The lengthy cyclical upturn of the 1990s has been replaced by a period of more sluggish growth in the Norwegian economy. However, capacity utilisation and pressure on sectors of the economy remain high. Labour force participation is markedly higher and unemployment lower than in the rest of Europe. Wage and price increases have consequently been higher in Norway than among its trading partners. Growth in the Norwegian economy will probably be limited by the labour supply for several years to come.

By Sigrid Russwurm

Norwegian manufacturing has traditionally been relatively raw-materials based. Natural conditions such as access to hydro-electric power, abundant forest and fisheries resources and petroleum deposits are reflected in the country's industrial structure. Power-intensive manufacturing sectors such as metals production, industrial chemicals and wood processing account for a significant share of Norway's export-oriented industry. Shipbuilding and offshore platform construction are other major sectors while other engineering industries such as the manufacture of electrical and electronic goods have taken on increasing importance in recent years. Fish farming is a relatively new export industry which has boomed during the last 15-20 years.


Oil activities a major factor in Norway¹ economy
Value added in Norway, measured as Gross Domestic Product (GDP) has increased by 80-90 per cent through the 80s and 90s, while the increase in the EU, for example has been around 50 per cent and in the USA about 70 per cent. The strong growth in Norway must be viewed, among other factors, in connection with the development of the oil industry after the initial finds of oil on the Norwegian shelf at the end of the 1960s. From 1980 to 2000, oil production has increased by over 300 per cent and Norway is now the world¹s second biggest exporter of oil. At the same time the oil sector¹s demand for goods and services from the mainland economy has grown substantially.
Norway has nevertheless a diversified industrial structure. More than half of the economy consists of service sector industries, which include housing, banking and insurance, transport and communications and the public sector. Petroleum-linked activities , including crude oil and gas production, made up a good 23 per cent, while manufacturing accounted for about slightly over 9 per cent of the GDP in 2000.
Norway's economy is open, with a per capita foreign trade that is one of the highest in the world. Approximately 77 per cent of Norwegian exports go to EU countries, while a good 68 per cent of imports come from these countries. Exports to the USA are on the same level as those to Asia, but imports from Asia are significantly higher than those from the USA. The Nordic countries, Great Britain and Germany are Norway's most important trading partners. Great Britain and Germany are major markets for Norwegian oil and gas. Sweden is the country that Norway imports most from. Exports of goods and services accounted for 46 percent of the GDP in 2000, while imports ac-counted 31 per cent. Exports of oil and gas constituted 46 per cent of total exports.


Economic recovery in the 1990s
At the start of the 1990s, the Norwegian economy suffered a considerable business downturn. Unemployment rose dramatically, housing prices plummeted and a severe financial crisis was under development. But the economic situation was reversed quite early in the 1990s. and in 1993 the mainland economy entered a long period of growth. Conditions were right for a turn-around. Price and cost increases had for several years been lower than those of Norway¹s trading partners, so the country¹s costs competitive strength, among other factors was greatly improved.
When interest rate levels also dropped in 1993, investments in both the mainland economy and exports increased. From 1993 to 1998, the average growth in the GDP for mainland Norway was 3 per cent, unemployment was halved and labour force participation reached its highest ever level.


High capacity utilisation
The growth rate in the Norwegian economy slackened noticeably towards the end of 1998 and has now been replaced by a period of more sluggish growth. On an annual basis the GDP for mainland Norway rose by 1,8 per cent from 1999 to 2000, after an increase of 0,8 per cent the previous year. The lower growth in the last two years is largely attributable to a sharp drop in oil investments following the peak year of 1998, while household demand has upheld growth.
Towards the end of last year, however, growth in private consumption diminished steeply . This can be linked to the increased interest rate level throughout the yea. There has been a markedly lower growth in the export of traditional goods than in the mid 1990s, despite strong growth in the international economy. As a consequence Norwegian exporters lost market shares last year, for the fourth consecutive year. Employment has changed little the last two years. The employment figures are low and stable and there is a lack of labour in sectors such as service. Despite the low rate of growth therefore, capacity utilisation in the Norwegian economy is still high.
Cyclical variations in the Norwegian economy have been stronger and more frequent during the last 20 years than they were up to 1980. Furthermore, production swings have to a greater extent than before resulted in major variations in both employment and unemployment. The trend towards increased instability leading to major swings in unemployment can be observed in several other OECD countries.
The deregulation of the credit market in the first half of the 1980s, combined with low real interest rates after tax and a change in the behaviour of both loan customers and credit institutions contributed strongly towards boosting the economic upturn of the mid 1980s. The considerable debts accrued during this period and over-investments in sectors such as commercial premises lay the basis for the very sharp drop which followed. In addition, the importance of petroleum activities has increased sharply since their start early in the 1970s. Developments in petroleum investments have played a major role in fuelling fluctuations in the mainland economy in the 1980s and 1990s.
Despite the pressure problems that gradually arose, the economic recovery of the mid 1990s was decidedly more balanced than that of the 1980s.
Firstly, private consumption increased largely in step with income in the 1990s. Therefore, household saving did not drop as it did in the mid 1980s.
Secondly, the export of traditional goods substantially increased during the upswing in the 1990s, contributing towards a major rise in corporate investments and manufacturing employment. This gave rise to a more parallel development between sectors exposed to international competition and the remaining sectors of the economy than during the economic upturn of the 1980s. Against this background, developments in the private sector appear to be more robust and balanced during the last upturn.
When the strong growth in production started in the spring of 1993, there were considerable available resources in the Norwegian economy. However, the strong and protracted upturn led to the build-up of considerable pressure in parts of the economy. Although the pressure was not this time connected to an unbalanced and loan-financed increase in private consumption and investments, there were also important likenesses between the upturns in 1980 and 1990. Developments in oil investments and relatively low real after tax interest contributed in this case also towards a vigorous growth in the Norwegian economy.
Oil investments increased by as much as 43 per cent from 1995 to 1998. This provided powerful impulses for the mainland economy in a situation where Norwegian economy was already marked by high capacity utilisation in a number of sectors. In addition, the drop in real interest after tax up to 1997 played a part in boosting growth in the economy.


