent, with inflation remaining low.

The authorities should not ease fiscal policy beyond the room for manoeuvre provided by the fiscal guidelines since easing would lead to further crowding-out of exposed industries. Wage moderation is needed to contain cost pressures, and work disincentives stemming from the disability and early retirement schemes should be reduced to stimulate labour supply.
The mainland economy is cooling off

Growth of mainland GDP has continued to ease from the 1998 cyclical peak, to only 1 1/4 per cent in 2002, and the first signs of slack have appeared. Overall GDP (including oil and gas production) grew by 1 per cent. Consumption and government spending stayed buoyant, but business investment fell sharply, taking a further hit in 2002 as businesses anticipated the removal of the investment surtax at the end of the year. Residential investment peaked in 2002 as high interest rates restrained demand and house prices levelled off. Gains in export market share by the traditional (non-oil and gas) sector reported for 2002 are unlikely to be sustained as profit margins have been squeezed. With layoffs accelerating, the unemployment rate edged up to 4.1 per cent by the end of 2002 -- a percentage point above its 1998 low. Core inflation (excluding indirect taxes and energy) dropped below the official 2 1/2 per cent target but headline inflation soared due to a weather-related SURGE in electricity prices during the w inter.

Monetary policy eased after profits were squeezed

Mainland industry has been severely squeezed since the economy peaked in 1998. The large interest rate spread against major currencies and the oil price hike propelled the external value of the krone to record highs. Meanwhile wage increases have averaged 5 1/2 per cent per annum. The external economic environment has also been weakening since the autumn of 2002, prompting the Bank of Norway to cut its official sight deposit rate in three equal steps from 7 to 5 1/2 per cent between December 2002 and March 2003. With the exchange rate falling back considerably as a result, monetary conditions have eased substantially. While further monetary easing cannot be ruled out, the projections assume policy rates to stay on hold as wages may not come down sufficiently to warrant further easing.

Fiscal policy is set to be moderately supportive

On current plans the fiscal stimulus should be modest. The fiscal policy guidelines introduced in 2001 allow the government to channel receipts equivalent to an ex ante 4 per cent real rate of return on the Government Petroleum Fund (which exceeds 40 per cent of GDP) into the budget. The resulting demand impulse is officially estimated to have been around 1/2 per cent of potential mainland GDP in 2002, but this will not be sustained in 2003. A drop in the market value of the capital in the Petroleum Fund -- due to the slump in stock markets and currency appreciation -- has reduced the government's leeway to tap resources from the Fund. Accordingly, fiscal easing stemming from the 2003 budget is only roughly half of that in 2002 and, barring a reversal of the capital losses on the Fund, should not pick up again in 2004.

Activity should pick up

Growth in mainland GDP is projected to recover from 3/4 per cent in 2003 to 1% per cent in 2004. Business and residential investment are set to remain weak but buoyant investment in the oil and gas sector, which is included in mainland demand, could provide an offset. Consumption growth should pick up as employment prospects improve and electricity prices come down. Mainland exports are projected to stay weak initially, but the global recovery should underpin a pick up in 2004. With new gas fields coming on stream, overall GDP should recover from 1 per cent in 2003 to 2 per cent in 2004. Wage growth is projected to come down a little and, with productivity accelerating, underlying inflation should stay on target.

Fiscal slippage could undermine the recovery

If calls for fiscal stimulus are met, monetary conditions may again need to tighten, unless stronger wage moderation provides an offset. Exposed industries would then be squeezed further.


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