Svein Gjedrem: Inflation targeting
Address by Mr Svein Gjedrem, Governor of Norges Bank (Central Bank of Norway), at the seminar on
foreign exchange policy issues arranged by the Association of Economists, Gausdal,
31 January 2003.
The address is based on the assessments presented at Norges Bank's press conference following the Executive
Board's monetary policy meeting on 22 January and on previous speeches. Please note that the text below may
differ slightly from the actual presentation.
* * *
The Norwegian economy exhibited strong growth from 1993 until 1998. This recovery brought the
economy out of recession into a period of high economic activity.
Mainland GPD and consumer prices
Percentage change on previous year
6 6
5 5
Mainland GDP
4 4
Consumer prices
3 3
2 2
1 1
0 0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Source: Statistics Norway
SG Gausdal 31.01.03
Growth in the mainland economy in the 1990s averaged over 3 per cent. Inflation was low and stable
at around 21⁄2 per cent annually, while it was higher than 8 per cent in the 1980s.
Annual wage growth1) and unemployment rate2)
Per cent
Annual wage
6 6
growth
4 4
Unemployment
2 2
0 0
1 9 9 3 1 99 4 1 9 9 5 19 9 6 1 99 7 1 9 9 8 19 9 9 2 0 00 2 0 0 1 2 00 2
1)
Average for all groups. Including costs associated with additional vacation days
2)
Registered unemployed as a percentage of the labour force
Sources: TRCIS, the Directorate of Labour and Norges Bank
SG Gausdal 31.01.03
At the same time, total employment rose sharply. The unemployment rate, measured by the LFS, fell
from close to 6 per cent in 1991 to almost 3 per cent in 1999.
Later in the 1990s, unemployment declined as long as wage growth in Norway was lower than wage
growth among our trading partners. This came to a halt in 1998. The rise in salaries for white-collar
workers accelerated and the social partners rejected a policy of wage moderation. Unemployment
stopped falling.
Output gap
Per cent of trend GDP
6 6
5 5
4 4
Hodrick-Prescott method
3 3
2 2
Production function method
1 1
0 0
-1 -1
-2 -2
-3 -3
-4 -4
-5 -5
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Sources: Statistics Norway and Norges Bank
SG Gausdal 31.01.03
At the beginning of the 1990s, the economy was in a deep recession. Production was well below
capacity. When growth in the economy picked up, capacity utilisation increased. The output gap1,
according to our methods of calculation, was closed around 1996. Thereafter, cost inflation and the
rise in prices for goods and services produced for the domestic market accelerated. The upturn
reached its peak in 1997, with GDP growth approaching 5 per cent.
The pace of such a strong upturn could not be sustained. In 1997 and 1998 the economy shifted from
an upturn with high growth rates to an expansion with lower growth but low unemployment, labour
shortages in many sectors and strong growth in labour costs.
Stock market prices in Norway and the US
Monthly figures. December 1995=100
300 300
275 275
250 250
Oslo Stock
S&P 500
225 225
Exchange
200 200
Benchmark
175 175
150 150
125 125
100 100
75 Oslo Stock 75
Exchange IT
50 50
25 25
96 97 98 99 00 01 02 03
Jan Jan Jan Jan Jan Jan Jan Jan
Source: EcoWin
SG Gausdal 31.01.03
Many other countries also experienced a period of strong expansion in the 1990s. Economic growth in
the US was particularly high. New technology generated optimism and laid the basis for strong
investment growth. At the same time, wage growth and inflation remained low. Equity prices, however,
rose sharply just before the turn of the millennium, particularly in the US, but also in many other
countries.
1
The output gap, which is a reflection of capacity utilisation in the economy, is measured by different methods: the trend GDP
method (the HP method) and the potential GDP method (the production function method). When using the HP method,
adjustments are made for the increase in vacation days in 2001 and 2002. This is also taken into account when applying the
production function method. The output gap is zero if aggregate output is equivalent to the level of activity that can be
achieved over time without generating a rise in price and cost inflation. A positive output gap indicates a level of activity that
fuels pressures on economic resources and rising price and cost inflation. (See for example Frøyland and Nymoen (2000)
and Olsen, Qvigstad and Røisland (2003) for more on the output gap.)
