Summary

Demand, output and market outlook

The cyclical upturn in the Norwegian economy continues. Demand is growing in all industry sectors at approximately the same rate as in the last round, with the exception of the export industry which reports somewhat lower growth. The high investment and activity level in the oil and gas industry, extensive residential construction and healthy household finances are important driving forces behind the upturn.

Expectations of continued high oil prices and record high petroleum-related investment are fuelling growth in land-based industry. Suppliers to the petroleum industry are thus reporting strong growth in some sectors. In the export industry, the shipbuilding and maritime industry are experiencing solid growth in demand. Growth in the process industry, however, is somewhat more moderate than earlier. In domestically oriented manufacturing, suppliers to the building and construction sector are experiencing steadily increasing demand, while the upturn in the offshore and maritime industry is having positive spillover effects on the engineering industry and other subcontractors. The building and construction sector continues to experience substantial growth, although in some regions, growth has slowed. Growth in retail trade continues and is particularly strong for building materials. Nevertheless, overall growth is somewhat lower than in most of 2004. The services sector is experiencing solid growth, especially in commercial services and in the financial, transportation and IT sectors.

The market outlook for the next six months indicates that growth in the Norwegian economy will continue, albeit at a somewhat slower pace. The outlook for the export industry is clearly less optimistic than earlier. Reports from the entire country concur on this point. It also appears that the peak has been reached in building and construction. Growth is expected to be lower in the period ahead, primarily due to slower growth in the housing market. The distributive trades and the services sector are expecting the upturn to continue at the same pace as during the last reporting period. None of the business sectors expect an increase in the growth rate in the next six months.

Capacity utilisation and investment

As in the last round, nearly 40 per cent of the companies report that they would have some or considerable difficulty dealing with growth in demand. The share of companies that would have considerable problems dealing with growth in demand has increased during the spring. Large operators in both building and construction and some petroleum-related industries have reached capacity limits.

Thus, investment plans are increasing. Forty-two per cent of the companies report plans to increase investment, while 11 per cent expect to reduce investment. On the whole, it appears that investment growth will be moderate in the entire private and public sector in the next six to twelve months.

Employment and labour market

Despite solid growth, enterprises are reluctant to hire new staff. In the last period, employment has remained unchanged in manufacturing and retail trade, whereas in the public sector, employment has declined slightly. The number of employees has increased, however, in petroleum-related industries, building and construction and the service sector. These sectors are also expecting growth in the next three-month period. Building and construction, however, is cutting back on plans to hire new staff. In a number of industries, typically the hotel and restaurant industry and some parts of manufacturing, the man-hours worked are increasing although the number employed is the same. One in four enterprises, an increase from one in five in the last round, reports that the supply of labour represents a constraint. As in earlier interview rounds, building and construction companies predominate among those that experience the supply of labour as a constraint.

Costs, prices and profitability

Increasing scarcity of resources and capacity has led to a sharper rise in prices in building and construction and petroleum-related industries. The export industry has also experienced a solid increase in prices in the last 12 months, largely due to rising commodity prices. The rise in prices has been moderate in the other industries. In the period ahead, there are more companies that expect a higher rather than a lower increase in prices, although price expectations appear to have moderated somewhat compared with earlier in the year.

Annual wage growth in 2005 is projected at 3.4 per cent, the same as the projection at this time last year. The projection for the public sector has been reduced by 0.5 percentage point since the last round and is now at the same level as the projection for manufacturing.

It appears that companies continue to focus heavily on cost control and continuous improvement of internal processes. This combined with solid demand and output is improving profitability in all industries.

