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The international situation.

2.1 Summary review

The economic slowdown in the OECD area seems to be more marked than we envisaged earlier. A recovery has admittedly begun in the United States but is slower than expected. In Western Europe the economic future is highly uncertain. We count on improved growth there in 1993 but this is strongly contingent on the assumption that the problems with German reunion are handled so as to permit a further reduction of interest rates next year in Germany and other countries in Western Europe. The forecast also presupposes that there are no additional major disturbances concerning the Maastricht Treaty after the narrow French majority in favour.

Economic activity in the OECD area has been very weak since the second half of 1990 though it has tended to pick up in the past year. In the second half of 1991 and the first of 1992 total production rose at an annual rate of 1 to 1 1/2 per cent. Growth was generated mainly by private consumption, which in the seven largest countries began to rise in the second half of 1991 and continued at the same rate in the first half of this year. Investment had fallen sharply in the first half of 1991 but the downward tendency ceased in the second half and a slight recovery was noted in the first half of this year.

A picture of unemployment and inflation (represented by the deflator for private consumption) in the OECD area since the early 1970s is given in Diagram 2.1. The recession in connection with the oil crisis of 1973-74 involved a sharp increase in unemployment. In the early 1980s a number of countries introduced more restrictive policies in order to combat the high rate of inflation that had prevailed since the beginning of the 1970s. In many countries it was hoped that the resultant increase in unemployment would be only temporary. It was argued that a permanent curb on inflation would stimulate growth in the longer run so that after some years, unemployment would fall back to or even below the initial level. The efforts to lower inflation in the 1980s were successful but instead of the expected reduction of unemployment, it seems that the level has become permanently higher than in the late 1970s and appreciably higher than before the oil crises. In the coming years economic policy in most OECD countries will probably still focus primarily on combatting inflation and improving public finance.

The recovery of activity in the past year has come entirely from North America, where production had fallen sharply in the first half of 1991. In Japan and Germany there has been a marked slackening of production in the past year and the level in the United Kingdom has been falling since the beginning of 1991. Ever since the first half of 1991 total production in Western Europe has been rising at an annual rate of less than 1 per cent.

With production as weak as this, the overall level of employment in the OECD area has not risen at all; a weak increase in the United States has been offset by cuts in Western Europe. Unemployment has gone on rising and in the summer it stood at 7 1/2 per cent of the labour force, while in Western Europe it exceeded 9 per cent. Wage and price increases have gone on falling; from 1991 to 1992 business sector wages are estimated to rise 4 1/2 per cent and consumer prices 3 1/4 per cent.

The shift in relative interest rates in the international money market became more pronounced in the early part of 1992 when short rates in the United States went on falling while German rates continued to rise and with them the rates in most other countries in the EMS. In September 1992 there was a marginal downward adjustment of the German rates. Japanese rates have been falling since the end of 1991. Our forecasts for 1993 assume that short US rates are raised and that German rates fall back, thereby narrowing the present extremely large differential.

Capital market rates have not shifted nearly as much as those in the money market. In recent years the long US rates have roughly followed the downward movement of inflation. The German rates were also lowered in the first half of this year following, sharp increases in 1989 and above all 1990. In August the rate for long government bonds was just over 7 per cent in the United States and just over 8 per cent in Germany.

The development of interest rates meant that the German mark in particular as well as other European currencies went on rising against the dollar up to the late summer of this year. The Finnish mark was written down early in September, followed somewhat later by the Italian, British and Spanish currencies. For the remainder of 1992 we have adopted the exchange rates that applied on 21 September. This implies that the German mark and the yen move up 5-7 per cent against the dollar from 1991 to 1992 and 2-4 per cent 1992-93.

The accumulation of household liabilities in the late 1980s has been a major factor behind the economic slowdown in the OECD area in recent years. Financial consolidation has been an important aim for households in many countries. The development of real estate prices has also contributed in that a period of rapid appreciation in many countries has now turned into a price fall. The severity of this problem varies, however, and seems to be greatest in the United Kingdom and the Scandinavian countries, more limited in the United States and relatively slight in Germany. The saving ratio's falling trend in the 1980s turned upwards in many countries in 1990 and 1991, which raises the question of when the new tendency will cease. In the past year the saving ratio in the United States has risen only slightly from the high level that was reached in the first half of 1991 and we assume little change in the forecast period. In the United Kingdom and our Nordic neighbours it seems that the saving ratio is still rising this year but we count on a largely unchanged level in 1993.

Even with a moderate increase in disposable income, this scenario implies that the, growth of private consumption in the OECD countries tends to pick up in the second half of this year and accelerates more appreciably in 1993. If this happens we assume that investment activity will also rise at an accelerating rate in the forecast period. The high level of business profits also points in this direction. Although the return on capital has tended to fall from the high in 1989, OECD estimates indicate that the level in 1991 and 1992 is still appreciably above the average for the period 1975-90.

Diagram 2.2 shows the registered and forecast development of GDP, private consumption and investment in the period 1971-93. We count on the present slowdown being shorter and shallower than in 1980-82. With inflation well under control, there is unlikely to be a fiscal squeeze as stringent as in the early '80s even though a number of countries face problems with public deficits. In the early '80s both money and capital market rates were sky-high in the United States, whereas now, as mentioned above, the former are at a record low and the capital rates are appreciably lower than a decade ago. Although interest rates in Western Europe have risen in recent years, except in the United Kingdom they are also not as high as in the early '80s.
Table 2.1 Consumer prices in selected countries and groups of
countries
Annual Percentage change
 1988 1989 1990 1991 1992 1993
Seven major countries
United States 4.1 4.8 5.4 4.2 3.1 3.6
Japan 0.6 2.3 3.1 3.3 2.1 2.0
Germany West 1.3 2.8 2.7 3.5 3.9 3.5
France 2.7 3.5 3.4 3.1 3.0 2.8
United Kingdom 5.0 7.8 9.5 5.8 3.9 4.0
Italy 4.9 6.6 6.1 6.5 5.6 5.5
Canada 4.1 5.0 4.8 5.6 1.7 2.5
Nordic countries
Denmark 4.5 4.8 2.7 2.4 2.4 2.6
Finland 4.6 6.6 6.1 4.2 2.8 3.5
Norway 6.6 4.5 4.1 3.4 2.5 2.8
Sweden 5.8 6.5 10.4 9.4 2.1 3.7
Other OECD-countries
Austria 2.0 2.6 3.3 3.2 3.9 3.6
Belgium 1.2 3.1 3.5 3.2 2.5 2.6
Netherlands 0.8 1.1 2.4 3.9 3.9 4.1
Spain 4.8 6.8 6.8 6.0 5.5 5.0
Switzerland 1.8 3.2 5.4 5.8 4.3 3.5
Total for these
countries 3.3 4.5 5.0 4.3 3.3 3.4
Sources: OECD and the Institute.