The optimism spread to Norway, where equity prices also rose. The level of activity was very high in
the securities market, among corporate lawyers, consultancies and in the ICT industry.
High oil prices through most of the 1990s resulted in buoyant investment activity and growth in
operating expenses in the petroleum sector. With substantial government tax revenues, expectations
concerning the use of petroleum revenues also rose. It became increasingly challenging to keep
pressures in the economy at bay by means of fiscal policy.
The response to this challenge was the revision of economic policy in spring 2001. The most important
policy change was the strategy for the phasing in of petroleum revenues - the so-called fiscal rule. An
inflation target for monetary policy was introduced at the same time. The revision came after four
years of strong economic expansion and high growth in labour costs, pressures to spend petroleum
revenues and high household credit growth.
Implementation of monetary policy
The interest rate is set so as to keep inflation at a low and stable level
•
• Higher interest rates will reduce inflation by curbing demand and strengthening
the krone. An interest rate reduction has the opposite effect.
• The effects of interest rates on inflation may vary over time.
• The effects on the exchange rate may vary according to international conditions
- interest rates in other countries
- required rates of return and risk premiums in financial markets
SG Gausdal 31.01.03
Norges Bank has one instrument: the interest rate. It is set to achieve the operational target for
monetary policy - an inflation rate of 21⁄2 per cent over time. An increase in the interest rate will
normally contribute to reducing inflation by curbing demand for goods and services and by
strengthening the krone against other currencies. An interest rate reduction has the opposite effect.
Inflation targeting means that monetary policy contributes to smoothing fluctuations in the economy.
This implies that the interest rate is increased in response to pressures in the economy and a risk of
higher inflation, and that the interest rate is reduced when growth is sluggish and the outlook points to
lower inflation. This objective is also expressed in the Regulation on Monetary Policy.
The effect of the interest rate on inflation is uncertain and may vary over time. Its impact is partly
dependent on the debt rate in the private and public sectors, the situation in the labour market and the
impact of a change in the interest rate on the exchange rate. The effect of interest rate changes on the
exchange rate may vary according to external conditions, such as foreign interest rates, required rates
of return and risk premiums in international financial markets.
If interest rate changes are to have the intended effect, confidence in monetary policy among financial
market participants is an important precondition. Without such confidence, it is not possible to predict
the impact of monetary policy on the real economy or on inflation.
The difference between expected short-term rates in Norway and Germany 10 years ahead is a
measure of confidence in monetary policy. In the period following the introduction of the inflation
target, long-term forward rates have largely been around 1 percentage point higher than in Germany.
Between 1⁄2 and 1 percentage point can probably be ascribed to Norway's inflation target, which is
higher than the price stability objective for the euro area. The narrow differential between Norwegian
and German forward rates indicates that there is confidence that the inflation target will be achieved. If
this confidence did not exist, the forward rate differential would probably have been far wider.
Difference between Norwegian and German forward interest
rates 10 years ahead. Per cent
1.4 1.4
1.2 1.2
1.0 1.0
0.8 0.8
0.6 0.6
0.4 0.4
0.2 0.2
0.0 0.0
01/01/99 01/10/99 01/07/00 01/04/01 01/01/02 01/10/02
Source: Norges Bank
SG Gausdal 31.01.03
The forward rate differential against Germany has narrowed somewhat recently to around
1⁄2 percentage point. German forward rates have risen, while Norwegian forward rates have been more
stable. The forward rate differential between the US and Germany is now close to zero. This may be
related to greater uncertainty as to developments in the German economy.
Forward interest rates 10 years ahead.
US, Germany and Norway
Per cent
7.5 7.5
7.0 7.0
Norway
6.5 6.5
6.0 6.0
US
5.5 5.5
Germany
5.0 5.0
4.5 4.5
01/01/01 01/05/01 01/09/01 01/01/02 01/05/02 01/09/02 01/01/03
Source: Norges Bank
SG Gausdal 31.01.03
The mandate for monetary policy with an inflation target provides a sound basis for assessing Norges
Bank's interest rate setting.