Region South-West

• The cyclical upturn is continuing. Demand is growing in all sectors at approximately the same pace as in the last round. Growth is picking up for suppliers to the petroleum industry. The pace remains very high in building and construction, driven primarily by construction of housing and infrastructure.
• The market outlook for the next six months is positive for all sectors. Optimism is greatest among suppliers to the petroleum industry, building and construction and corporate services.
• The outlook and improved profitability are translating into an increasing willingness to invest in retail trade, export and petroleum-related industries and household services. Half of the enterprises are increasing investment in 2005, while 15% expect to reduce investment.
• Employment is rising in building and construction, petroleum-related industries, retail trade and corporate services. All sectors are expecting moderate growth in employment in the next three months. Four of ten enterprises expect increased employment, while 15% expect a reduction.
• Consistent with the above, an increasing number of companies report substantial capacity problems and problems accommodating demand growth.
• More than one-third of the contacts indicate that the supply of qualified labour may impose a constraint on continued output growth. Building and construction, petroleum-related industries and a number of service industries are facing the greatest challenges.
• Both the public and private sectors expect annual wage growth of 3-3.5%.
• Export and petroleum-related industries, household services and building and construction report moderately higher prices. Among suppliers to the petroleum industry and building and construction, increasing capacity problems are resulting in appreciably higher prices.
• Profitability continues to improve in all sectors except domestically oriented manufacturing. Cost reductions and increased volumes are resulting in better capacity utilisation and higher margins.

 Region South

• All industries report solid growth and most industries report that growth is accelerating compared with the last interview round.
• The market outlook is positive in all industries.
• On the whole, growth in domestically oriented manufacturing has been solid and stronger in the last quarter, driven partly by continued solid growth in household demand. The export industry, however, is expecting the same solid growth rate as reported in the last period. A number of contacts report intense competition in the foreign markets. The export market in particular is fuelling growth for suppliers to the petroleum industry.
• Building and construction reports solid growth and a somewhat stronger growth rate than in the last round. The private building sector reports strong growth.
• Retail trade and the service sector report solid growth in the last period.
• In manufacturing and building and construction, there are more companies producing at or above capacity limits than in the last period. Reports from the business sector may indicate that the labour market is tightening and that the strong growth in activity over time has led to an increase in the number of companies operating at capacity limits. Service industries and retail trade still have considerable excess capacity.
• Manufacturing and retail trade are increasing investment. Investment levels appear to be stable, however, in service industries and the public sector.
• As in the last round of interviews, manufacturing reports solid growth in employment. Building and construction reports solid growth and a somewhat stronger growth rate than in the last round. Employment growth is moderate in retail trade and service industries. The number of person-years remains fairly stable in the public sector.
• Expected annual wage growth in 2005 is around 4% for both manufacturing and private services. This is somewhat higher than expectations a year earlier for 2004, and slightly higher than the annual wage growth reported at the end of 2004. The public sector is expecting an annual wage growth of 3.5% in 2005. This is somewhat lower than expectations a year earlier for 2004, but is in line with actual wage growth reported at the end of 2004.
• Selling prices have risen somewhat in manufacturing in the last 12 months. Selling prices have been stable in other industries.
• Profitability is improving in all industries. The export industry reports the weakest growth in profitability.

 Region East

• The contacts in the region report that demand and output growth remains solid. The average growth rate is nevertheless somewhat lower than in the previous round due to lower growth in building and construction, the export industry and household services. The growth rate in the period ahead is expected to be approximately the same as in the previous period.
• In domestically oriented manufacturing, demand and output have increased considerably in the last period. Suppliers to building and construction and the maritime/offshore industry as well as newspaper production have experienced the strongest growth. Growth in the export industry has slowed somewhat compared with the previous round, but remains solid. The technology industry is pushing up growth, whereas growth in the processing industry has been moderate, as in the previous round.
• Growth appears to be slowing in the building and construction sector. Activity remains high, although the number of new projects and building starts is levelling off or falling, especially in the housing market. Commercial building and construction activity continues to increase.
• Growth in retail trade remains solid. As in the previous round, the building materials sector is pushing up growth. The clothing and footwear sector reports solid growth, whereas car sales have levelled off and are expected to fall.
• In the service sector, overall growth is somewhat lower than in the previous round due to lower growth in the household sector and somewhat lower growth in the hotel and travel sector. Corporate services continue to grow markedly, especially companies in the financial, legal, transportation and IT sectors. Commercial services in general appear to be faring well.
• There is moderate pressure on factors of production. Less than 40% of the companies will have problems dealing with unexpected growth in demand. Building and construction still have the least excess capacity and the supply of labour represents a constraint.
• Investment in the entire private sector is rising moderately, although at a somewhat slower pace than in the previous round. Investment growth is strongest in retail trade. Only 10% have plans to reduce investment in the next six to twelve months.
• Employment has increased moderately in building and construction and in the service sector. These two sectors are the only ones with plans to increase employment in the period ahead. The public sector expects to reduce employment.
• Selling prices have risen moderately in the last 12 months. This increase is on a par with the previous period, but is higher than a year ago. Somewhat less than half of the companies are expecting a higher rise in prices in the period ahead, whereas the same number of companies are expecting lower or unchanged prices.
• Profitability continues to improve moderately in the entire private sector. Only 10% of the companies report lower profitability in the last period.

