Regional network 1/2009
- Regional Network report
Interview period: January 2009
Demand and output
In this round, enterprises in Norges Bank’s regional network report that output is continuing to fall at about the same pace as in the previous period. With the exception of the petroleum supplier sector, which is expanding at a moderate rate, all industries are exhibiting negative growth. The strongest declines are being observed in retail trade and domestically oriented manufacturing. The driving forces behind these developments are weaker private demand and stock reductions in the distributor chain owing to the prevailing market uncertainty.
Overall, production in domestically oriented manufacturing is falling sharply. Stable production in the food industry is making a positive contribution, while production and demand are declining for the building materials, furniture, newspaper and printing industries. The export industry is declining at the same pace in this round as in the previous round owing to weakening international demand. The export industry reports a marked decline among suppliers to the car industry and in the processing industry. Production in the building and construction industry is falling at about the same pace as in the previous round. All regions report that residential construction is declining and that many commercial building projects are being cancelled or postponed. Activity in retail trade is falling rapidly. The decline is most pronounced for sales of dwellings and building-related goods, in addition to consumer durables. The decline in activity in commercial services is moderate. Petroleum sector services seem to be holding up best. Contracting of labour is making a negative contribution. Activity in household services is also slowing, but at a somewhat more moderate pace than in the previous round.
The regional network contacts expect production to fall at approximately the same pace ahead as in the past three months. In the petroleum supplier industry, for the first time in many years, a weak decline is expected six months ahead.
The production decline for domestically oriented manufacturing is expected to slow somewhat ahead, while exporters are expecting the fall in production to accelerate. Our contacts in the petroleum supplier industry believe that a persistently low oil price will gradually lead to postponement of investments and lower activity. The building and construction industry is expecting activity to decline at a faster pace than at present as many projects are now being completed at the same time as there are fewer new projects to compete for. Retail trade contacts believe that the decline in turnover will be more moderate ahead than the fall observed over the past three months. The service sector expects a moderate fall in activity ahead, at about the same pace as the decline over the past three months.
Capacity utilisation and supply of labour
The enterprises in the regional network report that capacity utilisation is exhibiting a clear decline. The share of enterprises reporting problems in accommodating growth in demand is now down to 23 per cent. This level is now considerably lower than at the time capacity utilisation was highest at the beginning of 2008. The marked decline is due to recent years’ capacity expansions in pace with sharp growth combined with the current fall in demand. Regionally, capacity utilisation is higher in the western and northern regions than in the southeastern and southern regions. The labour market is being perceived as markedly less tight in this round than in previous rounds. Only 10 per cent of the contacts respond that the supply of labour would be a constraint to growth in production. This is the lowest level noted since we introduced this question in 2005 and is considerably lower than the highest level of around 50 per cent.
Employment is reported to have declined somewhat, in line with the business sector’s own expectations three months ago. All industries in the private sector report a decline, but the fastest fall in employment growth is being observed in the building and construction industry. In the municipal and hospital sector, employment is stable. Employment is expected to weaken further in the private sector over the next three months, with the strongest decline still being signalled in the building and construction industry and in manufacturing.
Investment is expected to fall in the private sector, while public sector budgets imply an unchanged investment level ahead. As a result of falling demand and production, many of our contacts are now experiencing spare capacity and reduced need for investment. Uncertainty surrounding market prospects and funding problems have prompted postponement of many investment plans.
Costs, prices and profitability
Expected annual wage growth in 2009 is slightly higher than 3½ per cent. This is appreciably lower than annual wage growth in 2008 of around 6 per cent reported in the previous round. Expected wage growth is falling sharply in all industries, particularly in the building and construction industry and in manufacturing.
The rise in prices is moderate and slowing compared with 2008. With the exception of retail trade, all industries are contributing to lower inflation. Inflation is expected to be moderate in the coming year. Among our contacts, there are twice as many that expect lower inflation than higher inflation.
Margins are falling in all industries and the fall is more pronounced compared with the previous period. Only the petroleum supplier sector is reporting an improvement in margins. The sharpest fall in margins is in the export industry and in building and construction.
Updated information obtained in March
In March, 44 contacts in the retail and service sectors were asked for information about developments in seasonally adjusted household demand and the rise in prices for goods and services, with emphasis on developments since the New year compared with 2008 Q4.
Demand for consumer durables such as cars, boats, furniture and electrical goods fell sharply before Christmas. The fall is reported to have slowed since the New Year. There are signs of growth in demand for boats and second-hand cars compared with 2008 Q4. Of consumer durables, only sales of building materials are reported to have shown a continued sharp decline. In the tourist industry, hotel occupancy rates continue to fall, while restaurants report that turnover is unchanged or showing a marginal decline. Sales of package holidays have improved somewhat over the New Year, but consumers are showing a preference for cheaper travel.
Prices for imported consumer durables are being pushed up by the krone exchange rate, reflected both in price developments since New Year and in price rises planned for the period to summer. Prices in the grocery trade and restaurant industry are rising, partly due to the impact of the agricultural settlement. Prices for other goods and services seem to have fallen, with the exception of building materials and textiles, which have remained unchanged. The tourist industry expects prices to decrease in the period to summer. Prices for other goods and services are expected to remain unchanged.