From the GDP figures for OECD countries in Table 2.2 it will be seen that this year's improvement in the growth of production comes entirely from North America. We envisage that US production swings from a fall of more than 1 per cent last year to growth at almost 2 per cent this year and 3 1/2 per cent in 1993. Investment turned up markedly in the first half of this year and the growth of private consumption also strengthened; both production and domestic demand rose at an annual rate of about 2 per cent. Growth in the second half-year is likely to be only slightly stronger, followed by a more appreciable acceleration in 1993. With the low dollar rate and subdued labour costs, American manufacturers are estimated to gain shares in both domestic and export markets in the forecast period.
Table 2.2 GDP in selected countries and groups of countries
Percentage volume change
 1988 1989 1990 1991 1992 1993
Seven major countries 4.5 3.3 2.3 0.8 1.6 3.0
United States 3.9 2.5 0.8 -1.2 1.9 3.4
Japan 6.2 4.8 5.2 4.4 2.1 3.4
Germany West 3.7 3.8 4.5 3.1 1.2 2.0
France 4.5 4.1 2.2 1.2 1.9 2.5
United Kingdom 4.1 2.2 1.0 -2.4 -0.8 2.1
Italy 4.1 2.9 2.2 1.4 1.3 1.8
Canada 4.7 2.3 -0.5 -1.7 1.5 3.5
Nordic countries 2.1 2.3 1.0 -1.2 0.3 0.9
Denmark 1.2 0.8 1.7 1.3 1.4 2.6
Finland 5.4 5.4 0.3 -6.5 -1.3 2.5
Norway -0.5 0.4 1.8 1.9 2.4 2.3
Sweden 2.3 2.4 0.4 -1.4 -0.7 -1.8
Other OECD countries 4.0 4.2 3.6 1.7 1.7 2.2
Austria 4.0 3.7 4.6 3.0 2.2 2.8
Belgium 4.9 3.8 3.7 1.5 1.4 2.0
Netherlands 2.7 4.2 3.9 2.1 1.8 1.8
Spain 5.1 4.7 3.7 2.4 2.2 2.5
Switzerland 2.9 3.9 2.2 -0.5 0.7 1.9
OECD Europe 3.9 3.4 2.7 1.0 1.1 2.0
OECD total 4.4 3.3 2.4 0.8 1.6 2.8
Sources: OECD and the Institue.


In Japan the growth of production in the first half of this year was slow. Domestic demand was still weak, particularly for investment. The collapse of share prices and the tightening of monetary policy in 1990-91 has greatly worsened business conditions. It was mainly because import growth virtually ceased that production showed an increase in the first half-year. In the forecast period we foresee a successive acceleration of both domestic demand and production. Monetary policy has been gradually eased and fiscal stimuli, for instance in the form of increased public investment, were presented by the Government this spring and summer.

In Western Europe (excluding East Germany) the growth of production is estimated to stay at only about 1 per cent in 1992 but could accelerate to 2 per cent next year. Growth this year in West Germany is likely to stop at just over 1 per cent. Problems connected with reunion have led to a restrictive monetary stance as well as increased taxes and charges. After an abrupt fall, production in East Germany began to stabilize towards the end of 1991 and appreciable growth can be expected in 1992. The upward tendency should continue to 1993 and the situation in East Germany is then expected to permit a somewhat less tight monetary and fiscal stance in West Germany, leading to an acceleration of domestic demand and production from 1992. Growth in the total German economy is estimated to be 1 3/4 per cent this year and 2 1/2 per cent in 1993.

In the British economy the recession continued in the first half of this year. The problems here have to do with a persistently high interest level that is burdening households as well as firms. The conditions for a recovery in 1993 therefore improved appreciably in that interest rates could be lowered when Britain left the ERM in September. In Sweden's Nordic neighbours there is the prospect of a return to aggregate growth this year after the fall in 1991. This is mainly because production in Finland is now falling much less markedly; the contraction of domestic demand is less dramatic than last year and exports are rising strongly. Growth in Denmark is continuing at much the same moderate rate as last year; private consumption is rising quite strongly but investment is still falling, partly because business confidence declined after the referendum on EMU. Production in Norway is growing faster than last year, generated mainly by rising private consumption and oil exports. In 1993 growth in these Nordic countries is likely to be among the best in Western Europe. In Finland there should be some renewed increase in domestic demand, accompanied by major positive effects of the exchange rate adjustments in 1991 and 1992. In Norway there will be a marked increase in domestic demand but as oil exports will probably slacken markedly from the high rate in 1992, the growth of total production will be largely unchanged. The higher growth of production foreseen in Denmark comes mainly from an upswing in investment, while the growth of private consumption ff also expected to accelerate.

With the outlook outlined above, GDP growth in the OECD area will strengthen from less than 1 per cent last year to more than 1 1/2 per cent in 1992 and 2 3/4 per cent next year. Such a moderate upswing should lead to much the same rate of wage increases as in 1992. As shown in Table 2.2, consumer prices are expected to rise 3 1/2 per cent in 1993 or little more than this year. Unemployment will hardly fall appreciably.

2.2 Survey by countries

United States

From the second quarter of 1990 to the first quarter of 1991 total production in the United States fell more than two per cent. A recovery began in the second quarter of last year but it has been so gradual that the earlier loss had still not been entirely recovered in the second quarter of this year.