 Region North-West

• The production rate for the region's domestically oriented manufacturing continues to rise. This improvement is driven by the upturn in the domestic market, but also increasingly by higher demand from the export industry, which is operating at full capacity utilisation. Oil and gas activities and the China-driven boom are pushing up the activity level in the shipbuilding/maritime industry.
• Domestically oriented manufacturing is expecting moderate growth in demand again in the next six months, whereas the export industry and suppliers to the petroleum industry are expecting a peak and a levelling off of demand over the summer. Even though manufacturing is generally experiencing a period of expansion, few companies are investing in production facilities and equipment. Product and skills development are considered to be more important.
• In building and construction, the activity level has been high and growth has continued in the last period. Further growth is not expected in the next six months. The public sector and petroleum-related investment are the main driving forces behind the high activity level.
• Retail trade has stabilised at a high level following solid growth in the last year. There is considerable optimism, and the sector is investing substantially in new, improved facilities.
• Service industries report a substantial increase in activity in the last period, which reflects increased demand from traditional manufacturing customers. The banking and hotel sectors report increased demand in the private market as well. This is prompting new initiatives and an increase in investment.
• The public sector reports that priority is still being given to improving productivity and freeing up personnel to enable them to deal with new tasks. Major investments related to pent-up needs and government-required renewal of facilities are also being initiated in this phase.
• Employment has increased slightly in manufacturing, building and construction and services in the last period, and the share of foreign labour and subcontractors is increasing steadily. Unemployment in general has declined in the region, but has increased in sectors dominated by women, such as the healthcare sector and the fishing industry.
• Both manufacturing and the public sector are lowering their estimates for annual wage growth, whereas building and construction have raised their estimate due to a tighter labour market.
• In the last year, the export industry, building and construction and services have experienced a noticeable increase in prices due to more expensive factor inputs and an improved market. A similar development is expected during the next year. In other sectors, developments are steady.
• All sectors report improved profitability - with petroleum-related enterprises and the export industry reporting the greatest improvement. Retail trade and the service sector also report solid improvement. The EU has introduced a punitive duty on Norwegian farmed salmon, which in the short term has resulted in a substantial cost disadvantage for the entire fish farming industry and in particular the fish processing industry.
• This round of interviews also confirms the positive developments in sickness absence. Most companies are focusing heavily on this and are reducing costs by reducing sickness absence. Large companies with traditionally high absentee rates reduced sickness absence by a couple of percentage points in 2004, and the trend remains positive in 2005. For companies with a generally low level of absenteeism, the reduction has been less apparent.

 Region North

• Growth in demand and output has continued in all sectors of Region North in this round. Domestically oriented manufacturing reports moderate growth and the export industry reports solid growth. The export industry expects the growth rate to remain unchanged in the next six months, while the growth rate for domestically oriented manufacturing is expected to rise.
• Building and construction report solid growth in this period, but are expecting the growth rate to slow in the next 6 months. Retail trade reports solid growth, with no change since the last round. Growth is expected to remain solid for the next six months.
• There is solid growth in demand for both household and corporate services. This growth is expected to gather pace in the next six months.
• The public sector reports strong growth in investment. Manufacturing, retail trade and the service industries are expecting moderate growth in investment.
• Manufacturing has cut back employment as a result of the introduction of new technology and efficiency measures, coupled with outsourcing of services. There have also been two bankruptcies in the engineering industry during the period. The public sector also reports employment cutbacks. Employment in building and construction and services has increased as a result of increased demand and output. Employment in retail trade is unchanged compared with the last period. Employment growth is expected to continue in building and construction and services, whereas employment is expected to remain unchanged in other industries. The supply of qualified labour is satisfactory and seldom represents a constraint on output.
• Manufacturing reports a solid rise in prices in the last 12 months, and the other sectors report a moderate increase. In the period ahead, the contacts tend largely to expect the rise in prices to remain unchanged.
• Export and service industries report solid improvement in profitability. The other sectors report stable profitability. On the whole, the rate of improvement in profitability is slowing somewhat compared with the previous round.