According to the regulation, the direct effects on consumer prices resulting from changes in interest
rates, taxes, excise duties and extraordinary temporary disturbances shall in general not be taken into
account. This means that monetary policy must be oriented towards bringing underlying inflation,
adjusted for the deviations mentioned above, close to 21⁄2 per cent. An adjusted index such as this will
be most relevant when assessing the orientation of monetary policy in retrospect.
The most common indicator of underlying inflation - the consumer price index adjusted for tax
changes and excluding energy products (CPI-ATE) - has shown a year-on-year increase of between
1.8 per cent and 2.7 per cent since the inflation target was introduced. In December, the last
observation to date, the year-on-year rise was 1.8 per cent.
When we report on the implementation of monetary policy, as in our Annual Report sent to the Ministry
of Finance for submission to the King and communication to the Storting, we will place particular
emphasis on analysing the reasons for deviations from the target that exceed +/- 1 percentage point.
Consumer price inflation. 12-month rise. Per cent
4 4
CPI
CPI-ATE1)
3 3
2 2
1 1
0 0
1995 1996 1997 1998 1999 2000 2001 2002 2003
1) Norges Bank's estimates up to July 2000. Thereafter figures published by Statistics Norway
Sources: Statistics Norway and Norges Bank
SG Gausdal 31.01.03
When the inflation target was introduced, the economy was marked by pressures in the labour market,
high cost inflation, considerable optimism among households and enterprises and high expectations of
increased use of petroleum revenues in the public sector. Norway introduced an inflation target almost
two years ago. Today's inflation is therefore to a considerable extent influenced by the policy we
pursued following the revision of economic policy on 29 March 2001. Developments have provided
further evidence that monetary policy is an effective instrument against inflation. Inflation is low even
though wage growth is unusually high. Monetary policy is working.
Underlying inflation in the fourth quarter of 2002
Projections published at different times and actual inflation
3 3
Actual price inflation
2.5 2.5
2 2
1.5 1.5
1 1
0.5 0.5
0 0
00 01 01 01 01 01 02 02 02 02 02 03
01 02
Jul Jul
Jan Mar Jan Mar Jan
Nov May Sep Nov May Sep Nov
Sources: Statistics Norway and Norges Bank
SG Gausdal 31.01.03
The underlying rise in prices has slowed in recent months, down to 2.0 per cent in the fourth quarter of
2002. The projection for the underlying rise in prices in that quarter was revised down in autumn 2001,
from 2.5 per cent to 2.1 per cent. Since then, our projections have varied between 2.0 and
2.2 per cent. The inflation projections for the fourth quarter of 2002 have been relatively stable since
the end of 2000 and close to the actual level of inflation. The low level of inflation is closely related to
specific economic developments that have taken place over the past two years.
Three important disturbances have influenced the 22 months of inflation targeting that lie behind us:
strong wage growth, the global downturn and a considerable appreciation of the krone.
The wage settlement in 2002 resulted in the highest increase in real wages in a generation.
After the wage settlement last year, we projected annual wage growth in 2002 of between 51⁄2 and
6 per cent. Wage growth in 2002 was far higher than expected. Substantial pay increases were also
agreed on for 2003. The various groups achieved very different results, increasing the risk of
wage-wage spirals. The outcome of last year's wage settlement may be an indication that the social
partners considered the labour market to be very tight this spring.
Annual wage growth in 2002
Projections published at different points in time. Per cent
7 7
6 6
5 5
4 4
3 3
2 2
1 1
0 0
01 01 01 01 01 02 02 02 02 02
00 01
Apr Jun Oct Apr Jun Oct
Feb Aug Feb Aug
Dec Dec
Source: Norges Bank
SG Gausdal 31.01.03
There is little new information about wage developments since the wage settlement last year.
Agreements have been concluded awarding high pay increases to seamen and doctors. We may have
underestimated the growth in salaries for white-collar workers last year, but there is also some
anecdotal evidence to suggest that during the autumn large companies and law and consultancy firms
tightened cost control.