While private consumption more than made up for the earlier drop, this was by no means the case for investment, which had already begun to fall early in 1990 and continued downwards until the end of 1991, when the total fall amounted to 11 per cent. The recovery in the first half of this year has returned investment to roughly 7 per cent below the earlier high. Investment in construction decreased considerably more than in machinery and the recovery to date has been weaker for the former than the latter. Construction has picked up only in the residential sector; the other components are still subdued by surplus capacity, for instance as regards office buildings.

Exports did very well initially in the current upward phase but slackened in the first half of this year as activity weakened in market countries. As increased domestic demand meant that imports also rose sharply, the external balance has been making a negative contribution to production so far in this phase. The depreciation of the dollar in the spring also contributed to a renewed increase in the US trade deficit in the first half of this year.

Production picked up so slowly that employment did not begin to rise until early in 1992 and the tendency up to the end of the summer has been gradual and irregular. Unemployment rose in the first half-year and then fell slightly in the summer. Wage increases have been very moderate and the rise of unit labour costs has been comparatively slow. This made it possible to keep inflation in check: in August 1992 the consumer price rise stood at only 3.1 per cent.

The sluggish development of production and employment, accompanied by low inflation, caused the Federal Reserve to go on lowering short rates of interest, which by the end of the summer were at a record low. In August the level was around 3 1/4 per cent compared with around 7 1/4 per cent for long rates, an usually wide spread.

The fall in long interest rates has thus been fairly limited, corresponding since 1990 to no more than the retardation of inflation. The downward tendency is hampered by the rapidly rising federal deficit in conjunction with the recession and expenditure occasioned by the savings and loan crisis. For fiscal 1992 the federal deficit is estimated to equal around 6 per cent of GDP. Official forecasts as well as commitments by the Democrat presidential candidate envisage a marked reduction of the deficit in the years ahead but similar predictions in the past have often proved unduly optimistic. Whatever the outcome of the November election, public consumption will probably be very subdued in the coming years, partly as a result of cuts in defence expenditure.

The development of interest rates caused the dollar to go on falling through the summer of 1992. For the purpose of our forecasts we assume that in the forecast period the dollar stays at the rate on 21 September. At this time the currency unrest in Europe had given the dollar a rising tendency against the European currencies. Even so, for 1992 and 1993 this assumption implies that the dollar falls 5-7 and 2-4 per cent respectively against both the German mark and the yen.

It is largely private consumption that will determine whether the growth of production strengthens in the rest of this year and in 1993. A further increase in business investment presumably requires an expansion of domestic demand, though some incentive may come from market opportunities at home as well as abroad as a result of good competitiveness and a sharp increase in business profits in the first half of this year. An investment survey in September this year indicated that the volume of business investment is rising almost 6 per cent in 1992.

The need to consolidate household finance has been a damper on economic activity in the early 1990s. Household liabilities grew in the 1980s and OECD estimates indicate that in 1991 they averaged approximately a full year's disposable income compared with 80 per cent in 1980. This was reflected in the saving ratio's falling trend in the 1980s. The net financial wealth of households did not deteriorate because assets also appreciated strongly; throughout the period 1980-91 the average level of net financial wealth exceeded one year's disposable income by a factor of more than 2.5. The saving ratio rose markedly in 1990 and the first half of 1991, largely because the combination of increased indebtedness and the economic slowdown encouraged financial consolidation. After a stable level in the latter part of 1991 and the beginning of 1992, the saving ratio rose somewhat in the second quarter of this year. This prompts the question of whether households will continue to opt for financial consolidation, thereby making the growth of consumption rather weak. We see the fluctuation in the saving ratio between the first and second quarters this year as a temporary phenomenon and count on the ratio staying at the average for the first half of 1992 throughout the forecast period.

Private consumption could then rise 2 per cent this year and almost 3 per cent in 1993. With a continued increase in employment, disposable income is estimated to rise faster in 1992 and 1993, the rate in the latter year being reinforced by an accelerating wage rise. The rise of consumer prices, however, is estimated to pick up but remain moderate at 3 1/2 per cent.

The upturn for investment in the first half of this year reflected a marked improvement in business profits and lower interest rates. A further improvement in business profits should be generated by just a modest reinforcement of activity in the future. Provided private consumption develops as outlined above, the growth of total investment should continue, with an accelerating tendency. Machinery investment is likely to rise faster than construction this year, while in 1993 both components are estimated to increase by 7 to 7 1/2 per cent. Including a positive contribution from stockbuilding, domestic demand would then rise more than 2 per cent this year and 3 1/2 per cent in 1993.

The lower dollar rate and the slow rise of unit labour costs have made American products notably competitive. This is reflected in the expected acceleration of US exports in the forecast period. The envisaged reinforcement of domestic demand means that imports also rise sharply. Total production is calculated to grow almost 2 per cent this year and by not quite 3 1/2 per cent in 1993.
Demand and GDP, United States
Annual change, per cent
 1990 1991 1992 1993
Private consumption 1.2 -0.6 2.0 2.8
Public consumption 3.3 1.2 -0.4 0.4
Gross fixed investment -3.1 -8.5 4.9 7.2
Stockbuilding(1) -0.5 -0.3 0.2 0.4
Total domestic demand 0.3 -1.8 2.1 3.4
Exports, goods and services 8.7 5.8 5.9 6.9
Imports, goods and services 3.1 -0.1 7.8 6.8
GDP 0.8 -1.2 1.9 3.4
(1) Change as a percentage of GDP in the previous year.


Japan

Economic growth in Japan slackened in the autumn of 1991, ending a phase in which GNP(1) had risen at an annual rate of 5 to 6 per cent ever since the second half of 1987. Growth in the second half of 1991 amounted to only 1 1/2 per cent. The slowdown is largely attributable to the restrictive monetary stance that had been introduced towards the end of 1989 but which, due to overheating in financial markets, did not become fully effective until 1991. Preliminary GNP figures for the first quarter this year do show an upturn to an annual rate of more than 4 per cent but this probably reflects occasional factors such as the leap-day, public procurement that has added to stocks, and the repatriation of business profits for annual accounts. The second quarter is expected to show little or no growth. The poorer business climate, with impaired profitability, has not only led to a steep drop in share prices and weak investment activity but also begun to affect households via subdued wage increases and smaller summer bonuses.

