Capacity utilisation in the business sector is high and a growing number of enterprises are now facing constraints. Statistics Norway’s business tendency survey for the third quarter shows that Norwegian manufacturing is optimistic about the prospects ahead. A clear majority of industrial leaders assess the general outlook as more positive in the short-term than in the third quarter. A majority of industrial leaders are considering an increase in investment. A shortage of skilled labour is posing a mounting challenge to manufacturing in the period ahead. This picture is consistent with information from the company contacts in Norges Bank’s regional network. In the August round of interviews, 59 per cent of the companies reported capacity problems, and this share has increased since the previous round. Output and employment are increasing in all sectors. Pressures are particularly strong in the building and construction sector and some corporate services. The rise in prices is moderate in retail trade. It also appears that extensive use of foreign contract labour, particularly in some manufacturing sectors and building and construction, is curbing wage growth. An increasing number of our company contacts report labour shortages, particularly a shortage of engineers, project managers, transport workers and skilled labour in corporate services. Labour shortages are also beginning to emerge in retail trade and household services. High demand for labour has resulted in a marked decline in unemployment so far this year. Unemployment is now in line with the unemployment level during the previous expansion at the end of the 1990s.
In the last rounds of interviews with our regional network, an increasing number of companies reported that wage growth in 2006 will be higher than budgeted early this year. The level of unemployment that is consistent with stable real wage growth is uncertain and probably varies over time. We have assumed that increased economic integration across countries, both in the form of an increase in inward labour migration and intensified competition in product markets, may have a dampening effect on wage demands for a given level of unemployment. In the period ahead, a tight labour market is expected to result in higher real wage growth. Nevertheless, it is assumed that labour inflows will have a dampening impact on wage demands, so that real wage growth will be a little lower in the next few years than in previous periods of equally low unemployment. The upward pressure on price and wage inflation given the level of current resource utilisation, as reflected in the output gap, is estimated to be lower than in the previous expansion even though the unemployment rate is at approximately the same low level. This is due in part to high productivity growth in recent years. Growth in disposable income has been high in recent years. Lower interest expenses and relatively high real wage growth have resulted in an increase in household purchasing power. The rise in house prices may also have fuelled growth in private consumption.