The effect is, however, expected to be more than offset by the prospects of very low inflation this year. In 2005 and 2006, wage growth is projected to increase as a result of a tighter labour market and higher inflation. There has been a tendency in recent years for a larger portion of pay increases to be agreed in the first year of the two-year period covered by the main agreement. If we consider these two-year periods together, the estimated relationship between wage growth and developments in the labour market are approximately in line with that observed since the mid-1990s. Developments in real economic variables are mirrored in credit markets. In recent years, household income has shown solid growth, and household confidence has been high. However, corporate earnings have been low, and until recently enterprises have primarily focused on enhancing efficiency. Credit developments are giving ambiguous signals to our interest-rate setting. Growth in household borrowing is high, but enterprises are reducing debt. The change in the breakdown of credit may have been amplified by banks’ increased eagerness to extend credit to households after a period of losses on loans to the business sector. Some reports from our regional network indicate that there are some restraints on credit for the business sector in some areas. Developments in credit to enterprises shadow developments in their investments. Low credit growth indicates that mainland business investment has not yet picked up. Total credit is expanding broadly in line with normal growth in nominal GDP.

Relative labour costs measured in a common currency are in line with the level prevailing in 1990, but approximately 10 per cent higher than in the mid-1990s. The internationally exposed sector has been scaled back. Those companies that are still operating may be in a better position to bear the high wage level. BIS Review 16/2004  3  In 2003, employment and investment both fell, although investment picked up somewhat towards the end of the year. Efficiency-enhancing measures are expected to continue to mark developments in the business sector this year. This will curb the demand for labour. The situation varies across business sectors. Distributive trades and enterprises supplying services to households are expanding as a result of high growth in private consumption. Production for the business market fell through 2003. Demand for services in this market segment will pick up in pace with a rise in manufacturing output and other industries. Strong competition has resulted in substantial restructuring. Manufacturing production is being moved both from Norway and other countries to lower-cost countries. This may continue. EU and EEA enlargement by 10 new members from 1 May may also increase competition in some industries, particularly in the service sector. Investment in onshore industries in Western Norway and Northern Norway has generated a positive impetus to the construction industry. Activity in 2003 in the rest of the country has mainly been held up by public investment projects. Information from our regional network indicates that construction activity has picked up markedly in most regions.