Industrial production fell more than one per cent in the course of 1991 but did so from a very high level; in the previous year the level had risen almost 7 per cent. The total volume of production in 1991 was 2 per cent up on 1990. The fall continued in the early months of this year but an adjustment of surplus stocks seems to have begun and in the May business survey by the Bank of Japan the negative shift in stock assessments had ceased. The number of housing starts rose in the first half of this year and in April the 12-month change was positive for the first time since the end of 1990. Exports went on rising and a further improvement is expected when economic activity recovers elsewhere, particularly in the United States.

In the coming months, however, economic activity will be subdued by the need to adjust stocks. The possibility of sustained growth depends substantially on the effectiveness of the fiscal measures and the management of the crisis in financial markets. Public investment is to be brought forward as part of the measures that were adopted in the spring. Further measures were presented in August, partly with the aim of stabilizing share prices and restoring confidence among foreign investors. The stimulatory measures, together with the successive easing of monetary policy since last summer, may cause domestic demand to strengthen in the second half of this year.

The slowdown has eased the pressure from prices and costs. The average rate of inflation in the first half-year was 2 per cent and little change is foreseen in the forecast period. Growth of the money supply has remained low, mainly due to restrictive bank lending. The share price fall has undermined the capital base of banks and the fall in real-estate prices has rendered their assets more uncertain.

The balance on current account doubled in 1991 from USD 36bn in 1990 to 73bn. The value of exports rose and imports fell. Having been negative ever since 1986, the real contribution from net exports to GNP growth was positive at 1 1/2 percentage points in 1991. Although the external surplus went on rising in the early months of this year, the economic slowdown and the easing of monetary policy caused the yen to fall in the spring. The rate improved in the summer against the dollar and was unchanged against the German mark until the increase in German interest rates in July strengthened the mark against both the dollar and the yen. Our exchange rate assumption means that from 1992 to 1993 the yen continues to strengthen against the dollar.

In the second half of this year, increased starts and the early implementation of public investment are expected to generate a higher volume of construction. Investment in machinery is expected to pick up next year. Labour shortages are less of a problem but there is still a long-term need for labour-saving investment. Households are benefiting from low price increases and a persistently stable labour market with unemployment at 2 per cent. With some fall in the high saving ratio, from the second half of this year private consumption could again rise at an annual rate of about 3 per cent. The recovery of domestic demand is estimated to involve rising imports, while exports continue to grow. The GNP contribution from the external balance is expected to remain positive next year.
Demand and GNP, Japan
Annual change, per cent
 1990 1991 1992 1993
Private consumption 4.2 2.7 2.6 3.2
Public consumption 1.9 3.4 2.6 2.6
Gross fixed investment 9.5 3.4 -0.3 3.4
Stockbuilding(1) -0.2 0.0 0.1 0.0
Total domestic demand 5.4 3.0 1.6 3.1
Exports 10.7 5.1 4.5 6.1
Imports 12.0 -2.8 1.8 4.8
GNI2 5.2 4.4 2.1 3.4
(1) Change in per cent of previous year's GNI.
(2) GDP plus net external factor income.


Germany

Two years after German reunion, the introduction of a functioning market economy in the new federal states has proved more difficult than expected. The currency union at mid 1990 was intended to launch an economic recovery in East Germany but immediately exposed the economy to devastating international competition. The currency write-up raised the value of income as well as of assets and liabilities but interest on the latter trebled to the level in West Germany.

The political reunion was completed in the autumn of 1990 and massive support was provided by the Western half of the country. A self-generating upswing is still obstructed, however, by unresolved questions of ownership, the slow development of competitive products, inadequate infrastructure (particularly in public administration) and the dramatic increase in wage costs. After falling steeply up to the middle of last year, production in East Germany has stabilized but a recovery is not imminent.

Total labour productivity has improved slowly to only about 1/3 of the level in West Germany despite a sharp contraction of employment. About 50 per cent of the former state-owned industrial enterprises are still managed by Treuhandanstalt and their privatization presupposes rationalization and structural changes. Virtually the entire trade and services sector has been privatized, however, and a great many small firms have been established.

The development of production varies greatly between branches and regions, being weakest in the absence of public sector demand or where external competition is strong. Construction has picked up and there is even some shortage of skilled labour. Some services and consumer goods industries are also expanding. Production is expected to rise 3 to 7 per cent this year from last year's notably low level, followed by growth at 7 to 11 per cent in 1993.

The absence of a distinct employer representation in East Germany may have contributed to the weak resistance to unduly large wage increases. This year the wage level is estimated to reach 70 per cent of that in West Germany after negotiated increases in the region of 25 per cent - far more than the growth of productivity. Wage increases of 15 per cent are envisaged in 1993. Decreased employment is leading to extensive transfers. Rapid price increases are expected to follow the strong rise of wage costs and the ongoing transition to a system of market prices; German observers count on a consumer price rise of about 13.5 per cent this year and 9 to 10 per cent in 1993. This is still expected to yield an increase in real income. Private consumption continues to grow, though somewhat more slowly than the rate of more than 5 per cent in 1991. Commuters to jobs in West Germany make an appreciable contribution to household income; for East Germany in 1991 and 1992, the difference between total domestic production (GDP) and gross national income (GNP) is estimated to be 3-4 percentage point. With some economic improvement in the eastern part of the country, commuting to the western region is not expected to grow as rapidly next year.

The dramatic development in the Eastern region has major social and political consequences. For the economy, however, the crucial factor is growth in West Germany, which accounts for about 93 per cent of total German production. Reunion has also been an economic shock for the Western region. It was counteracted initially by the appreciation of the German mark up to the early months of 1991 and the slowing of world demand, which made it easier to redirect resources to meet demand in East Germany. In the second half of 1991 deliveries to the eastern region rose less rapidly and the world economy remained sluggish. Increased taxes and charges together with a restrictive monetary stance also subdued domestic demand. Seasonally-adjusted GNP fell in both the third and the fourth quarter. Industrial production reached a high in the second quarter of 1991 and turned downwards towards the end of the year.

