Moderate optimism on economy as wage growth moderates

The Norwegian government's revised Budget for 1999, which was passed by parliament on 18 June 1999, made no major changes to economic policy. In the aftermath of the moderate 1999 wage settlement, the government has scaled down its wage growth estimates for 1999.

The revised national Budget for 1999 was passed by the Norwegian parliament (Stortinget) on 18 June 1999. The annual procedure for revising the Budget enables the government to adjust its economic policy in the light of developments that have taken place since the release of the Budget in the autumn of the previous year (NO9811100N). In conjunction with the revised national Budget, the government also produced an up-to-date analysis of state of affairs of the national economy. Statistics Norway (Statistisk Sentralbyrå, SSB) and the Bank of Norway (Norges Bank) have also published their own economic analysis for spring 1999.

Revised national Budget for 1999

The Norwegian economy has seen an upward trend during most of the 1990s, but during the summer and autumn of 1998 it became clear that the economy was approaching a relatively turbulent period. Increased wage growth, low oil prices and international economic instability contributed to weakening the Norwegian krona and pushing interest rates upwards. The result was a cyclical downturn in the national economy in the autumn of 1998, which generated expectations about falling growth in GNP for 1999 and an increase in unemployment at the end of 1999. The government emphasised in the Budget that 1999 would be marked by great uncertainty as to the correct estimates for economic developments in relation to issues such as wage developments, the exchange rate and developments in the international economy in general.

The estimates presented in the revised Budget show a somewhat higher increase in unemployment and a relatively lower inflation rate and lower wage growth than previously expected. Interest rates are down and the krona has been strengthened. The revised Budget, however, does not entail any major alterations to the government's economic policy, although it is more expansive than the original Budget issued in autumn 1998.

Employment

The government assumes employment growth to have come to a halt in the first quarter of 1999, and the growth rate is expected to fall further from 0.3% in 1999 to -0.3% in 2000. The unemployment rate is estimated to reach 3.5% in 1999 and 3.8% in 2000, which is somewhat higher than originally expected (3.2% for 1999). The government's most recent estimates are sustained by new figures from Statistics Norway in its Economic Survey, published in May 1999. However, the revised estimates for unemployment do not necessarily mean a worsening of the employment situation since autumn 1998 - at that point, the government's figures were in fact lower than the other institutions, and both Statistics Norway and the Directorate of Labour have had to modify their figures compared with previous estimates (NO9812115N).

Despite an expected increase in unemployment in autumn 1999, the government points to the fact that there will still be a significant shortage of staff in some sectors of the Norwegian labour market, such as the health, social and educational sectors. Increases in unemployment will mainly take place in the oil and shipbuilding sectors, which are expected to witness a significant fall in investments in 1999. Statistics Norway, however, assert that the relatively large number of foreign employees in some sectors, such as building and construction sector, makes it more difficult accurately to assess future developments with regards to unemployment. The government continues to emphasise that an important objective is to secure access to qualified labour, and that it has no intentions of altering the direction of its labour market policy stipulated in the Budget in 1998.

Wage developments

The 1998 pay settlement, aided by a shortage of human resources, generated an average wage growth of 6.2% in 1998, which was twice the figure of Norway's trading partners (NO9902116F). In the 1999 Budget, the government stipulated that a precondition for its economic policy was an average wage growth of 5% from 1998 to 1999. In the light of these factors, the government and the social partners decided to give new life to the cooperative venture on incomes policy which has characterised Norwegian industrial relations in the past decade or so (NO9812117N). A public committee (the "Arntsen committee") was established, comprising all the major social partner organisations, which concluded that the main task must be to bring Norwegian wage growth down to the level of its trading partners by 2000 (NO9903120F). As such, it was recommended that wage growth from 1998 to 1999 should be approximately 4.5%. The 1999 wage settlement (NO9904126F), according to the revised Budget, was by and large pursued within this framework of 4.5%. The newest estimates from Statistics Norway estimates a slightly higher wage growth of 5%, whereas the Bank of Norway expects a 4.75% wage growth.

Commentary

There has been little controversy surrounding the revised Budget for 1999, especially when compared with the spring settlement of 1998. This may be explained by the fact that economic developments so far in 1999 have been more positive than expected in autumn 1998. The price of oil has improved recently, the Norwegian currency has strengthened its position and interest rates are on their way down. The 1999 spring wage settlements also seem to have generated lower wage growth than expected. Thus, although most analysts agree that economic growth in Norway is stagnating and that unemployment will most likely increase in the next two to three years, there seems to be little need for extraordinary adjustments to the government's economic policy.

One explanation why the revised Budget involves only minor adjustments to economic policy, is the relatively moderate 1999 wage settlement and renewed cooperation on incomes policy between the government and social partners. The partners seems willing to the commit themselves to moderate wage growth at the level of Norway's trading partners. As part of this renewed venture on incomes policy, several committees have been established to look at various aspects of Norwegian economy and working life (NO9906135F).

One question of concern raised by many commentators, however, is the extent to which the government is being too expansionist in its revised Budget. Such an argument is put forward by the Confederation of Norwegian Business and Industry (Næringslivets Hovedorganisasjon, NHO), which agrees with the government assessment of state of affairs in the Norwegian economy, but believes the expansive measures proposed in the budget to be premature. NHO is also worried that the strengthened position of the Norwegian krona in the long term will contribute to weakening internationally competitive industries in Norway. This view is also shared by the Norwegian Confederation of Trade Unions (Landsorganisasjonen i Norge, LO).

The revised Budget also generated a discussion about the economic situation in the oil-related industries' profitability, investments and employment. A majority in parliament wants to see measures adopted to ease the situation in the oil sector and other related branches. The demand for labour has also decreased in cyclically sensitive branches such as building and construction, and the number of laid-off workers has increased. LO wants to see stronger efforts to deal with this situation in the form of labour market measures to prevent an increase in unemployment and a decrease in levels of qualified staff. There was no majority in parliament in favour of increased funds for such labour market measures. (Haavard Lismoen, FAFO Institute for Applied Social Science)

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