Record in work force participation
Record-sized labour participation both historically and internationally have made possible the vigorous growth in the economy during the 1990s. In Norway employment rose annually by about 1.2 per cent from 1993 to 2000. In the EU area unemployment remained largely unchanged during this period, while in the USA yearly growth was about the same as in Norway. Compared with the EU average, Norway has a far higher rate of employment in all age groups. Here one must note that the number of part-time employed is relatively high in Norway compared with many other countries.


Low unemployment
Unemployment in Norway was substantially reduced in the 1990s and is among the lowest in the OECD. On a yearly basis it constituted 3.4 per cent of the work force in 2000, up from 3.2 per cent in the preceding year, according to figures from Statistics Norway. This moderate rise must mainly be linked to an increased number of lay -offs and dismissals in the sectors of industry that supply the oil sector either directly or indirectly. But the rise in industrial unemployment appears to have stopped at the start of 2001. In the EU as a whole, unemployment has remained at a high level throughout the 1990s and in 2000 was three times as high as in Norway. However, there are big differences in the unemployment figures in the various EU countries, In the USA unemployment has been has been strongly reduced in the second half of the 1990s and stands now at 4 per cent, the lowest level since 1970.


Higher wage and costs growth
At the end of the long period of growth imbalances appeared in the Norwegian economy in the shape of increased wage growth. In 1998 this was about twice as much as the wage growth among our most important trading partners. Wage growth has since been gradually reduced but still exceeds that of the countries we compete with. Inflation has also risen somewhat during recent years and is now higher than it is among our main trading partners. Last year, consumer pricesrose by a good 3 per cent. Major fluctuations in the price of electricity and petrol the last two years have affected developments in consumer prices. Dearer petrol and electrical current contributed towards increased prices last year, while they can pull the opposite way this year.


Escalating oil price
The Norwegian economy is vulnerable to fluctuating prices for oil and other raw materials such as metals, pulp and paper and industrial chemicals. Considerable unrest on the international currency and finance markets during the winter of 1997- 98 affected developments in the Norwegian economy. Oil prices were approximately halved from 1997 to 1998, a factor which was largely responsible for the first deficit on the current balance since 1989. In the course of 1999, declining price developments started to reverse. Oil prices zoomed and last year the average oil price was at its highest level since 1985, about three times higher than in the summer of 1998. Oil price development in the near future is very difficult to predict on account of greater uncertainty regarding economic developments in the USA.
Towards the end of previous cyclical upturns, the Norwegian economy has normally developed major imbalances in the external accounts. This has not been the case at the end of the 1990s. With the exception of one single year, Norway has had large surpluses on its balance of payments every year since 1989 as a result of significant crude and natural gas exports,.because of both higher oil prices and increased export volume. Increased oil production, while imports linked to oil investments gradually decrease, would indicate mounting surpluses on the balance of payments in coming years.


