An appropriate policy mix has contributed to improved outlook for the Norwegian economy over the last year. Growth in mainlandNorwayis picking up, and the situation in the labour market has improved. The revised fiscal budget has a broadly neutral effect on the activity level of the mainland economy. Fiscal restraint is important to avoid a renewed strengthening of the Norwegian krone.

During the second half of 2002 and the first half of 2003, the outlook for the Norwegian economy weakened considerably, and unemployment increased. The interest rates were very high by the end of 2002, and the krone exchange rate was strong. Against this background, the fiscal budgets for 2003 and 2004 were framed to facilitate a looser monetary policy stance. The policy mix has proved to be successful in boosting the private sectors of the economy. The weakening of the krone exchange rate since the beginning of 2003 has, together with stronger growth internationally, improved the outlook for exposed industries. Furthermore, the lower interest rates have contributed to an upswing in domestic demand, in particular private consumption.

Fiscal policy

The main features of the revised budget 2004 are:

• A structural, non-oil fiscal deficit in 2004 of NOK 55.2 billion. This implies an excess spending of NOK 21 billion compared to the expected return of the Petroleum Fund. In 2003, excess spending is now estimated at NOK 25 billion.
• An increase in the non-oil fiscal deficit from 2003 to 2004 of 0.4 per cent of Mainland Norway trend-GDP. The budget is assessed to have a broadly neutral effect on the activity in the Norwegian economy.
• A real underlying growth in Fiscal Budget expenditures of 2¼ per cent from 2003 to 2004.
• A non-oil budget deficit estimated at NOK 68.0 billion in 2004. This deficit is covered by a transfer from the Government Petroleum Fund.
• Based on an oil-price of NOK 200 per barrel, the central government net cash flow from the petroleum activities is estimated at NOK 159.9 billion. This is NOK 16.5 billion higher than estimated in the National Budget 2004, largely due to an upward adjustment of the assumed oil price in 2004 by NOK 30 per barrel.
• The consolidated surplus in the Fiscal Budget and the Government Petroleum Fund, including interest and dividends, is estimated at NOK 123.4 billion. The capital in the Fund at the end of 2004 is estimated at about NOK 1 016 billion.
• A real growth in the revenues of the local governments from 2003 to 2004 of 3¾ per cent, or NOK 7¼ billion.

Monetary policy

According to the regulation of 29 March 2001, monetary policy shall aim at stability in the internal and external value of the krone, thus contributing to stable exchange rate expectations. Monetary policy shall also underpin fiscal policy by contributing to stable developments in output and employment. In accordance with this, Norges Bank’s implementation of monetary policy shall be geared at maintaining low and stable inflation. The operational target is defined as an annual increase in core inflation (CPI-ATE) of close to 2.5 per cent over time.

Since December 2002, Norges Banks has reduced its key rate (deposit rate) by 5¼ percentage points. The key rate is now 1.75 per cent.

In the Report to the Storting on Financial Markets, the Ministry of Finance evaluates the conduct of monetary policy by Norges Bank in 2003. The press release is available at www.odin.dep.no/fin/engelsk.

The Government Petroleum Fund

By the end of 2003, the market value of the Government Petroleum Fund was NOK 847 billion, about NOK 10 billion lower than estimated in the National Budget 2004. The market value is now estimated to grow to NOK 1 016 billion by the end of 2004.

A proposal on ethical guidelines for the Petroleum Fund is presented in the Revised National Budget 2004. The guidelines follow the proposals of the Graver Committee, which submitted a report to the Government in June 2003. The press release on ethical guidelines is available at www.odin.dep.no/fin/engelsk.

General outlook

Expansionary monetary policy has contributed to a slightly stronger recovery of the Norwegian economy than projected in the National Budget 2004. Strong growth in private consumption, driven by low interest rates and strong real income growth, and an upswing in mainland fixed business investment will contribute to higher economic growth this year. A reduction in the spread against corresponding foreign rates of more than 4 percentage points since December 2002 has contributed to a weakening of the krone of some 8 per cent. This, together with stronger economic growth internationally, has improved the outlook for the exposed industries.

Mainland GDP is now expected to pick up from 0.7 per cent in 2003 to 3.2 per cent in 2004.

Labour market

The recovery of the mainland economy is reflected in an improvement in the labour market. Total employment has been relatively stable in the last three quarters, following a decline up to the second quarter of 2003. Following a sharp increase in the first half of 2003, unemployment has stabilised and is now projected to decline. On an annual basis, the unemployment rate (Labour Force Survey) is now estimated at 4.3 per cent in 2004, compared to an estimated 4.7 per cent in the National Budget 2004. A further improvement in the labour market is foreseen in 2005.

Prices and wages

The outcome of the wage settlements concluded so far this year indicates a somewhat lower wage growth in 2004 than assumed in the National Budget 2004. The wage growth is now estimated at 3¾ per cent in 2004.

Consumer price inflation has so far this year been lower than estimated in the National Budget 2004. Growth in consumer prices is expected to pick up as the effect of the strong exchange rate in 2002 on import prices abates. In addition, the negative contribution to consumer prices resulting from lower electricity prices this year compared to last year, will soon fade out. The consumer price index (CPI) is expected to increase by ½ per cent in 2004 and 2 per cent in 2005. Excluding changes in excise duties and without energy prices (CPI-ATE), consumer price inflation is expected to pick up from ¾ per cent in 2004 to 2¼ per cent in 2005.

Key projections for the Norwegian economy. Volume change from previous year.Per cent

Source: StatisticsNorwayand Ministry of Finance

Key figures for the Petroleum sector

Source: StatisticsNorway, Ministry of Petroleum and Energy and Ministry of Finance.

Key figures for the fiscal budget (incl. social security) and Government Petroleum Fund before loan transactions. NOK billion.

Source: Ministry of Finance

Central government net lending (surplus). NOK billion

Source: StatisticsNorwayand Ministry of Finance.