Consumer price inflation remains subdued
Norges Bank projects consumer price inflation at 2½ per cent in 1999 and 2¼ per cent in 2000. The projection for 1999 has thus been revised downwards compared with the September Inflation Report.
Price inflation will still be slightly higher than among trading partners up to and including the year 2000. In the remainder of the projection period, consumer prices are projected to rise at a slightly slower rate than among trading partners. Wage growth is estimated at 6 per cent between 1998 and 1999. The wage carryover from 1998 accounts for a large share of the growth in wages. Centrally negotiated pay increases are thus estimated to be lower in 1999 than in recent years. Wage growth is projected at 4¼ per cent in 2000.
The estimates are based on the assumption that the krone exchange rate will return to its initial range in the first half of 1999.
In a commentary, Central Bank Governor Kjell Storvik states that the developments presented in the Inflation Report are consistent with a gradual return of the krone exchange rate to its initial range. The social partners can also make a substantial contribution to reducing the cost associated with a restructuring of the labour market by showing moderation in next year's wage settlements.
The December Inflation Report also includes medium-term projections for the Norwegian economy for the period to 2002. This analysis shows that the Norwegian economy features a strong financial position, but that the economy will enter a period of restructuring with slower economic growth and lower price and wage inflation in the years ahead. Mainland GDP growth is projected to slow to ½ per cent in 1999, followed by a contraction in mainland GDP of ¼ per cent in 2000. The turnaround is attributed to weaker profitability in the business sector, slower growth in the world economy and a fall in fixed investment. As a result, price inflation and the rise in costs will edge down and the current account surplus will again match the budget surplus. The projections indicate that demand and output growth will pick up from 2001 following this period of restructuring.
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