Energy price inflation will also be considerable lower ahead. In August, the enterprises in Norges Bank’s regional network noted that there had been a shift in sentiment in the Norwegian economy. An extra round of calls to some contacts in October indicated that the outlook had worsened since August. The latest reports from enterprises in Region East indicate that demand has declined since summer, with a further drop in September and October. Customers are responding to tighter lending conditions by postponing projects. The changes have occurred rapidly, and there is now considerable uncertainty among our contacts in this region with regard to developments over the next six months. The majority of the enterprises report that they will reduce investment. Many are considering workforce reductions as an alternative if the situation does not change in the New Year. The majority also envisage lower wage and price inflation ahead. In the past year, unemployment has been as low as in the mid-1980s. Seasonally adjusted registered unemployment was 1.8 per cent in October. The enterprises in Norges Bank’s regional network are expecting some reduction in the workforce ahead. There has been a slight increase in layoffs. Going forward, enterprises will probably adjust the workforce to lower output growth and reduce the use of overtime. After a long period of high housing investment and rising prices, activity in the housing market is now slowing. Tighter credit conditions are amplifying the fall in house prices.
Norges Bank operates a flexible inflation targeting regime so that weight is given to both variability in inflation and variability in output and employment when setting interest rates. The Norwegian economy has in general exhibited solid growth since the beginning of the 1990s, although with a mild setback in 2002 and 2003. Over the past four years, the mainland economy has been in a sharp upturn, with annual growth averaging well over 4 per cent and particularly vigorous growth in 2007. Growth is now slowing markedly in the Norwegian economy. Household consumption has stagnated and house prices are falling. Growth in the Norwegian economy has slowed, while inflation has accelerated. In October, the year-on-year rise in the consumer price index (CPI) was 5.5 per cent. Electricity prices rose sharply through summer after unusually low prices last year. Underlying inflation has also picked up. Inflation adjusted for tax changes and excluding temporary changes in energy prices (CPIXE) was 3½ per cent in October. Wage growth is markedly higher and productivity growth has slowed considerably. The high rate of cost inflation has led to a faster rise in prices for domestically produced goods and services. Prices for imported consumer goods are no longer falling and are now on the rise. The slowdown in the real economy is expected to start pushing down inflation towards next  BIS Review 143/2008  3  summer. Higher unemployment and weaker corporate profitability will probably lead to low pay increases in the wage negotiations next spring.