Pressures in the Norwegian economy have been reduced this year. Wage settlements indicate an average wage growth of about 4^2 per cent from 1998 to 1999. This should be viewed as rather moderate, given the large carry-over from last year. Norwegian wage growth may then come down in line with our trading partners next year.

Furthermore, the Norwegian krone has strengthened and is back at the levels seen last summer. Norges Bank (the Central Bank) has lowered its key deposit rate by altogether 1.5 per cent since January 1999.

In the years from 1993 through 1998, the growth of the Norwegian economy was above its historical trend. In this period, mainland GDP growth (which excludes petroleum and other offshore activities) averaged 3^3 per cent annually. Strong job creation contributed to a significant increase in the employment rate and unemployment fell. At the same time, inflation pressures for a long period remained subdued due to a flexible response in the labour market and low imported inflation. However, increasing imbalances in the labour market contributed to a significant wage growth in 1998, almost twice the corresponding growth rate of Norway’s main trading partners. To restore the balance of the economy, the government proposed a tight 1999 Fiscal Budget.

Fiscal policy

To ensure a balanced economic growth and a high level of employment over the medium term, price and wage inflation must be brought in line with the corresponding rates of our trading partners. With pressures still prevailing in parts of the economy, fiscal policy should be kept tight. Allowing for some new expenditure items that will not be covered by reduced spending or increased revenues, there will be a modest adjustment in the fiscal stance. The amendments to the budget adopted in December are generally balanced, with the exception of items totalling NOK 1.7 bn. This amount corresponds to expenditures related to the Kosovo crisis, primarily help for refugees.

The main features of fiscal policy in 1999 as presented in the Revised National Budget are:

• A fiscal tightening of ^2 per cent of mainland GDP, as measured by the change in the non-oil cyclically adjusted deficit net of interest payments.
• A real underlying growth in Fiscal Budget expenditure of 1^2 per cent from 1998 to 1999.
• Taxes and excises, excluding child benefits, are reduced (in real terms) as a consequence of changes in rules by about NOK 620 mill (on an accrued basis). Paid taxes and excise duties, excluding child benefits, are estimated to increase by NOK 370 mill.
• The non-oil Fiscal Budget deficit is estimated at NOK 10.9 bn in 1999.
• The allocation to the Government Petroleum Fund, the fund established in 1990 to accumulate public financial wealth abroad, is estimated at NOK 26.8 bn after the non-oil budget deficit has been covered. The total surplus, including interests and dividends on accumulated capital, is estimated to NOK 30.5 bn in 1999. The total capital of the Fund is estimated at NOK 203 bn by the end of 1999.

The General Government Fiscal Balance is estimated to show a surplus (net lending) of 3.9 per cent of GDP, and the General Government gross debt is estimated at 25 per cent of GDP at the end of 1999.

Monetary policy

When monetary policy is aimed at stabilising the Norwegian krone against European currencies, Norwegian interest rates must over time be expected to be near the European level. Fiscal policy has a main responsibility for ensuring that developments in aggregate demand are compatible with balanced growth in the Norwegian economy. Within the margin of manoeuvre established by aiming at exchange rate stability, interest rates can be adapted to the cyclical situation. Monetary policy also contributes to stabilising the Norwegian economy by underpinning income policy.

In the event of significant changes in the exchange rate, monetary policy instruments shall be oriented with a view to returning the exchange rate over time to its initial range. However, there are limitations to the extent to which Norges Bank can use instruments in the form of interest rate changes and currency market interventions to maintain exchange rate stability. In the event of significant changes in the exchange rate, Norges Bank must therefore assess to what extent it is appropriate to use instruments in the light of the conditions in the foreign exchange market and the situation in the Norwegian economy.

Since the beginning of 1997, there have been periods of appreciation and depreciation pressures on the krone. The pressures on the krone exchange rate have occurred in periods with large fluctuations in oil prices and in periods of turbulence in international currency markets. In most of this period, the krone still remained within or near the initial range, as defined in the Exchange Rate Regulation. The fluctuations in the exchange rate have been relatively moderate compared with the experiences of other small countries with a floating exchange rate. Nor have these fluctuations exceeded the magnitude there was reason to envisage when the Exchange Rate Regulation was adopted in the spring of 1994.

After having reduced its key deposit rates three times this year, by altogether 1.5 per cent, Norges Bank’s deposit and lending rates are 6.5 and 8.5 per cent, respectively, i.e. 4 per cent above the corresponding rates of the European Central Bank.

General outlook

Economic growth in the coming years is expected to be considerably weaker than in recent years. The macroeconomic projections for 1999 point to a marked slowdown of growth in the Norwegian economy:

• Mainland GDP is estimated to grow by ^3 per cent in 1999. Total GDP, which includes petroleum and shipping, is expected to increase by close to 1^2 per cent in 1999
• Private consumption is projected to increase by 2^1 per cent in 1999. Slowing growth in wages and employment is expected to dampen household spending.
• Higher interest rates contributed to a sharp drop in residential investments towards the end of 1998. Despite an expected pick-up in the course of this year, driven by increased real estate prices and reduced capacity constraints in the construction sector, residential investment is estimated to fall by 5^3 per cent from 1998 to 1999.
• After several years of strong growth, mainland business fixed investments are projected to fall by 5^2 per cent this year, owing largely to a double-digit drop in investments in manufacturing, reflecting falling commodity prices, lower profits and weak external conditions.
• Petroleum investments are estimated to decline by almost 13 per cent in 1999, following a 26 per cent increase last year.
• Traditional merchandise exports are projected to grow by a moderate 2 per cent, reflecting weak world demand. However, the current account balance is expected to move into a surplus of NOK 7.5 bn, corresponding to 0.7 per cent of GDP, following a deficit of NOK 16.3 bn in 1998.
• With GDP growth slowing, employment growth is expected to come down to ^1 per cent this year, pushing the unemployment rate up moderately to an estimated 3.5 per cent.
• The growth in consumer prices is estimated at 2.4 per cent from 1998 to 1999. Average wage growth is estimated at 4^2 per cent in 1999.

As a technical assumption, the oil price is assumed to average NOK 110 per barrel in 1999.

Main economic indicators

Key projections for the Norwegian economy. Volume change from previous year, pct.

Source:Statistics Norway and Ministry of Finance

Key figures for the petroleum sector

Key figures for the Fiscal Budget (incl Social Security) and Government Petroleum Fund before loan transactions. NOK billion

Source: Ministry of Finance