After several years of strong growth, the Norwegian economy is set to slow markedly in 1999 and 2000. Economic policy is geared at obtaining a soft landing. In its budget for 2000, the Government proposes a neutral fiscal stance. Pressures in the economy have been reduced this year. Wage settlements indicate an average wage growth of about 4^3 per cent, reflecting mainly a large carry over from last year. Wage growth is expected to come down in line with our main trading partners from next year onwards.

Economic outlook
Economic conditions in Norway are generally favourable. After a strong cyclical upturn in the years 1993-1998, employment has grown to a record high level, and unemployment has fallen to about 3 per cent. A tight labour market led to a sharp acceleration in wages in 1998, but wage growth has been reduced markedly this year. The increases in oil prices imply significant surpluses both in government budgets and on the current account of the balance of payments. Partly due to these factors, the krone exchange rate has returned to its previous levels, after having depreciated through the summer and fall 1998.

In the years from 1993 through 1998, the Norwegian mainland economy expanded at an average annual rate of 3^3 per cent. Strong job creation contributed to a significant increase in the employment rate and unemployment fell. At the same time, cost 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, at about twice the corresponding rate of Norway’s main trading partners.

Developments through the end of 1998 and into 1999 indicate that pressures in the mainland economy have subsided. In particular, activity in some manufacturing sectors of the economy has levelled off as a result of lower demand for goods and services supplied to the petroleum sector. In other parts of the economy, the situation continues to be characterised by high capacity utilisation and a shortage of labour. Wages this year will still rise at a faster pace than in main trading partner countries.

Mainland GDP growth is expected to slow from 3^1 per cent in 1998 to ^2 per cent in 1999, driven mainly by a marked contraction in investments, particularly in the petroleum sector. For 2000, a modest rise in mainland GDP growth is projected as export growth picks up. Private consumption will provide a solid impetus to growth both this year and next. Total GDP is estimated to increase by about 1 per cent in 1999 and close to 3 per cent in 2000, mainly due to higher oil production.

The economic prospects vary between different sectors of the mainland economy. On the one hand, the production outlook in manufacturing appears to be weak, partly reflecting the projected contraction in petroleum investments this year and next. On the other hand, the growth outlook remains favourable for service sectors and other industries, which primarily supply goods and services to the domestic market.

With GDP growth slowing, employment growth is expected to be moderate this year and next. The unemployment rate is projected to remain unchanged from 1998 to 1999 at 3.2 per cent, increasing to 3.6 per cent in 2000.

Consumer price inflation is forecast to slow from 2.2 per cent this year to 2 per cent next year, reflecting low growth in import prices and lower wage inflation.

As pressures in the economy subside, wage growth is expected to come down from 6^1 per cent in 1998 to 4^3 per cent in 1999, slowing further to 3^1 per cent in 2000.

After showing a deficit in 1998 for the first time since 1989, the current account of the balance of payments is projected to show a surplus of close to NOK 33 billion this year and NOK 87 billion next year.

The forecasts are based on an oil price assumption of NOK 125 per barrel in both 1999 and 2000.

Economic policy
The main challenge to economic policy in the present situation is to bring price and cost inflation in line with that of our trading partners. This is necessary in order to maintain high employment and low unemployment, as well as to prevent high interest rates in the years ahead. It is therefore important that wage growth as early as next year will be brought down to the same level as in trading partner countries, estimated at a little more than 3 per cent.

Fiscal policy has a main responsibility for ensuring balanced economic growth. Together with continued and strengthened co-operation with the social partners, the fiscal budget for 2000 should contribute to moderate price and cost inflation.

The main features of fiscal policy in 2000 as presented in the National Budget are:

- A neutral fiscal stance, as measured by the change in the non-oil, cyclically adjusted budget surplus net of interest payments.

- An increase in real terms in tax and excise payments of a little more than NOK 1.9 billion from 1999 to 2000, including changes in the child benefit scheme. Accrued taxes and excise duties, including changes in the child benefit scheme, are estimated to rise by around NOK 2.9 billion.

- A real underlying growth in Fiscal Budget expenditure of 2^2 per cent in 2000 measured in relation to estimates for the 1999 accounts.

- A non-oil Fiscal Budget deficit of NOK 13.3 billion. This deficit will be covered through a transfer from the Government Petroleum Fund.

- The Central Government’s net cash flow from petroleum activities is estimated at NOK 85.1 billion. The net allocation to the Government Petroleum Fund, after the non-oil deficit has been covered, is accordingly estimated at NOK 71.8 billion. In addition, interests and dividends on accumulated capital in the Petroleum Fund are projected at NOK 7.4 billion, entailing a total surplus on the Fiscal Budget and Petroleum Fund of NOK 79.2 billion.

- General Government net lending (corresponding to the "Maastricht definition" of general government financial balances) is estimated at NOK 91.4 billion or 7.4 per cent of GDP.

In the proposed budget for 2000 the Government has given special priority to inter alia development aid, research and education and a follow up of the reforms in the health care sector.

Monetary policy is aimed at maintaining a stable krone exchange rate against European currencies. In the event of significant changes in the exchange rate, monetary instruments shall be oriented with a view of returning the exchange rate over time to its initial range. There are limitations in the scope for managing the exchange rate in the short term. It is, however, important that monetary policy contributes to stable expectations concerning exchange rate movements. Economic policy as a whole must also be compatible with low price and cost inflation. With the objective of a stable exchange rate, fiscal and incomes policy must generally bear the main responsibility for stabilising growth in domestic production and demand.

In the summer of 1998, the fall in oil prices, international financial turbulence and imbalances in the Norwegian economy contributed to a sharp depreciation of the krone exchange rate and a doubling of Norwegian short term interest rates. In 1999, a tight fiscal budget, higher oil prices, a considerable interest rate spread against the corresponding euro area rates and moderate wage settlements have brought the krone back to previous levels. This has provided the basis for interest rate reductions totalling 2^2 percentage points since the beginning of the year. However, Norwegian money market rates are still a good 3 percentage points higher than corresponding euro rates.

The Government indicated in the Revised National Budget 1999 that it would consider expanding the list of countries and areas eligible for investments by the Government Petroleum Fund. The Government plans to amend the regulation for management of the Petroleum Fund so as to add Brazil, Mexico, South Korea, Taiwan, Thailand and Greece to the list of eligible markets, with effect from 1 January 2000.

Norway’s public finances are generally sound compared to that of many other countries. However, during the next century, increased pension outlays will put pressure on government budgets. In 1998, two official reports dealing with pension policy problems were submitted. In the National Budget, different measures are discussed aiming at stimulating higher labour force participation among older workers. The Government intends to follow up the focus on pension policy issues in the Long Term Programme 2002-2005 that will be presented early in 2001.

Key projections

Central and General Government net lending. NOK million

1) Including consolidated and Central Government accrued, unrecorded taxes.

Sources: Statistics Norway and Ministry of Finance.

Key figures for the Fiscal Budget (incl. Social Security) and Government Petroleum Fund. NOK billion. Accrued values.

Source: Ministry of Finance.

Key figures for the petroleum sector