BIS Review 4/2003  1  Output gap Per cent of trend GDP 6  6  5  5  4  4  Hodrick-Prescott method  3 2  3 2  Production function method  1  1  0  0  -1  -1  -2  -2  -3  -3  -4  -4  -5 -5 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002  Sources: Statistics Norway and Norges Bank SG Gausdal 31.01.03  At the beginning of the 1990s, the economy was in a deep recession. Production was well below 1 capacity. When growth in the economy picked up, capacity utilisation increased. The output gap , according to our methods of calculation, was closed around 1996. Thereafter, cost inflation and the rise in prices for goods and services produced for the domestic market accelerated. The upturn reached its peak in 1997, with GDP growth approaching 5 per cent. The pace of such a strong upturn could not be sustained. In 1997 and 1998 the economy shifted from an upturn with high growth rates to an expansion with lower growth but low unemployment, labour shortages in many sectors and strong growth in labour costs. Stock market prices in Norway and the US Monthly figures.
This wage gap also provides an indication of pressures in the real economy, not unlike the measures of the output gap shown earlier. As illustrated,  2  The wage gap is calculated as the difference between the rise in labour costs in manufacturing in Norway and 4.5 per cent. The wage gap is calculated as the difference between the rise in labour costs in Norway and trading partners in the years prior to 2001.  there tends to be a correlation between the wage gap and the output gap. The output gap can be an expression of our assessment of pressures in the economy. The wage gap can be a more direct indication of the social partners’ perception of the situation. This provides useful information in interest rate setting. Moreover, wage figures and wage growth estimates in real time are considerably more reliable than preliminary national accounts figures for output and demand that are used to estimate the output gap, which tend to be subject to substantial revision. The wage growth estimates drawn up by Norges Bank early last summer, just after the income settlements, underestimated the increase by 0.16 percentage point, with small deviations, on average for the period 1995-2001. On the other hand, the wage gap is a lagging indicator. Wage growth in any one year has been heavily influenced by economic developments in the preceding 12-18 months.