The first quarter this year saw a strong improvement in industrial production; occasional factors contributed but the change clearly represented a recovery. This is evident above all in investment activity and foreign trade. Export price reductions and a lower exchange rate helped to expand the volume of exports. Production fell again in the second quarter. Capacity utilization in manufacturing has declined from 90 per cent in December 1990 to 85 per cent in June this year. Employment has also been declining since the third quarter last year. Unemployment has been more or less stable, with a rising tendency only in recent months. Preliminary figures suggest that GNP fell in the second quarter and we count on a first-half increase of almost 1.5 per cent in annual terms. The growth is generated by domestic demand, with what appears to be a negligible contribution from foreign trade.

The weaker activity has not yet had much effect on wage increases, which are based instead on high profits earlier. This year's settlements have again added appreciably to wage costs, though somewhat less than in 1991. Neither has inflation slackened as a result of the weaker activity. The slower price rise since mid year mainly reflects the disappearing effect of last year's increases to taxes and charges. Consumer prices are estimated to rise 4 per cent this year and 3 1/2 per cent in 1993.

The July increase to the discount rate manifested the Bundesbank's determination to combat inflationary tendencies. However, this rate applies to only about a third of bank refinancing and as the Lombard rate was not changed, the measure had limited implications, though the overall monetary stance can be said to be restrictive. The money supply (M3) has admittedly risen appreciably more than the target of 3.5-5.5 per cent but this is not just a conjunctural phenomena, being also a consequence of subsidized investment credits (insensitive to interest rates) to the Eastern region, an increased incidence of short-term deposits and a wider use of the German mark for trade in Eastern Europe. The international financial markets reacted very strongly when the German discount rate went up. The dollar fell sharply, triggering extensive support, and share prices dropped. In conjunction with the devaluation of the Italian lira in September, the Bundesbank made a cautious downward adjustment, lowering the Lombard rate 1/4 of a percentage point and the discount rate 1/2. We count on further reductions in 1993.

The financial transfers to East Germany in 1991 totalled DEM 130bn or almost 70 per cent of the region's GNP. This generated a rapidly rising budget deficit. The additional revenue from increased VAT next year is calculated to offset the termination of the temporary "solidarity" tax, levied from mid 1991 to mid 1992. Tax at source on interest income is to be introduced next year and further ways of reinforcing the budget are being discussed. Unlike the case in the two previous years, most of this year's budgetary appropriations for the Eastern region are likely to be utilized. At total level, public expenditure will have contractive effects on the economy in the Western region and expansive effects in the East.

Whereas the former Federal Republic generated large surpluses on foreign trade in goods and services, in 1991 the current account of the reunited Germany showed a deficit of DEM 33bn. This is mainly because the strong pressure from demand in the Eastern region led to increased imports, accompanied by a weak development of exports to other countries. In the first quarter of 1992 exports of goods fell while imports rose. The current-account deficit (seasonally adjusted) rose to DEM 12bn from 7bn in the fourth quarter of 1991.

In the second half of 1992 domestic demand in the Western region is forecast to rise at the same rate as in the first half. After a weak third quarter, production is expected to pick up. The real income of households will rise with the end of the "solidarity" tax, the full effect of negotiated wage increases, tax relief for families and more subdued price increases. Increased VAT in 1993 should led to purchases being brought forward. Construction activity is not expected to rise as much as early in the year but machinery investment will stop falling. After a gradual start this autumn, world economic activity is expected to improve in 1993. West German export growth will then accelerate and generate a stronger increase in domestic demand. The expansion of construction investment in 1992 and 1993 implies a need for new machinery and other equipment. GNP is estimated to rise 1 1/4 per cent in 1992 and 2 per cent in 1993.

Official national accounts for the Eastern region and for the reunited Germany have now been published for the second half of 1990 and for 1991. The figures are highly preliminary and only about half of those for the eastern region are based on collected statistics, the others being more or less free estimates. This material has been used to weight together our forecast for West Germany with a very rough forecast for the eastern region, largely an average of the most recent German forecasts.

The result points to increases in total GNP of 1 3/4 per cent in 1992 and 2 1/2 per cent in 1993. It is the relatively lively investment activity in the eastern region that raises the total figure. Excluding intra-German trade, the eastern region's foreign trade is still negligible. Private consumption in 1991 made up 12.5 per cent of total German consumption and makes some positive contribution to the total.
Demand and GNP, West Germany
Annual change, per cent
 1990 1991 1992 1993
Private consumption 4.7 2.5 1.0 1.7
Public consumption 2.1 0.8 1.9 1.3
Gross fixed investment 8.8 6.7 1.5 2.5
Stockbuilding(1) -0.5 0.0 0.1 0.0
Total domestic demand 4.5 3.0 1.4 1.8
Exports 11.0 12.1 3.6 4.9
Imports 11.6 12.6 4.2 4.5
GNI(2) 4.5 3.1 1.2 2.0
(1) Change in per cent of previous year's GNI.
(2) GDP plus net external factor income.


France

Low domestic demand and uncertainty in connection with the Gulf crisis halted GDP growth in the winter half-year 1990/91. Activity recovered in the summer and industrial production rose. Unemployment, having persisted at a high level in 1990, still rose sharply in the course of last year. Despite a weak fourth quarter, GDP growth in the second half-year reached an annual rate of over 2 1/2 per cent, an appreciable recovery from the two preceding half-years. Growth was strong again in the first quarter this year and although occasional factors were involved, it does seem that the upswing in the French economy that began in the spring of 1991 is continuing. Even with some fall-off in the second quarter, we count on an annual GDP growth rate for the first half-year in the region of 1 1/2 per cent.

