Norges Bank

Regional network report

Regional network 5/2006

Interview period: October and November 2006

Summary

Demand, output and the market outlook

All industries report continued solid growth. Growth in this round is the strongest that has been registered so far in the regional network. The entire country and most industries are experiencing an upturn. The market outlook remains positive, but all industries are expecting somewhat slower growth in the period ahead. An important reason for this is capacity shortages.

In domestically oriented manufacturing and the export industry, growth remains solid. Growth is higher now than in the previous round. Growth is particularly solid in building-related manufacturing, as well as maritime and oil-related industry. Within the export industry, there are reports of strong growth in the engineering industry, shipbuilding, fish farming and furniture manufacturing. Suppliers to the petroleum industry report continued strong growth, although the peak has probably been reached. Building and construction report solid growth, but growth has slowed in the last few rounds. Labour shortages seem to be curbing growth in this industry. Growth remains solid in retail trade and the service sector. Developments are particularly strong in commercial services.

Capacity utilisation and investment

66% of our contacts now report that they would have some or considerable difficulties in accommodating an increase in demand, compared with around 59% in the previous round. Capacity constraints are still most pressing in the building and construction sector. The share of companies that would have some or considerable difficulties in accommodating an increase in demand has increased markedly in manufacturing and the service sector in this round. This is primarily because labour shortages have become more acute.

All industries report a moderate to solid investment rate, as in the previous rounds. This must be seen in the context of growth, expectations of continued growth and capacity constraints. It appears that investment is increasing most in the service sector and the local government and hospital sectors.

Employment and the labour market

There is solid growth in employment. Employment growth in this round is the strongest that has been registered so far in the regional network. Building and construction and service industries report the strongest growth. Employment growth is expected to be somewhat lower in the period ahead, partly because many companies are concerned about recruitment and partly because many companies have already increased employment substantially.

The labour market is tightening. 56% of our contracts, compared with 47% in the previous round, report that labour shortages will be a constraint to output/turnover in the event of increased demand. Labour shortages are most pronounced in building and construction although this problem seems to be growing in other industries. In the spring, labour shortages were most acute in Region North-West and South-West. In this round, we have registered a dwindling labour supply throughout the country. Engineers in particular are in short supply, in both manufacturing and building and construction. There is also a shortage of project managers, craftsmen, carpenters, mechanics, drivers, economists and architects. Efforts to solve this problem include increased use of resources on training, increased use of foreign labour and higher wages to attract/retain labour.

Costs, prices and profitability

Annual wage growth is accelerating. Expected annual wage growth is 4¾% compared with 4½ % in the previous round. Wage growth is highest in building and construction and the service sector. Our contacts indicate that they expect annual wage growth to be higher in 2007.

Prices overall have risen more rapidly than in the previous round. The rise in prices has gathered pace throughout the year. In this round, price increases are the highest ever registered in the regional network. Prices have increased most in building and construction, manufacturing and corporate services. A majority of companies are expecting prices to rise at a faster pace in the period ahead in all industries except the household service sector. Building and construction is the industry where most contacts are expecting prices to rise at a faster pace.

The entire private sector reports solid growth in profitability. The overall growth rate is approximately the same as in the previous round. Suppliers to the petroleum sector report the most pronounced improvement in profitability, although commercial services also report solid profitability growth during the period.

Region South-West

  • The boom is continuing. Overall activity growth is stronger and more broadly based than previously. The level of activity among suppliers to the petroleum industry is still rising sharply. The same applies to both household and corporate services. Moreover, growth is strong in domestically oriented manufacturing and in the export industry. Retail trade is characterised by solid growth.
  • In the building and construction sector, on the other hand, the growth rate is more moderate, as in the previous round. This may primarily reflect a particularly high activity level and may indicate that the sector is approaching capacity limits.
  • The market outlook for the next six months remains positive in all sectors. As in the previous round, service industries are most optimistic about growth. In the other sectors, growth is also expected to remain solid.
  • Investment is expected to increase in most sectors. The level of investment in retail trade remains fairly stable.
  • Just over six of ten businesses report that labour shortages are limiting their possibilities for expansion. All industries are facing labour supply constraints. The situation is particularly difficult in the building and construction sector.
  • Employment is rising in most industries. The exception is the public sector. Nearly half of the contacts expect to increase their workforce over the next three months. Only a few will be reducing their workforce. The labour market will remain very tight.
  • This is also indicated by accelerating wage growth. This applies particularly to manufacturing and services sectors. A number of industries now expect higher annual wage growth in 2006 than indicated in the previous round of interviews. Wage growth varies between 4% and 6% in different industries.
  • Prices have risen sharply in most industries with the exception of the export industry and retail trade. About six of ten companies expect prices to continue to rise at the same pace in the next 12 months, while approximately every sixth company expects prices to rise at a faster pace. The price outlook is roughly the same as in the previous round.
  • Profitability continues to improve in all business sectors.

