Regional network 5/2008
- Regional Network report
Interview period: November 2008
Demand and output
In this round, contacts report that production has fallen for the first time since spring 2003. Activity is lower in all industries except suppliers to the petroleum industry, where growth is still reported to be moderate. The decline seems to be largely driven by reduced private demand for housing, cars and other consumer durables. In addition, many export companies have shown a marked decrease in activity since summer.
Total output is expected to fall further and more sharply in the next six months. Suppliers to the petroleum industry still expect weak growth, while the other industries expect activity to decline.
Domestically oriented manufacturing reports a marked fall in the production of all types of building materials. Output is also falling in the export industry in spite of the depreciation of the krone, which has improved export companies’ profitability. Reduced demand for commodities and auto parts for the car industry is contributing considerably to the fall in output. Activity in the building and construction sector declined further and at a faster pace than in the two previous rounds. Residential construction is slowing as existing projects reach completion, and housing starts are limited. Activity in commercial construction is also slowing. Retail trade has decreased for the second consecutive reporting period, with the largest decline in housing and building-related materials, cars and other consumer durables. Enterprises in the corporate services sector report a moderate decline in activity. The restaurant, hotel, tourist and transport industries are contributing negatively. The same applies to consultancy and advisory services for the building and construction industry. Activity is also lower in household services. Estate agents, restaurants, hotels and travel agencies are also experiencing lower demand from the retail market.
In manufacturing for both domestic and export markets, the fall in output is expected to accelerate. Suppliers to the petroleum industry expect output levels to remain stable at a high level ahead. However, contacts report that there is more uncertainty about longer-term prospects because many projects are being postponed owing to financing problems. Building and construction activity is expected to slow more sharply. Contacts expect a continued decline in residential construction and slower demand for commercial buildings. However, expectations are high of an increase in public sector projects, particularly construction projects. Contacts in services and retail trade are expecting a further fall in activity.
Capacity utilisation and supply of labour
Contacts report a substantial fall in capacity utilisation in the economy. Now, only 33 per cent report that they will now have problems accommodating demand growth of close to 48 per cent in August. The change is due to a considerable improvement in the labour supply. Only 16 per cent respond that the labour supply will constrain production in the event of a rise in demand. In August, 37 per cent stated that the supply of labour was a problem. The labour supply has improved in all industries, but is still weakest in petroleum-related activity.
For the first time since 2003, overall employment is reported to have decreased. Growth is still moderate in the public and services sectors, while employment is falling in manufacturing and building and construction. Employment in the private sector is expected to shrink further over the next three months. The strongest decline is expected in manufacturing and building and construction, while retail trade and services anticipate a moderate reduction. Employment is expected to remain stable in the public sector.
Overall investment is expected to decline. The municipal and hospital sector reports moderate growth, while the investment level is reporte to be falling in all the private sectors. The reason seems to be higher capacity as a result of substantial investment over a long period. The market outlook now indicates that capacity is satisfactory. Owing to the financial crisis, many contacts report that planned investment projects are being shelved or postponed.
Costs, prices and profitability
Wage growth in 2008 is expected to be about 6 per cent. There is little change in relation to the previous contact round, although the public sector has increased its projections somewhat. Wage growth is expected to considerably lower in 2009.
Overall, inflation is moving down compared with earlier this year. However, a weaker krone is pushing up prices in the export industry. In the other industries, the rise in prices is slowing.
Inflation is expected to fall in the coming year. Of 252 enterprises, 117 are expecting lower inflation and only 40 higher inflation. This is the lowest level measured since the network was established. Inflation over the past has been high, prompting the contacts to expect lower inflation ahead. Moreover, inflation is being pushed down by weaker demand and increased competition. The contacts that expect higher inflation ahead point to higher prices for imported goods and strong growth in labour costs.
Margins are falling in all sectors except among suppliers to the petroleum industry and in the export industry. While the krone depreciation has helped the export industry, it has had a correspondingly negative impact on retail trade. Among reasons for reduced profitability, contacts highlight enterprises’ inability to raise prices or productivity to compensate for higher labour and commodity costs.
In this round, contact enterprises report that credit is tighter. The share stating that the supply of credit has to some or to a great extent been affected by financial turbulence has risen considerably since the same question was asked in January 2008. A greater number of enterprises regard the question as relevant in this round than was the case in January.
Charts - regional network (pdf, 74 kB)