ON SAFER GROUND?

• Author: Gjedrem, Svein

The estimates in Norges Bank's third-quarter Inflation Report show broadly the same development in the mainland economy as in the repons presented earlier this year. The deviations are well within the margin of uncertainty inherent in such projections. However, there has been a shift in the balance of risks.

Last winter the uncertainty associated with economic developments was greater than normal. There was a risk that the weakening of the krone and the high level of wage growth peculiar to Norway could become self-reinforcing and trigger an acceleration in inflation. Nor could we rule out the possibility that the Norwegian economy would move in the opposite direction, into a deflationary recession.

The budget for 1999, as adopted in November of last year, and the wage settlement last spring contributed to reducing the uncertainty. Moreover, the setback in Asia proved to be temporary and the crisis in Latin America had a more limited impact on the global economy than feared. In addition, higher oil prices are contributing to growing optimism in Norway.

We still expect the mainland economy to expand at a slower pace than the growth in output potential both this year and next, with the attendant effect of curbing labour market pressures. This seems to be necessary in order to keep price and cost inflation in line with European rates. However, unemployment appears to have increased at a somewhat slower-than-expected rate.

It now seems that the downturn will be confined to certain sectors of the economy, in particular the construction and engineering industries. However, the construction industry features a high degree of flexibility with a common Nordic labour market. Moreover, residential construction is gradually expected to show an upswing.

The problems in...