 Region South

  • Growth reported in the September round continues. Both domestically oriented manufacturing and the export industry report solid growth and the upturn is broadly based. There are no reports of declining demand and output. Suppliers to the petroleum industry report somewhat lower growth now than before the summer. This is because a number of companies are producing at full capacity. The building and construction industry reports somewhat stronger growth in this round, while growth in commercial services has slowed somewhat. Retail trade and household services report continued solid growth.
  • Domestically oriented manufacturing, suppliers to the petroleum industry and retail trade expect the growth rate over the past three months to continue in the six months ahead. The export industry, building and construction and retail trade expect somewhat slower growth. The business sector is optimistic about the future, although several industries are concerned about the shortage of qualified labour and the rise in input costs.
  • The entire business sector in Region South is facing mounting capacity problems. The challenges are particularly demanding in the building and construction industry, manufacturing and in commercial services. In manufacturing, the challenges are related to plant capacity, qualified labour and, for some, the supply of raw materials. In the building and construction industry and in commercial services, the supply of labour is the main challenge.
  • The rate of investment in manufacturing is solid. Investment growth is moderate in retail trade and service industries. The local government and hospital sectors report solid growth in investment.
  • Employment is still on the rise. Growth is strongest in the private sector, but employment is also edging up in the local government and hospital sectors.
  • Annual wage growth is estimated at 5% in manufacturing and 6% in building and construction, while service industries expect 5%. In the local government and hospital sectors, annual wage growth is estimated at 4%. Expected annual wage growth has increased in the course of 2006.
  • All industries report a rise in selling prices over the past year. The export industry, the building and construction sector and commercial services report the sharpest rise in selling prices. Next year, 58% expect prices to remain stable, 29% expect prices to rise at a slower pace, and 13% expect prices to rise at a faster pace.

 Region East

  • All business sectors in Region East report solid growth. Growth is expected to continue at approximately the same pace in the period ahead.
  • In domestically oriented manufacturing, the solid growth is primarily being driven by favourable developments for suppliers to the maritime and energy sectors. There are no signs of a slowdown. In the export industry, growth is even stronger. Suppliers to the international oil and gas sector report solid results. Nor are there signs of moderating growth in the export industry.
  • Output continues to rise in building and construction, but at a more moderate rate than earlier. Growth appears to be somewhat stronger in the construction market than in the building market.
  • In retail trade, growth is solid and is expected to remain buoyant. Suppliers of building materials and groceries report solid growth, but growth is more moderate for clothing and cars.
  • The service sector, especially commercial services, reports solid growth. Growth is strongest in the consulting, staffing, banking/finance and architecture sectors, and these sectors also have the highest expectations about future growth.
  • Idle capacity is falling steadily in Region East. 67% of the companies report that they will now have difficulty in accommodating unexpected growth in demand. This is a substantial increase since the previous round when the share was 44%. The supply of labour is the primary constraint.
  • Employment has increased in all business sectors over the past three months. The service sector reports the strongest growth. There are plans to increase employment in all industries.
  • Annual wage growth in 2006 is estimated at approximately 5¼ %, which is higher than in the previous round. The service sector expects the highest annual wage growth. A majority of companies expect even higher wage growth next year as a result of the tight labour market.
  • Over the past 12 months, prices have increased in all industries with the exception of retail trade and household services. In manufacturing and building and construction, the rise in prices has picked up since the previous round. The rise in prices is expected to remain unchanged in the next 12 months. The export industry and retail trade are expecting a slower rise in prices, while other industries expect a sharper rise.