 Region Central Norway

• The economic situation has shown little change in the last year.
• There is solid growth in manufacturing output and private services. Suppliers to the petroleum industry and manufacturing with deliveries to building and construction are experiencing strong growth, whereas growth in the export industry has moderated in the last few months.
• The activity level in building and construction is high and growth remains buoyant. The market outlook is somewhat mixed, but on the whole it appears that growth will continue at least until the end of 2005.
• The growth rate in retail trade, particularly for capital goods, appears to be slowing.
• Our contacts are optimistic about developments in the next half year. They expect a growth rate that is approximately in line with developments so far this year.
• Employment is generally stable. There are still relatively few enterprises that are increasing their workforce. There are signs of increased employment in building and construction, retail trade and the service sector. In particular, companies providing temporary employees report solid growth.
• Most enterprises have excess production capacity to meet future growth in demand. In building and construction, the supply of skilled labour is limiting the growth potential.
• The investment rate in the region is fairly stable, but there are a number of positive signals from all sectors. The public sector is planning to increase investment again following a period in the first half of 2005 when investment activity was slightly lower, compared with 2004.
• Tender prices are rising in building and construction as a result of increased costs. A number of export industries are experiencing a marked rise in prices. In retail trade, price changes have generally been marginal.
• Wage growth is expected to be close to 3.5% in all industries. This is somewhat lower than expected by the public sector and somewhat higher than expected by manufacturing enterprises earlier this year.
• Many enterprises report improvements in profitability due to increased sales, but many companies are also experiencing a decline in profitability. For most enterprises, profit margins are not rising.

 Region Inland

• All industries in Region Inland report increasing activity. Overall growth is somewhat lower than in the two previous rounds. The market outlook is generally positive and indicates growth in the period ahead.
• Growth is somewhat higher in domestically oriented manufacturing and somewhat weaker in the export industry compared with the previous round. Manufacturing companies supplying goods to both domestic and export markets are recording the strongest growth in the domestic market. For domestically oriented manufacturing, the building materials sector is experiencing the strongest growth. The region's manufacturing industry expects continued growth.
• Building and construction report continued solid, though moderating growth in demand due primarily to extensive residential construction in urban areas, the building of holiday cottages and continued strong demand in the local government sector. The outlook for the next six months indicates that growth will remain solid.
• In the service sector, demand remains high and growth continues at approximately the same pace as in the previous round for a number of sectors including banking, transport and travel services. Growth is equally strong in both corporate and household services.
• Retail trade is experiencing somewhat weaker growth due to a decline in car sales. Growth is expected to edge up in the months ahead.
• In general, the economy in the region is far from its capacity limit. Some manufacturing segments, however, are experiencing pressure on capacity. This has previously been the case for building and construction, but pressure in this sector appears to have eased. The supply of highly skilled labour is a problem for some service companies.
• Private sector investment shows signs of increasing after having been relatively stable. This applies in particular to parts of manufacturing and the service sector (excluding retail trade).
• Employment is rising in building and construction. The number of manufacturing employees is also rising slightly. Employment is fairly stable in retail trade and the rest of the service sector.
• Selling prices have increased moderately in the last year and the trend is thus the same as in the last round. Expectations concerning future inflation are somewhat weaker, reflecting a levelling off of raw material prices and more intense competition in some industries.
• Projections for wage growth are at approximately the same level as they were at this time last year in nearly all sectors.
• Profitability is stable or improving slightly in all business sectors. Nevertheless, average growth in profitability is somewhat lower than in the last round.