With high growth in employment and falling unemployment, consumption growth is expected to be high in the period to the end of the year and into next year. As the interest rate level gradually normalises, household interest expenses will increase. Household interest-bearing debt is approximately NOK 1300 billion. According to our interest rate forecast, which I will return to later, the interest rate in 2008 will be more than 2 percentage points higher than in 2006. Such an interest rate increase will have a pre-tax effect on household income of roughly NOK 25 billion. Combined with projected lower employment growth and higher inflation, this might reduce growth in household purchasing power in the years ahead. Higher wage growth would have the opposite effect. Overall, moderate growth in household purchasing power is expected to result in lower consumption growth in the period ahead. A continued rise in house prices may contribute to sustaining consumption growth. House prices have increased further this autumn, and the twelve-month rise moved up to 18.2 per cent in October. Residential construction is still high. In 2005, the number of housing starts was the highest since the beginning of the 1980s. It appears that growth will be high again this year, but somewhat lower than in recent years. A number of contacts in Norges Bank’s regional network report high demand for new dwellings, and order backlogs for residential construction are still exhibiting solid growth. A gradual increase in the interest rate will probably curb activity in the housing market.

Capacity utilisation in the business sector is high and a growing number of enterprises are now facing constraints. Statistics Norway’s business tendency survey for the third quarter shows that Norwegian manufacturing is optimistic about the prospects ahead. A clear majority of industrial leaders assess the general outlook as more positive in the short-term than in the third quarter. A majority of industrial leaders are considering an increase in investment. A shortage of skilled labour is posing a mounting challenge to manufacturing in the period ahead. This picture is consistent with information from the company contacts in Norges Bank’s regional network. In the August round of interviews, 59 per cent of the companies reported capacity problems, and this share has increased since the previous round. Output and employment are increasing in all sectors. Pressures are particularly strong in the building and construction sector and some corporate services. The rise in prices is moderate in retail trade. It also appears that extensive use of foreign contract labour, particularly in some manufacturing sectors and building and construction, is curbing wage growth. An increasing number of our company contacts report labour shortages, particularly a shortage of engineers, project managers, transport workers and skilled labour in corporate services. Labour shortages are also beginning to emerge in retail trade and household services. High demand for labour has resulted in a marked decline in unemployment so far this year. Unemployment is now in line with the unemployment level during the previous expansion at the end of the 1990s.