 Region North-West

  • The export industry in Region North-West continues to expand, with robust growth across the board in the past quarter. The overall growth rate for the next six months has been revised downwards to solid growth. The export sector with large offshore deliveries expects the boom to continue over the next 2-3 years, but many companies have now reached capacity limits.
  • Domestically oriented manufacturing as a whole recorded strong growth over the past quarter. Solid growth is expected in the next six months.
  • Activity among suppliers to the petroleum industry has increased sharply in the current quarter, and continued strong growth is expected in the next six months. The contacts in building and construction report continued solid growth in the current quarter, but a levelling off to more moderate growth is expected in the next six months.
  • Growth in retail trade has been solid for the past three months, but growth is expected to slow somewhat during the next six months. The service sectors report solid growth in the past quarter. In the next six-month period, moderate growth is expected in all service sectors.
  • 85% of the companies report that they would have considerable problems in accommodating a rise in demand, which is the highest ever reported. Major capacity constraints are reported by manufacturing along with building and construction, in particular.
  • Employment growth has been solid in the past quarter.
  • All sectors plan to increase investment in the next six-month period. Local government investment will be lower in the first quarter of 2007 compared with the level reported in the previous round.
  • The estimates for annual wage growth in 2006 have risen in this round compared with what was reported earlier this year, and is now between 4.5% and 5.5%. Domestically oriented manufacturing has the highest expected wage growth and this applies particularly to the supplier industry for the offshore sector.
  • The rise in prices during the last 12 months has also picked up markedly compared with earlier reports. Domestically oriented manufacturing has recorded the sharpest rise in prices this year, particularly for shipbuilding and ship equipment suppliers. Compared with reports from the previous round, more companies are now expecting a higher rise in prices in the next 12-month period.
  • Profitability has improved in all sectors in the last period. The export industry has recorded the largest improvement in profitability, mainly due to the combination of increased volumes and favourable prices. In recent years, there has been a shift in manufacturing output towards the flourishing offshore segment, resulting in increased profitability.

 Region North

  • All industries in the region report continued growth in demand and output. Growth is expected to continue at the same pace in the period ahead.
  • Growth is accelerating in domestically oriented manufacturing and the activity level is high in all segments of this industry. There are no signs of a slowdown.
  • In the export industry, output continues to rise, but at a more moderate pace than earlier. This is an expression of a high activity level and that the sector is experiencing capacity constraints. Growth is expected to remain moderate in the period ahead.
  • In building and construction, growth remains solid in all segments, and growth is expected to continue at the same pace. High capacity utilisation and shortages of qualified labour may limit growth in the longer term.
  • Retail trade reports strong growth and expects continued solid growth in the next six months. Sales of building materials, cars, leisure boats and brown and white goods reflect the strongest growth.
  • The service sector reports continued growth, although corporate services report somewhat lower growth than in the previous round. Tourism and the hotel industry report the strongest growth.
  • In this round, 57% of the contacts report that they would have some or considerable difficulty in accommodating expected or unexpected growth in demand. This is approximately the same as in the previous two rounds. This indicates that the level of activity in Region North is still high, with improved utilisation of production equipment and intense competition for qualified labour.
  • Most sectors expect to increase investment. Manufacturing expects the strongest growth in investment. The level of investment in retail trade remains fairly stable.
  • Employment has risen in all industries except retail trade, where employment is stable. Employment growth has been strongest in building and construction. All industries plan to increase employment in the period ahead. Retail trade, which is not planning to change employment levels, is the exception.
  • Labour shortages have become considerably more acute in all sectors except service industries and the local government and hospital sectors. 51% of our contacts report that the supply of labour will be a constraint if demand increases. In building and construction and manufacturing, there are shortages of engineers, managers and skilled workers. The service sector reports shortages of specialised and skilled labour in the fields of auditing, hotel operations and cleaning.
  • Annual wage growth in 2006 is estimated at between 3.5% and 5.5%. This represents an increase compared with estimates in the previous round for building and construction and retail trade. Intense competition for labour is still the most important cause of wage growth. Roughly half of our contacts expect wage growth to remain unchanged next year.
  • Building and construction report a sharp rise in prices, while retail trade reports moderate price increases. The rise in prices is solid in the other sectors. Building and construction report the greatest change since the previous round. This may indicate that the strong growth in this sector is also affecting selling prices in Region North. 30% of our contacts expect that prices will remain stable in the next 12 months, while 24% expect that prices will rise at a faster pace. The share of companies expecting prices to rise at a faster pace is lower than in the previous round and is highest in the service sector.
  • All sectors report solid profitability growth. The export industry, where growth in profitability is moderate, is the exception. Compared with the previous round, profitability growth is accelerating in building and construction, retail trade and the service sector, while it is slowing in the export industry.

