Economic growth in Mainland Norway is expected to remain moderate. Capacity utilisation continues at a high level, with a tight labour market. Price and wage inflation is still somewhat higher than among Norway’s trading partners. The Government proposes no major amendments to the budget adopted last fall.

Renewed economic growth after the slowdown last fall

Mainland GDP is projected to increase by 1^2 per cent from 2000 to 2001. This is slightly lower than estimated in the National Budget 2001. The downward revision is due to the slowdown in economic growth in the second half of 2000 and lower growth internationally.

Despite moderate economic growth, the level of activity in the Norwegian economy is still high. In 2001 the unemployment rate is expected to remain low, close to 3^1 per cent. Employment continued to grow last year, and a further moderate growth is expected this year. The labour market participation rate has reached a very high level both by historical and international comparisons.

Average growth in annual wages is now estimated at 4^2 per cent in 2001, the same as in 2000. The two extra holidays both in 2001 and 2002 imply that hourly wage costs will increase somewhat more. Consumer prices are expected to increase by 3 per cent, which is the same rate as last year. So far this year, rising energy prices and higher indirect taxes have contributed to relatively high inflation, while a halving of the VAT on food effective from July 1 ^st> will pull headline inflation down in the second half of the year. Inflation corrected for excise duties and energy prices is expected to remain more or less stable at 2^3 per cent throughout the year.

Reflecting both high production volume and relatively high oil prices, the current account balance is projected to equal last year’s record surplus, NOK 204 bn., or 13.7 per cent of GDP in 2001. The forecasts are based on an oil price assumption of NOK 225 per barrel in 2001, which is slightly below the average price so far this year.

Fiscal policy

The main features of fiscal policy in 2001 as presented in the Revised National Budget are:

• A structural oil-adjusted fiscal deficit in 2001of about 1.9 per cent of GDP for Mainland Norway. Last autumn the structural oil-adjusted fiscal deficit was estimated to be unchanged from 2000 to 2001. Due to new accounting information for 2000, the structural oil-adjusted fiscal deficit in 2000 is now estimated at 1.6 per cent of GDP for Mainland Norway.
• A real underlying growth in Fiscal Budget expenditure of around 2^3 per cent from 2000 to 2001.
• An increase in accrued tax and excise payments in real terms of roughly NOK 4.7 bn from 2000 to 2001.
• A non-oil Fiscal Budget deficit of NOK 5.3 bn this year. This deficit will be covered through a transfer from the Government Petroleum Fund.
• Central Government net cash flow from the petroleum activities is estimated at about NOK 223 bn in 2001. The upward revision compared to the National Budget is mostly due to a higher estimated oil price. Total surplus of the Fiscal Budget and the Government Petroleum Fund, including interests and dividends on accumulated capital in the Petroleum Fund, is estimated at NOK 233 bn in 2001. The total capital of the Fund is estimated at NOK 632 bn, or more than 40 per cent of GDP, at the end of 2001. Proceeds from the sales of 21.5 per cent of the State’s direct financial interests in the petroleum industry (SDFI) and proceeds from sales of shares at the Statoil IPO have not been included in these figures. Such proceeds will be added to the Petroleum Fund.

In a white paper to the Storting on 29 March 2001 (Report no. 29 (2000-2001)), the Government proposed new guidelines for fiscal policy which are intended to come into effect in 2002. The guidelines suggest that the use of petroleum revenues over the Government Budget will be increased moderately and gradually, approximately in line with an estimated 4 per cent real return on the capital of the Petroleum Fund. This year’s deficit is higher than the guidelines would have implied if they had been put to use already this year.

General Government net lending (surplus) is estimated at 16.2 per cent of GDP in 2001.

Monetary policy

On 29 March 2001 a new regulation on monetary policy was established with immediate effect, replacing the former regulation of 6 May 1994. This regulation must be seen in relation with the new guidelines for fiscal policy. In a period where fiscal policy is to allow for a gradual and sustainable increase in the use of petroleum revenues, the Government wants to anchor the role of monetary policy in securing low inflation and a stable exchange rate.