Private consumption picked up in the course of 1991 but sales of durables were slack and households focused on reducing liabilities. In the first quarter this year, however, sales of durables, including cars, also rose. Weak markets and increased borrowing costs have impaired business finance. Efforts to reduce indebtedness and poorer access to external financing apart from bank credits led to a reduction of investment expenditure last year. After the investment boom in the second half of the 1980s, unutilized capacity still exists even though machinery investment has been falling since the end of 1990. Construction investment was unchanged in the autumn of 1990 but picked up again in the course of 1991.

Foreign trade has benefited from German reunion via the increased German import demand and the circumstance that German producers have supplied their domestic market instead of exporting. The favourable development of unit labour costs helped France gain market shares. With the weak development of total domestic demand, this was accompanied by subdued import growth. The external balance made a positive contribution to GDP growth in 1991 and the first quarter of 1992. The deficit on trade in goods has been reduced by degrees since the beginning of 1991 and with the customary surplus for services, the balance on current account turned into a surplus last autumn.

The budget deficit for 1991 was larger than estimated but this was mainly because economic activity had been lower than expected. The drop in tax revenue, particularly from VAT and corporate taxes, was accompanied by increased expenditure for unemployment. In the 1992 budget the total tax levy is calculated to be unchanged but this includes some cuts in corporate tax. It seems that fiscal policy will be largely neutral in 1992 and 1993. The increase in the budget deficit is estimated to correspond to the cyclical loss of revenue. The tight monetary stance, aimed at maintaining the ERM parity, has been successful in keeping inflation down but has limited the scope for stimulatory measures. In May, however, bank reserve requirements were eased and the additional liquidity may be one explanation for the higher growth of the money supply. This is probably not an inflationary threat because high real rates of interest and weak investment activity mean that demand for credit is low.

Consumer prices have risen in the past year at an annual rate of about 3 per cent and much the same rate is foreseen in the forecast period. There would then be some room for an improvement in profit margins. The weak labour market will continue to subdue wage increases. With further productivity gains as the economy recovers, the rise of unit labour costs will remain modest. French producers will continue to improve their competitiveness in relation to trade partners in the rest of Europe.

The growth of external demand between the two halves of this year is expected to be relatively weak, leading to a somewhat slacker increase for French exports. Export growth should then recover as international activity improves next year. Domestic demand is also calculated to rise, leading to increased imports, with the result that net exports cease to contribute to GDP growth.

Although high unemployment and low wage increases are slowing the growth of household income, private consumption is calculated to remain strong. The prospect of an economic improvement should induce households to lower the high level of saving. Investment in machinery is expected to stop falling in the second half of this year. When the financial situation of firms improves and demand rises, investment activity will pick up. GDP is estimated to rise almost 2 per cent this year and 2 1/2 per cent in 1993.
Demand and GDP, France
Annual change, per cent
 1990 1991 1992 1993
Private consumption 2.9 1.5 2.2 2.6
Public consumption 1.9 2.9 2.0 1.8
Gross fixed investment 2.9 -0.6 0.0 2.8
Stockbuilding(1) -0.1 -0.2 -0.2 0.0
Total domestic demand 2.6 1.0 1.5 2.5
Exports, goods and services 5.5 4.2 5.3 6.0
Imports, goods and serdces 6.5 3.0 3.8 5.6
GDP 2.2 1.2 1.9 2.5
(1) Change in per cent of previous year's GDP.


United Kingdom

The recession in the British economy since mid 1990 was still evident in the first quarter this year but preliminary GDP figures for the second quarter suggest that the low has been reached, marking a break in the longest downward phase in the post-war British economy. We count on weak growth in the remainder of the year and some further improvement in 1993.

It had been predicted that the British economy would begin recovering last autumn: domestic demand would be stimulated by the ongoing reduction of domestic price increases and interest rates, while exports would be boosted by increased international activity after the Gulf war. Instead, however, GDP tended to go on falling in the second half-year and the annual drop of more than 2 per cent for 1991 was greater than in either of the two previous recessions in 1974-75 and 1980-81. Exports did rise and made a positive contribution to GDP but the rapid increase in unemployment and persistently high interest rates contributed to a weakening of domestic demand.

The difficulty in lowering interest rates has to do with the exchange rate policy, which involves holding sterling within the ERM margin. The series of increases to German interest rates have tended to obstruct a further lowering of the British rate, while during the summer the pound weakened to the lowest level since joining the ERM in the autumn of 1990. The situation became untenable in September and Britain left the ERM. Sterling fell and interest rates were lowered. Our forecasts adopt the exchange rate on 21 September for the duration of the forecast period.

Weak international activity and a tight monetary policy in the United Kingdom contributed to the reduction of domestic demand in 1991 and early 1992 as well as to one of Europe's highest unemployment rates, 9.7 per cent, last July. Decreased utilization of manufacturing capacity, high interest rates and declining profits, leading to business closures, meant that investment fell as much as 10 per cent in 1991. This was accompanied by a fall of almost 2 per cent in private consumption, reflecting decreased real disposable income and a rising saving ratio. The nominal wage rise has slackened and the fall in real-estate prices has lowered capital income. Meanwhile, a marked retardation of inflation resulted in high real rates of interest; together with the labour market uncertainty, this favoured saving. The saving ratio in the first quarter this year was 13 per cent, which may be compared with a level of just over 7 per cent in the same part of 1988. Private consumption fell substantially in the first quarter but the negative investment trend was broken by increased public investment. Domestic demand stopped failing, accompanied by a positive contribution from stockbuilding. With a negative contribution from foreign trade, however, GDP continued to decline.

Preliminary second-quarter figures indicate that GDP was largely unchanged. No information is yet available on the GDP components. Figures for retailing and new cars suggest that private consumption may have risen. Some continued increase is also calculated for public investment. Preliminary first-half figures suggest that imports of goods and services rose 4.5 per cent as against less than 1 per cent for exports. Substantial import growth is not uncommon at the beginning of a recovery, partly to replenish stocks and partly because the import content of investment is fairly large.