 Region Central Norway

  • All industries report continued growth. Corporate services and suppliers to the petroleum industry report the strongest growth. The growth rate appears to be accelerating in the service sector, whereas in building and construction growth seems to be somewhat slower than earlier this year.
  • The outlook is marked by optimism and expectations of continued growth, but capacity constraints may hinder growth.
  • Investment appears to be increasing in all industries as well as in the public sector. Investment growth seems to be strongest in retail trade and the service sector.
  • Employment is rising in all industries except retail trade, where employment levels are reported to be stable. Employment growth is strongest in manufacturing and the service sector.
  • There seems to be increasingly less spare production capacity. The most common constraint is the shortage of labour. Building and construction and services have the least spare capacity. The service sector reports that they have less spare capacity than in the previous round.
  • Annual wage growth is expected to be between 3.5% and 5%. Building and construction and services are expecting the most pronounced wage growth. Half of our contacts, including the majority of contacts in the service sector, expect wage growth to be higher in 2007 than in 2006.
  • All industries report a moderate to solid rise in prices. Building and construction and corporate services report the sharpest increases. The number of contacts expecting prices to rise at a faster pace in 2007 has increased. The service sector expects the sharpest rise in prices due to labour shortages.
  • All industries report increased profitability, although profitability growth seems to be lower in domestically oriented manufacturing and the service sector compared with earlier this fall.

 Region Inland

  • Region Inland reports solid growth in demand in all industries during the period. Compared with the previous round, growth has been somewhat stronger in manufacturing and building and construction and somewhat weaker in the service sector and retail trade.
  • Output is increasing somewhat, both in domestically oriented manufacturing and in the export industry. In domestically oriented manufacturing, growth is strongest in building-related manufacturing and the food industry. Growth in the export industry is not sector-specific. A number of companies have increased output as a result of investments in expanded production capacity.
  • Building and construction report strong output growth, partly due to extensive building of commercial properties and leisure homes. The majority of Norges Bank's contacts are operating at virtually full capacity, and this may be a constraint on further growth.
  • The service sector continues to grow, albeit at a slower pace than in the previous round. The market outlook indicates stronger growth in this sector during the next half year, e.g. in transport, tourism and IT consultancy.
  • Capacity currently represents a constraint for many companies in many industries. The share of companies that will encounter problems in accommodating an unexpected increase in demand is around 61%, higher than in the previous round. The supply of qualified labour is the most important constraint, particularly in the service sector and building and construction. A new development in this round is that labour shortages are also a constraint on local government production, particularly in the technical sector.
  • Building and construction report the strongest growth in employment, whereas employment is relatively stable in the other industries. In building and construction, labour shortages are restricting further employment growth. The service and local government sectors expect moderate growth in employment.
  • In manufacturing and retail trade, investment levels are exhibiting a gentle downward trend. The local government sector is expecting relatively strong growth in investment in 2007.
  • Annual wage growth is estimated at about 4% in all industries as a whole, approximately the same as in the previous round. Growth is clearly strongest in building and construction. The estimate for overall wage growth is about 1 percentage point higher than in the same round in 2005.
  • Selling prices are rising at about the same pace as in the previous round. Prices are rising at a faster pace in manufacturing but at a slower pace in retail trade. The share of companies expecting prices to rise at a faster pace in the next 12 months is 43%, considerably higher than the 26% share expecting prices to rise at a slower pace. The number of companies expecting prices to rise at a faster pace is highest in manufacturing, retail trade and building and construction.
  • Most industries report a moderate increase in profitability. Developments are somewhat weaker than in the previous round, however, because some companies have been unable to increase prices to compensate for increased costs.

In autumn 2002, Norges Bank established a regional network of enterprises, organisations and local authorities throughout Norway. More about the regional network

Published 13 December 2006 13:56