Labour costs1) in manufacturing: Norway
and trading partners
Percentage change in hourly costs
8 8
7 7
Norway
6 6
5 5
Trading partners
4 4
3 3
2 2
1 1
1) Labour costs per hour
0 0
1991 1993 1995 1997 1999 2001
Sources: Statistics Norway, TRCIS/IMF and Norges Bank
SG Gausdal 31.01.03
Since 1998, wage growth in Norway has been markedly higher than that of our trading partners. Until
spring 2001, the monetary policy objective implied that, over time, wage growth had to be reduced to
the level in Europe. The inflation target of 21⁄2 per cent implies that wage growth over time can hover
around 41⁄2 per cent. This takes into account that productivity growth in Norway has been around
2 per cent over the past twenty years. If wage growth is higher than 41⁄2 per cent, monetary policy
generally has to be tight in order to counter inflation. This will normally lead to deteriorating
competitiveness in the business sector. If wage growth is lower than 41⁄2 per cent, monetary policy
normally has to be eased to counter inflation that is too low. This can result in a weaker krone and an
improvement in competitiveness in the business sector.
The difference between current wage growth and the long-term equilibrium level of 41⁄2 per cent can be
referred to as the wage gap for the Norwegian economy.2 This wage gap also provides an indication of
pressures in the real economy, not unlike the measures of the output gap shown earlier. As illustrated,
2
The wage gap is calculated as the difference between the rise in labour costs in manufacturing in Norway and 4.5 per cent.
The wage gap is calculated as the difference between the rise in labour costs in Norway and trading partners in the years
prior to 2001.
there tends to be a correlation between the wage gap and the output gap. The output gap can be an
expression of our assessment of pressures in the economy. The wage gap can be a more direct
indication of the social partners' perception of the situation. This provides useful information in interest
rate setting. Moreover, wage figures and wage growth estimates in real time are considerably more
reliable than preliminary national accounts figures for output and demand that are used to estimate the
output gap, which tend to be subject to substantial revision. The wage growth estimates drawn up by
Norges Bank early last summer, just after the income settlements, underestimated the increase by
0.16 percentage point, with small deviations, on average for the period 1995-2001. On the other hand,
the wage gap is a lagging indicator. Wage growth in any one year has been heavily influenced by
economic developments in the preceding 12-18 months. When we look at future prospects, a good
estimate for the output gap can therefore provide a better indication of the outlook for wage and price
inflation. Both these simple measures are based on stylised assumptions concerning productivity
growth and must therefore be used with caution.
Wage gap1) and output gap
Per cent
4 4
3 3
Output gap
2 2
1
1
Wage gap
0 0
-1 -1
-2
-2
1) Up to 2000: difference between rise in hourly
labour costs in manufacturing in Norway and
-3 -3
among trading partners. Thereafter growth in
excess of 4.5 per cent.
-4 -4
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Sources: Statistics Norway, TRCIS/IMF and Norges Bank
SG Gausdal 31.01.03
The high level of wage growth in 2002 implied a tight monetary policy. The interest rate differential
against trading partners widened. The krone appreciated further.
Relationships in the foreign exchange market are unstable, but there are a number of fundamental
forces that influence the krone.
High oil prices and the phasing in of petroleum revenues into the Norwegian economy are part of the
explanation, but the predominant factor is probably the cyclical divergence between Norway and
abroad.
Krone exchange rate1) and 12-month interest rate
differential against trading partners. Per cent
4.0 88
3.5 92
3.0 96
Interest rate differential,
(left-hand scale)
2.5 100
TWI
(right-hand
2.0 104
scale)
1.5 108
1.0 112
Jan 99 Jul 99 Jan 00 Jul 00 Jan 01 Jul 01 Jan 02 Jul 02 Jan 03
1) Trade-weighted effective exchange rate (TWI). A rising value denotes an appreciating rate
Source: Norges Bank
SG Gausdal 31.01.03
The main explanation for the wide interest rate differential is not that interest rates are high in Norway,
but that interest rates are at a historic low abroad. For example, interest rates have not been at such a
low level in the US since the 1960s. Foreign interest rates have been reduced markedly to counter a
downturn, while Norway has featured labour shortages, high income and consumption growth and a
more normal interest rate. Low volatility in foreign exchange markets has probably amplified the effect
of a wide interest rate differential. Furthermore, equity prices have shown a pronounced decline over
close to 21⁄2 years and investors have been seeking alternative investment vehicles.