Expectations of an economic improvement grew in the second quarter but appear to have become less optimistic since then. Following the devaluation of sterling and the latest cuts in interest rates, the conditions for a recovery in the British economy appear relatively good. The saving ratio is unlikely to go on rising from the present very high level. Even a moderate reinforcement of real disposable income could then generate increased private consumption. Real earnings have been rising for a long time because nominal wage increases fell back less rapidly than consumer prices, which are expected to rise 4 per cent in both 1992 and 1993. The inflow of construction orders picked up in the first quarter, pointing to a future increase in investment. Machinery investment is expected to recover more slowly because the utilization of manufacturing capacity is still low. Investment should also be stimulated by the improvement in business costs, with a slower rise of unit labour costs. Given expectations of a successive improvement in activity, business investment in both machinery and construction should rise at a gradually accelerating rate in 1993. Stockbuilding should also be positive in the forecast period. The international recovery and the depreciation of sterling are expected to generate successively stronger export growth. With the expected increase in domestic demand, however, the volume of imports will rise to the same extent. As GDP fell in the first half of this year and is expected to rise only slightly in the second half, the annual level is calculated to fall 3/4 per cent in 1992 and then rise 2 per cent in 1993.
Demand and GDP, United Kingdom
Annual change, per cent
 1990 1991 1992 1993
Private consumption 0.8 -1.8 -0.7 1.5
Public consumption 3.1 2.8 1.9 2.1
Gross fixed investment -2.4 -10.1 0.1 3.5
Stockbuilding(1) -0.7 -0.7 0.6 0.3
Total domestic demand 0.6 -3.8 0.5 2.2
Exports, goods and services 5.0 0.5 2.8 5.5
Imports, goods and services 1.0 -2.9 6.6 5.4
GDP(2) 1.0 -2.1 -0.7 2.1
GDP(3) 1.0 -2.4 -0.8 2.1
(1) Change in per cent of the previous year's.
(2) Measured from the expenditure side at purchasers' prices.
(3) Average of GDP measured from the production, income and
expenditure sides (at factor
costs).


Denmark

Economic growth in Denmark in 1991 was weak, little more than one per cent for GDP. The rise of wages and prices remained modest. A further increase in the high level of unemployment brought the annual level to 10 1/2 per cent. The current-account surplus that had been achieved in 1990 after continuous deficits for twenty-six years, grew in 1991 and corresponded to 1.7 per cent of GDP.

An unexpectedly sharp increase in private consumption was offset by other components of domestic demand. Total fixed investment fell almost 3 per cent. Residential construction, having dropped about 10 per cent annually for three years, went on declining at this rate in 1991. Total business investment was unchanged but this includes a sharp increase for investment in ships and aircraft; excluding those components, the level fell almost 5 per cent. Construction investment in the business sector was particularly negative. The contribution to growth from the combined result of exports and imports in 1991 was appreciably smaller than the year before.

For several reasons the domestic demand forecast for 1992 has been adjusted downwards from what was expected in March. The national accounts now show that the first quarter was very subdued. Interest rates have also risen; the differential with Germany had already moved up in January-may and after the Danish referendum had rejected the Maastricht Treaty, it widened still further - at the beginning of September the difference between the long rates in Denmark and Germany was about 1 3/4 percentage points. Both the higher interest rates and the general uncertainty that may follow the result of the referendum are tending to make the economic recovery in Denmark rather gradual.

The first-quarter figures point, as mentioned, to a very weak outcome for domestic demand. This applies in particular to private consumption, which was unchanged from the fourth quarter of 1991. Retail turnover fell in the first quarter and rose only modestly in the second. Consumption is expected to pick up in the second half-year and the annual growth rate for 1991 is estimated to be about 1 3/4 per cent.

Gross fixed investment was also discouraging in the first quarter, falling almost 3 per cent from the fourth quarter of 1991. Residential investment, however, having fallen in recent years, is expected to turn up this year, an assessment that is supported by the national accounts for the first quarter as well as by statistics on starts. Real-estate prices have stabilized and rose slightly in the first quarter. But business investment is still falling as a consequence of weak domestic demand. The business tendency survey for manufacturing reported very low capacity utilization last spring, to which should be added high real rates of interest. The poorer harvest this year as a result of the drought will also subdue agricultural investment.

Improved competitiveness has enabled Danish industrial exports to gain large shares in many important markets in recent years and this tendency is expected to continue in 1992. Industrial exports have done well to date but the poor harvest is expected to lower the value of net exports from agriculture. Total exports are expected to rise 4.5 per cent this year. With weak domestic demand, import growth is expected to stop at about 3.5 per cent. Domestic demand and net exports are making roughly equal contributions to GDP growth, which in 1992 is estimated to stop short of 1 1/2 per cent.

Economic policy for 1992 and 1993 involves continued expenditure restraint. However, the programme for activating the unemployed, presented in May and introduced at mid-year, is substantially shifting the composition of expenditure, with decreased cash support and increased public consumption because public sector jobs will be provided for a proportion of the unemployed. As a result, public consumption, having fallen in recent years, will tend to rise in both 1992 and 1993.

Next year the growth of domestic demand should pick up, though a persistently high real rate of interest would presumably have a modifying effect. A stronger increase in household disposable income, combined with a slight reduction of the saving ratio, is expected to cause private consumption to rise about 2.5 per cent in 1993. With this increase and stronger international activity, fixed investment should turn upwards next year, though here, too, the rise is only modest. Stronger international demand would tend to raise export growth, while increased domestic demand boosts the volume of imports. The expected GDP growth of around 2 1/2 per cent in 1993 would then come mainly from the expansion of domestic demand.

A positive feature of the Danish economy is the swing in the balance on current account, with the prospect of a stable surplus in both 1992 and 1993. Against this must be put the high level of unemployment, 11 per cent in the spring and summer. As the economy improves and the activation measures take effect, unemployment should fall slightly in the second half of this year and somewhat more in 1993, though the level will still be high at around 10 per cent. The activation programme presented in May is a short-term measure for the period up to 1994 and will not tackle the steadily rising proportion of long-term unemployed. Reforms for overcoming labour market rigidities in the longer run are being discussed in Denmark.
Demand and GDP, Denmark
Annual change, per cent
 1990 1991 1992 1993
Private consumption 0.5 2.3 1.8 2.5
Public consumption 1.0 -1.2 0.5 0.5
Gross fixed investment -0.4 -2.8 -3.0 2.5
Stockbuilding(1) -0.6 -0.3 0.2 0.4
Total domestic demand -0.8 0.1 0.8 2.4
Exports, goods and services 8.0 6.0 4.5 5.0
Imports, goods and services 2.1 3.9 3.5 5.0
GDP 1.7 1.3 1.4 2.6
(1) Change in per cent of the previous year's GDP.


