The upswing in the global economy spread to the Norwegian economy through strong export growth and higher prices for Norwegian exports. At the same time, demand in the sheltered sector remained buoyant. There was also slippage in government budget spending allocations throughout 1999. Private consumption continues to rise, fixed investment is increasing in service sectors, and unemployment remains low. The decline in petroleum investment is necessitating restructuring and lower production levels in some Norwegian manufacturing sectors. Developments so far indicate that this turnaround has been offset by continued high employment growth in the public sector, private services and non-petroleum-related manufacturing. Chart 10 Wage shares by industry Labour costs as a percentage of factor income  However, enterprises’ financial position is vulnerable. The growth in labour costs in the latter half of the 1990s left its mark on profitability. Both in manufacturing and other industries, labour costs as a percentage of factor income have increased since the mid-1990s. The analysis in the June 2000 Inflation Report indicates that consumer price inflation in 2001 and 2002 may exceed levels which are consistent with exchange rate stability over time. The risk of rising wage and price inflation has increased, while there now appears to be little risk of a pronounced recession over the next two years.
On the basis of developments in the Norwegian economy and the future outlook, Norges Bank raised its key rates by 0.25 percentage point as of 13 April, by 0.5 percentage point as of 15 June and by 0.5 percentage point as of 10 August. As already mentioned, this represents a substantial step in the adjustment of the interest rate that is appropriate on the basis of the analyses in the June Inflation BIS Review 67/2000  10  Report. However, in the light of recent trends in the economy and the balance of risks, the probability that the next change in interest rates will be an increase is greater than the probability of a reduction. Coordination of economic policy The experience of the 1970s and 1980s shows that, in the long term, monetary policy is not suitable for influencing competitiveness or the size of the internationally exposed sector. Any attempt to do this through the use of monetary policy instruments will inevitably lead to instability. However, fundamental real economic forces of this kind can be shaped through the use of fiscal policy. Although monetary policy is not suitable for influencing competitiveness, exchange rate fluctuations may provide an early warning that the internationally exposed sector is on the verge of losing or gaining strength in the contest for economic resources. A sound basis for exchange rate stability is a fiscal policy which manages to smooth fluctuations in domestic demand and production, coupled with well functioning income determination.