The appreciation of the krone in the first half of last year gradually changed the inflation outlook. In
isolation, this implied a reduction in interest rates. However, the Norwegian economy was also
exposed to high pay increases last spring, which had the opposite effect.
In this situation, if monetary policy were to give priority to short-term inflation considerations, we could
perhaps have reduced the interest rate last summer. But this would have led to fluctuations in output
and employment. Household and enterprises might have continued to increase their borrowing. In
addition, we might have been confronted with waning confidence in financial markets and a weaker
krone. Once the effects of high wage growth had fed through to prices and pushed up inflation, the
interest rate would have been raised irrespectively, perhaps to a higher level than has been the case.
The end result of such a policy would have been wider fluctuations in aggregate demand, output and
employment.
As the inflation target gains confidence and credibility also among the social partners, the interest rate
will make an even greater contribution to stability in the real economy. Overall employment is
influenced by wage formation. Monetary policy cannot prevent an increase in unemployment that is
caused by a wage-driven cost shock.
Output gap for the euro area, the OECD countries and
Norway. Per cent of trend GDP
6 6
5 5
4 4
Norway1)
3 3
2 2
OECD countries
1 1
0 0
-1 -1
Euro area
-2 -2
-3 -3
-4 -4
-5 -5
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
1) Mainland Norway
Sources: OECD and Norges Bank
SG Gausdal 31.01.03
In spite of last year's high wage growth, the interest rate was only raised by 0.5 percentage point last
summer. Later in the year, the interest rate was reduced, primarily as a result of weak external
economic developments that led to a reduction in interest rates abroad, thereby widening the interest
rate differential. The global downturn and the strengthening of the krone have had a dampening
impact on the Norwegian economy. When cyclical developments in Norway and abroad again
converge, interest rates in Norway will be closer to the level abroad. This may also bring the krone
back to a more normal level. Today's particularly strong krone must also be seen in connection with
the stock market decline, high oil prices and fears of war in Iraq. The very low level of interest rates
among trading partners reflects an environment of sluggish growth, high unemployment and a risk of a
prolonged downturn with deflation. This is a situation that we must strive to avoid.
The direct effect of the global downturn on overall growth in the Norwegian economy has so far been
limited. This is partly attributable to high oil prices and the high level of activity in the oil sector.
However, as a result of the interest rate differential and the strong krone, the global downturn will have
a substantial impact on Norwegian business and industry.
The government's use of petroleum revenues or expectations of increased spending of petroleum
revenues may have contributed to sustaining activity and the strong krone. Increased use of petroleum
revenues over the central government budget is stimulating demand for goods and services. This will
intensify the contest for economic resources and pressures in the business sector.
Mainland GDP in 2002
Percentage change. Projections published at different points in time
2.5 2.5
2 2
1.5 1.5
1 1
0.5 0.5
0 0
Nov 00 Mar 01 Jul 01 Nov 01 Mar 02 Jul 02 Nov 02
Source: Norges Bank
SG Gausdal 31.01.03
The exchange rate may move more in the short term than is necessary in the long term. One reason
may be that the krone has to overshoot its long-term level since market participants will weigh the
interest rate differential against the possibility of a future depreciation of the krone. However, we may
also have seen an extra wave in the exchange rate if market participants are basing their expectations
on higher government spending of petroleum revenues than implied by the fiscal rule. Given the
current level of the exchange rate, it would appear that foreign exchange market operators have been
expecting a substantial increase in the use of petroleum revenues. Fiscal policy discipline will
therefore be of importance to the krone exchange rate.
Fiscal policy
• The fiscal policy guideline: the central government
budget deficit shall be equivalent over time to the
expected real return on the Government Petroleum Fund.
• The fiscal guideline has been adhered to
The fiscal guideline implies that petroleum revenues shall
•
be phased in gradually
• The fiscal guideline is robust to fluctuations in
government revenues
SG Gausdal 31.01.03
According to the guideline for fiscal policy, the central government budget deficit shall over time be
equivalent to the expected real return on the Petroleum Fund. The fiscal rule is robust to fluctuations in
government revenues and provides a stable framework for economic developments.
