National Report for Regional Network - May 2005

Interview round:	3-2005
Interview period:	May 2005

Summary

Demand, output and market outlook

The cyclical upturn in the Norwegian economy continues. Demand is growing in all industry sectors at approximately the same rate as in the last round, with the exception of the export industry which reports somewhat lower growth. The high investment and activity level in the oil and gas industry, extensive residential construction and healthy household finances are important driving forces behind the upturn.

Expectations of continued high oil prices and record high petroleum-related investment are fuelling growth in land-based industry. Suppliers to the petroleum industry are thus reporting strong growth in some sectors. In the export industry, the shipbuilding and maritime industry are experiencing solid growth in demand. Growth in the process industry, however, is somewhat more moderate than earlier. In domestically oriented manufacturing, suppliers to the building and construction sector are experiencing steadily increasing demand, while the upturn in the offshore and maritime industry is having positive spillover effects on the engineering industry and other subcontractors. The building and construction sector continues to experience substantial growth, although in some regions, growth has slowed. Growth in retail trade continues and is particularly strong for building materials. Nevertheless, overall growth is somewhat lower than in most of 2004. The services sector is experiencing solid growth, especially in commercial services and in the financial, transportation and IT sectors.

The market outlook for the next six months indicates that growth in the Norwegian economy will continue, albeit at a somewhat slower pace. The outlook for the export industry is clearly less optimistic than earlier. Reports from the entire country concur on this point. It also appears that the peak has been reached in building and construction. Growth is expected to be lower in the period ahead, primarily due to slower growth in the housing market. The distributive trades and the services sector are expecting the upturn to continue at the same pace as during the last reporting period. None of the business sectors expect an increase in the growth rate in the next six months.

Capacity utilisation and investment

As in the last round, nearly 40 per cent of the companies report that they would have some or considerable difficulty dealing with growth in demand. The share of companies that would have considerable problems dealing with growth in demand has increased during the spring. Large operators in both building and construction and some petroleum-related industries have reached capacity limits.

Thus, investment plans are increasing. Forty-two per cent of the companies report plans to increase investment, while 11 per cent expect to reduce investment. On the whole, it appears that investment growth will be moderate in the entire private and public sector in the next six to twelve months.

Employment and labour market

Despite solid growth, enterprises are reluctant to hire new staff. In the last period, employment has remained unchanged in manufacturing and retail trade, whereas in the public sector, employment has declined slightly. The number of employees has increased, however, in petroleum-related industries, building and construction and the service sector. These sectors are also expecting growth in the next three-month period. Building and construction, however, is cutting back on plans to hire new staff. In a number of industries, typically the hotel and restaurant industry and some parts of manufacturing, the man-hours worked are increasing although the number employed is the same. One in four enterprises, an increase from one in five in the last round, reports that the supply of labour represents a constraint. As in earlier interview rounds, building and construction companies predominate among those that experience the supply of labour as a constraint.

Costs, prices and profitability

Increasing scarcity of resources and capacity has led to a sharper rise in prices in building and construction and petroleum-related industries. The export industry has also experienced a solid increase in prices in the last 12 months, largely due to rising commodity prices. The rise in prices has been moderate in the other industries. In the period ahead, there are more companies that expect a higher rather than a lower increase in prices, although price expectations appear to have moderated somewhat compared with earlier in the year.

Annual wage growth in 2005 is projected at 3.4 per cent, the same as the projection at this time last year. The projection for the public sector has been reduced by 0.5 percentage point since the last round and is now at the same level as the projection for manufacturing.

It appears that companies continue to focus heavily on cost control and continuous improvement of internal processes. This combined with solid demand and output is improving profitability in all industries.