Earlier, the krone was devalued in response to high wage growth, which contributed to veiling the effect of relatively high wage growth on manufacturing industry’s competitiveness. With an inflation target, monetary policy has become forward-looking. The high pay increases awarded in last year’s wage settlements therefore engendered expectations of higher interest rates. This led to an appreciation of the krone. Manufacturing industry is thus faced with a double burden: high wage growth and a strong krone. Over the last 30 years, manufacturing has been scaled back in waves, particularly in the years between 1977 and 1987. In the years leading up to the periods of contraction, profitability in the manufacturing sector deteriorated. It can take time for such a deterioration to translate into lower output and employment. But when the turnaround does occur, it tends to be swift and pronounced. It now appears that a new period of downscaling is under way. Several factors point to this. First, a trend analysis suggests that manufacturing employment will decline in the years ahead. This is partly related to an expected decline in petroleum investment and somewhat higher productivity growth in manufacturing than in other industries. Second, manufacturing costs have increased sharply since 1988 as a consequence of high wage growth. The appreciation of the krone since the summer of 2000 has amplified the deterioration in cost competitiveness. Third, as a result of the fiscal guideline, the internationally exposed sector is exposed to additional pressure.
The impact of monetary policy occurs with long and variable lags. Our analyses indicate that a substantial share of the effects occurs within two years. A time horizon of two years when setting interest rates allows monetary policy to contribute to stabilising production. This horizon prevents monetary policy in itself from causing unnecessary fluctuations in the economy. The sharp rise in labour costs in recent years carries with it a potential for higher unemployment. The interest rate is an effective instrument for countering lower demand and growing unemployment when measures to stimulate demand do not translate into higher wage growth or unstable financial markets. However, there is little monetary policy can do to prevent an increase in unemployment that is driven by high cost inflation. A pre-condition for an effective interplay between wage settlements and monetary policy is that the response pattern in monetary policy is known and consistent. When the response pattern in monetary policy is known and consistent over time, the social partners can take into account monetary policy responses when negotiating wages. In 2002, wage growth was higher than we had expected up to the wage settlement in the spring of 2002. In spite of the rise in unemployment, the wage settlement in 2002 indicated that the social partners still perceived the labour market as tight. Preliminary figures indicate annual wage growth between 5½ og 6% in 2002, which is substantially higher than projected.