The fiscal rule has been adhered to. In the budget for 2003, petroleum revenue spending was indeed
somewhat higher than 4 per cent of the Petroleum Fund. This was because the estimated value of the
Petroleum Fund at the end of 2002 was markedly reduced through the year as a result of the sharp
decline in equity prices and the appreciation of the krone. Spreading the use of revenues in this way is
in line with the fiscal rule as it has been formulated.
As a result of the change in the inflation outlook two years ahead, Norges Bank's Executive Board
decided to reduce the key rate by 0.5 percentage point, to 6.0 per cent, on 22 January. In its
assessment of the inflation outlook, Norges Bank pointed out that the krone has strengthened since
the October Inflation Report and that it was 3 per cent stronger than the assumption underlying the
baseline scenario. We also cited fears of war and high oil prices, a weak and unsteady global
recovery, higher electricity prices, lower optimism among households and the prospect of lower growth
in private consumption than previously projected. We also pointed out that we had not yet seen the full
impact of high wage growth and a strong krone on employment in enterprises that are heavily exposed
to international competition.
On balance, developments point to low inflation in the period ahead. According to Norges Bank's
assessment, with an interest rate of 6.0 per cent, the probability that inflation two years ahead will be
lower than 21⁄2 per cent is greater than the probability that it will be higher.
The global recovery is weak and unsteady. Growth forecasts for our trading partners were revised
downwards in the course of last year. The situation has been marked by fears of war in Iraq over a
longer period.
US - consumer confidence
Monthly figures. Seasonally adjusted. 1985=100
160 160
140 140
120 120
100 100
80 80
60 60
40 40
20 20
0 0
1990 1992 1994 1996 1998 2000 2002
Sources: EcoWin/Conference Board and NBER
SG Gausdal 31.01.03
In the US, consumer confidence has weakened since the autumn of 2000. Growth in the US has been
sustained over the last year, fuelled by low interest rates, an expansionary government budget and
growth in private consumption. Business investment and net exports have made a negative
contribution. A new package of measures, including tax cuts and higher government transfers, has
recently been presented in order to stimulate the US economy and prevent a recession. However,
growth in the US will probably remain low this year.
Industrial confidence in the euro area and
the German IFO index
Monthly figures. Seasonally adjusted
15 110
10
5
100
IFO business
climate
0
(righthand scale)
-5
90
-10
-15
80
-20
Euro area (left-hand
-25 scale)
-30 70
1995 1996 1997 1998 1999 2000 2001 2002 2003
Sources: EcoWin, EU Commission and IFO
SG Gausdal 31.01.03
Monetary policy in Europe has become more expansionary. Since the presentation of Norges Bank's
Inflation Report on 30 October, key rates have been reduced by 0.5 percentage point in Sweden and
the euro area. The outlook for the euro area is still not very encouraging. In particular, industrial
confidence has been weak for some time.
Contribution of exports and net exports1) to GDP
growth
Percentage points
3 3
2 2
1 Exports 1
0 0
-1 -1
Net exports
-2 -2
-3 -3
-4 -4
1996 1997 1998 1999 2000 2001 2002
1) Based on figures for total imports and exports for mainland economy. 2002 figures are
projections
Sources: Statistics Norway and Norges Bank
SG Gausdal 31.01.03
There are also signs of stagnation and low growth in the Norwegian economy. The chart shows the
contribution from net exports to activity in the mainland economy. We see that this component curbed
growth in mainland Norway by about 3⁄4 percentage point, from a positive contribution of a good
1 percentage point in 1999. In contrast to the situation in the mid-1990s, when high imports
contributed to weak net exports, our export industries are now being affected. Traditional merchandise
exports fell towards the end of last year. Export prices have also declined somewhat, reducing
corporate profitability. A strong krone and high domestic demand have also contributed to the
continued rise in imports.
Regional network November 2002
Generally falling production in the export industry.