The new guidelines stipulate that monetary policy shall aim at stability in the internal and external value of the krone, contributing to a stable exchange rate. 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 aimed at maintaining low and stable inflation. The operational target is defined as an annual increase in consumer prices close to 2.5 per cent over time. Monetary policy shall be forward-looking, and direct effects on consumer prices stemming from changes in interest rates, taxes, excise duties and extraordinary, temporary disturbances, shall in general not be taken into consideration.

While the new regulation on monetary policy represents a different mandate for Norges Bank, it does not in itself suggest a significant change in the implementation of monetary policy. The new guidelines represent continuity in the conduct of monetary policy, and lay a good basis for Norges Bank to continue to pursue a monetary policy with a high degree of credibility both in the financial markets and in the economy as a whole. The new guidelines for fiscal policy and monetary policy provide a good basis for maintaining a stable exchange rate.

During the course of 2000, Norges Bank raised its key deposit rates by altogether 150 basis points, thereby reversing more than half of the cuts made in 1999. Norges Bank’s deposit and lending rates now stand at 7 and 9 per cent, respectively. The money market rate (3 months) for NOK is now at about 7^2 per cent, i.e. somewhat less than 3 percentage points above the corresponding rates of the Euro area.

Ethical Considerations and The Petroleum Fund

The Government Petroleum Fund is a financial investor with well-diversified portfolios of bonds and equities quoted on large international stock exchanges. Norges Bank is responsible for the operational management of the Government Petroleum Fund on behalf of the Ministry of Finance, and seeks to achieve high returns within pre-defined risk limits.

The Government emphasises ethical considerations with respect to the Petroleum Fund. The Ministry of Finance is considering adjusting the regulation on the management of the Fund to the effect that the Ministry excludes specific companies from the Fund. This should be seen as an escape clause that will only be used if the government through an investment by the Petroleum Fund may be in danger of violating its international commitments. If the fund is invested in companies that produce e.g. anti personnel landmines, such a clause may be applied.

General outlook

Macroeconomic projections for 2001 point to rather stable growth in the Norwegian economy:

• Mainland GDP is estimated to grow by 1^2 per cent in 2001, slightly slower than in 2000. Total GDP, which also includes petroleum and shipping, is expected to increase by 2^2 per cent in 2001.
• Private consumption fell in the second half of last year on a seasonally adjusted basis. The projected growth of 1^2 per cent in 2001 thus implies a significant growth during the year. However, it is still a marked downward revision from earlier estimates. The savings rate is expected to decrease somewhat.
• The number of housing starts in 2000 was the highest in a decade and is projected to increase slightly in 2001. Growth in residential investments is estimated to slow to 6^3 per cent in 2001 following the steep increase of 12^1 per cent last year, which in turn followed two years of negative growth.
• Mainland business fixed investments are projected to fall slightly in 2001, after increasing by a little less than 2 per cent in 2000.
• Petroleum investments declined significantly in 1999 and 2000, and thereby constituted a marked negative impulse to economic growth. This is expected to end as petroleum investments stabilise in 2001, a significant upward revision from earlier estimates.
• Traditional merchandise exports are projected to grow by 3^1 per cent in 2001, after growing only 2 per cent last year. This implies a continued fall in market shares in Norway’s export markets. The estimate is also a downward revision from the National Budget reflecting the lower projections of world economic growth. The current account balance is estimated at NOK 204 bn, the same as last year's record surplus. In 2001, this corresponds to 13.7 per cent of GDP.
• Employment growth is estimated at ^2 per cent, the same as in 2000, thus keeping the Norwegian participation rate at a record level both historically and internationally. The unemployment rate is estimated to be 3^1 per cent in 2001, marginally down from last year.
• Consumer price inflation is estimated to average 3 per cent in 2001, while inflation corrected for excise duties and energy prices is estimated at 2^3 per cent. Average growth in annual wages is estimated at 4^2 per cent in 2001.

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

1)

Crude oil, natural gas and pipeline transport.
²⁾> Sum of accrued taxes, royalties, area fees and CO2 tax.
³⁾> Sum of paid taxes and royalties incl CO2 tax, dividends from Statoil and net payments from direct central government participation in petroleum activities.
⁴⁾> The price of natural gas is unchanged.

Source: Statistics Norway, Ministry of Oil and Energy and Ministry of Finance.

1)

Including central government accrued, unrecorded taxes.

2)

Comparable with the Maastricht criterion of 3 per cent deficit.

Source: Statistics Norway 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.