Tight fiscal policy
Fiscal policy has a primary responsibility for stabilizing Norway's economy. During the severe economic downturn of the early 1990s, the freedom of action that solid public finances provided was used by the authorities to introduce measures aimed at upholding demand. After the cyclical turnabout, a relatively tight fiscal policy has been pursued, starting in 1994. However, towards the end of the upturn, fiscal policy was not tight enough to prevent pressure problems for the economy.
During recent years, Norway has on the whole had sizeable surpluses in its public finances, while countries in the EU and OECD have registered some major budget deficits. A tight fiscal policy combined with increasing oil revenues and economic growth have turned the deficits of the 1991-1994 period to a surplus from and including 1995. This led - in 1996 - to the first net allocation to the state petroleum fund, in accordance with the guide lines for such allocations. The general government surplus, corresponding to the surplus concept of the Maastricht criteria for public finances, accounted for 14 per cent of the GDP in 2000, while gross debt was about 21 per cent.
The scope of the public sector varies considerably from country to country This must be viewed in the context of, among other things, the extent to which the public sector re-distributes resources among the people and to what extent the production of services such as health care is conducted privately or publicly.
Norway is one of the OECD countries that has the biggest number of employees in the public sector. The number of public sector workers is more than twice as high in Norway than it is in the USA, while Denmark and Sweden are on about the same level. The demand for labour in the health and social sector will escalate considerably in coming years.
This is the result of an ageing population and the need for more labour to carry out reforms that are due to be effected in the range of municipal services. In Norway public consumption and public transfers constitute around 20 per cent of the GDP, a lower figure than in Sweden and Denmark but higher than in the United States and Germany. The public sector finances consumption and transfers largely through tax and duties. In Norway the level of tax and duties, measured in relation to the total GDP, has in recent years remained at the same level as the average for the EU countries. The taxation level in Norway is lower than the average for the Nordic countries ­ also in relation to the GDP for mainland Norway ­ but conside-rably higher than the average for the industrialised countries. This is because services in the health and education sectors in the Nordic countries are largely a public responsibility while in many other countries they are more frequently produced by the public sector and financed through user payments.


Interest rate increases in 2000
The exchange rate for the Norwegian krone has remained relatively stable since the mid 1990s, with the exception of periods with major fluctuations in the oil price and turbulence on international currency markets . The international financial crisis in 1998 led to a doubling of the Norwegian money market rates in the same year. The steep rise in interest rates alone led to a tightening up of monetary policy. Through 1999 conditions in Norwegian and international economy were favourable for a reduction in the interest rate level, but this tendency was reversed last year. The gap between Norwegian and European interest levels widened some-what through 2000, but it is considerably less than it was in 1998.


Risks to the forecast
In the light of the pronounced cyclical movements experienced in the past 20 years, one must assume that the Norwegian economy will in the future too be exposed to considerable cyclical swings. Most of the institutions which make prognoses for the Norwegian economy appear to base their predictions on a relatively stable development in the next few years, with only moderate changes in the unemployment figures. The lower growth rate in the Norwegian economy in 1999 and 2000 is characterised as a brief disruption of growth. As early as this year, growth in the Norwegian economy can again rise towards a more long term trend level.. A number of factors point towards a stable development, ending in a soft landing during the next two years, despite previous experience with far sharper cyclical fluctuations. This is because the basic conditions of the Norwegian economy now appear to be good. This is shown by the fact that both the public finances and the households' financial position are strong.
In addition the pronounced drop in oil investments during the past couple of years appears to have stopped. If oil prices remain at their present high level for a long period, one cannot discount the fact that oil investments may again provide stronger growth impulses to the mainland economy than signals from the latest investments status from Statistics Norway now indicate.
There appears to be a relatively balanced risk factor in Norway¹s economic development. On the one hand, there is a fair degree of uncertainty with regard to international growth, particularly in the USA. Weaker growth in the international economy will retard the growth of Norwegian exports. Lower prices for crude and other raw materials will gradually lead to lower profitability and reduced investments in activities in mainland Norway. The impact could be more severe if an economic downturn in the USA involved a weakened dollar, which would escalate the fall in raw material prices measured in Norwegian kroner.
On the other hand, the continued high capacity utilisation makes the Norwegian economy vulnerable in the face of a new and strong growth in demand.
Manpower reserves have been substantially depleted in recent years.
At the same time, the sluggish population growth means that the labour force will grow only slightly in coming years. Furthermore, longer holidays in 2001 and 2002, coupled with the tendency towards more absence due to sickness and more people being granted disability benefits or early retirement contribute towards a further depletion of the labour force.
The widespread shortage of labour can therefore make it difficult to bring the wage and prices growth down to a European level. A much higher level of costs in Norway than among its overseas competitors will over time result in substantial reductions in the sectors that are exposed to competition.


The author of the article, Sigrid Russwurm, is Deputy Director General in the Economic Policy Department of the Ministry of Finance. She is head of the section responsible for economic monitoring and macroeconomic prognoses.

UDA091ENG

Produced by Nytt fra Norge for the Ministry of Foreign Affairs, April 2001
The author is responsible for the contents of the article. Reproduction permitted.