•
Slow growth in industrial output for the domestic market
•
• For retail trade and services there is growth in supplies to
households and no growth in supplies to the business sector
Lower unemployment in manufacturing and higher demand for
•
labour in retail trade
SG Gausdal 31.01.03
Last autumn, our regional network reported lower activity in some manufacturing sectors and low
growth in manufacturing production for the home market. In addition, there is no growth in sectors
supplying services to the business sector. On the other hand, the level of activity in retail trade and
services for households is higher. Companies are reporting lower employment in manufacturing, but
higher demand for labour in retail trade.
Unemployment has edged up over the last six months. There was little increase in manufacturing up to
end-2002. Unemployment has primarily risen in services, communication and the IT sector. However,
an increase in manufacturing unemployment was observed in January. Manufacturing unemployment
is expected to edge up in the period ahead. Moreover, the high pay increases awarded in last year's
settlements have consumed a large share of the growth in allocations to government agencies. As a
result, employment is not likely to show strong growth in this sector in 2003.
Change in number of unemployed on same month
previous year
Total number of unemployed and long-term unemployed
25000
20000
Total
Long-term
15000
10000
5000
0
-5000
-10000
mai 01 jul 01 sep 01 nov 01 jan 02 mar 02 mai 02 jul 02 sep 02 nov 02 jan 03
Sources: Statistics Norway and the Directorate of Labour
SG Gausdal 31.01.03
Growth in the Norwegian economy was sustained by a strong increase in household consumption
through 2002. In line with expectations, the sharp rise in real wages fuelled particularly high
consumption growth last autumn.
There are now signs that the strong growth in consumption may be slowing. Household expectations
are lower than earlier and expectations concerning their own financial situation have also fallen
markedly.
Consumer confidence indicator
45 45
30 30
Trend
15 15
0 0
-15 -15
Unadjusted
-30 -30
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Sources: Norsk Gallup Institutt AS, Association of Norwegian Savings Banks
SG Gausdal 31.01.03
Household borrowing is remains high and the debt burden is still on the rise. Growth in credit to
households has slowed in recent months, but growth remains at a double-digit level. On the other
hand, the sharp rise in house prices in recent years seems to be levelling off. This may also result in
lower credit growth through the winter and spring.
Credit growth by borrower sector and house
prices. 12-month rise. Per cent
25 25
Non-financial corporate
20 20
sector
15 15
Households
10 10
5 5
House prices
0 0
1998 1999 2000 2001 2002
Sources: Norwegian Association of Real Estate Agents, EFF, FINN.no, ECON EF, ECON and Norges Bank
SG Gausdal 31.01.03
The sharp rise in electricity prices may lead to lower growth in consumption this year. Higher electricity
expenses reduce household purchasing power. Many enterprises will also be facing higher costs. On
the other hand, high electricity prices generate revenues for central and local government.
Electricity prices
1 January 1998 = 100
340 340
300 300
Spot prices
260 260
incl. tax and grid
rental
220 220
Electricity prices index
in the CPI*
180 180
140 140
100 100
*Electricity (including grid rental) accounts for 3.3% of CPI
60 60
Jan 00 Jul 00 Jan 01 Jul 01 Jan 02 Jul 02 Jan 03
Sources: Statistics Norway, NordPool, Viken Energi and Norges Bank
SG Gausdal 31.01.03
Higher electricity prices will result in a sharp increase in the consumer price index this winter. The
year-on-year rate of increase in the consumer price index may approach 4 per cent in January and
February. Underlying inflation will also be affected. For example, this can be the result of higher rents
and higher costs in some business sectors. However, these effects can to a large extent be
disregarded. Assuming that weather conditions remain fairly normal over the next year, the rise in
prices at the same time next year will be that much lower. Electricity prices will then make a
comparable negative contribution to overall inflation.
Conclusion
In retrospect, developments over the past decade feature several elements of a normal business
cycle. Following a long period of expansion in the 1990s, the economy is stagnating as a result of
overheating in the labour market, high wage growth and high borrowing in the private sector.
The new guidelines for monetary policy were introduced in March 2001 when there were pressures in
the economy, expectations of increased use of petroleum revenues and growing divergence between
cyclical developments in Norway and abroad. Today, after close to two years of inflation targeting,
experience shows that monetary po