Finland

Total production fell in 1991 by 6.5 per cent, the sharpest peacetime drop in Finland this century. The consequences in the labour market were swift and drastic: unemployment, which had averaged 3.5 per cent in 1990, reached about 11 per cent at the end of 1991.

The deep recession succeeded a long period of growth, with clear sips of overheating in the late 1980s. The first indications of a slowdown appeared at the beginning of 1990, when investment and consumer demand began to slacken. Firms and households had acquired large liabilities after the credit market had been deregulated in the mid 1980s and now began to consolidate their financial position. This ongoing process contributed to the dramatic drop in domestic demand in 1991 and its effects are continuing. The collapse of trade with the former Soviet Union accentuated the downward tendency. Whereas about 13 per cent of total exports had gone to the Soviet Union in 1990, in 1991 the share dropped to less than 5 per cent and this coincided with weak import demand in important market countries such as the United Kingdom and Sweden.

Households stepped up their saving sharply in 1991 and the saving ratio reached a very high level. Loan repayment and increased bank saving were stimulated by a high real rate of interest. Private consumption fell almost 4 per cent; as in 1990, this mainly affected durable goods.

Capacity utilization decreased rapidly in 1990 and 1991. The combination of high liabilities, high real rates of interest and falling profits led to financial difficulties for a growing number of firms. The poorer economic situation elicited sharp reactions, with a drop of 22 per cent for private investment. Total construction, a major component in Finland, fell 17 per cent and investment in machinery 25 per cent.

The contraction of domestic demand caused a volume drop of more than 16 per cent for imports of goods, while exports fell about 8.5 per cent. Hit by surplus capacity and weak demand, exports from forest industries fell more than 9 per cent. As exports declined less sharply than imports, the balance of trade showed a swing of FIM 7bn to a surplus of 5bn. The balance on current account improved less markedly, mainly due to increased interest payments from Finland.

Public sector financial saving has weakened markedly in recent years, from a surplus at 3 per cent of GDP in 1989 to a deficit of 5 per cent in 1991. Besides the effects of the recession, this has to do with fiscal stimuli that were introduced when the recession turned out to be deeper than expected. The erosion of bank balance-sheets in the wake of falling property prices and massive credit losses has also necessitated major efforts to ensure the stability of the financial system. The budget for the current fiscal year represents a tightening of the fiscal stance and the budget presented at the beginning of September proposes large savings for fiscal 1993.

The Finnish currency came under pressure in 1991, necessitating a high interest level. Following the peg to the ecu in June 1991, interest rates could be eased but during the autumn a renewed loss of confidence led to currency outflows and increased interest rates. In November the currency was devalued more than 12 per cent but the exchange market remained unstable and the high interest rates were maintained. The pressure on the exchange rate grew in the summer of 1992 and further increases to interest rates failed to prevent an acute situation at the beginning of September. On 8 September, after massive currency outflows, the Central Bank left the currency free to float indefinitely. Two weeks later, the exchange rate had stabilized at a level that represented a write-down of approximately 10 per cent.

The recession has now passed its low. The devaluations and the income policy agreements have greatly strengthened competitiveness, which is now benefiting exports, and industrial production has begun to rise. Figures for the first half of 1992 put the value of exports almost 20 per cent up on a year earlier, implying a volume increase of about 10 per cent (allowing for the transport strike last year). The breadth of the export performance is striking, with good growth for all major commodity groups. Exports to EC countries have increased most, almost 60 per cent in value to France, for instance, and more than 20 per cent to both Germany and the United Kingdom.

Domestic demand is still falling in 1992. Household purchasing power has been markedly restricted, for instance by tax increases, and private consumption is expected to fall almost 5 per cent.

Investment in 1992 is also suffering from a record level of real interest rates, weak profits and persistent surplus capacity. While the decline of fixed investment is expected to slacken from 1991, the fall is still substantial for all categories. Weak domestic demand continues to lower imports, though considerably less markedly than last year. Net exports are making a large positive contribution to growth (over 3 1/2 per cent) and the drop in GDP this year is expected to stop at just over 1 per cent.

Consumer prices are expected to rise less than 3 per cent this year. With the contraction of domestic demand, the effect of the devaluation on import prices is not reflected to the usual extent in consumer prices. In 1993, as an effect of the recent depreciation of the mark, prices are expected to rise somewhat faster.

The situation in the labour market has continued to deteriorate and unemployment moved up in the summer towards 13 per cent. The very bleak situation is expected to curb wage demands in this autumn's wage negotiations for 1993. With low wage increases and the effect of the devaluations, Finnish producers are in a persistently favourable competitive situation and good export growth is expected to continue in 1993, particularly if international activity picks up. Little change in private consumption is foreseen from 1992 and there are many indications that investment will go on falling in 1993. Domestic demand is likely to be largely unchanged but the contribution from foreign trade is calculated to raise the growth of total production in 1993 towards 2 1/2 per cent.
Demand and GDP, Finland
Annual change, per cent
 1990 1991 1992 1993
Private consumption 0.2 -3.8 -4.8 0.0
Public consumption 4.4 3.1 -0.5 0.0
Gross fixed investment -5.0 -19.0 -12.0 1.0
Stockbuilding(1) 0.0 -1.7 0.4 0.4
Total domestic demand -0.2 -8.0 -5.0 0.2
Exports, goods and services 1.6 -6.3 9.5 10.8
Imports, goods and services -1.0 -11.7 -3.8 3.5
GDP 0.3 -6.5 -1.3 2.5
(1) Change in per cent of the previous year's GDP.


Norway

Increased demand and production in 1990 led to expectations of a recovery in the mainland economy after production had fallen for two years. In 1991, however, the level of mainland production was unchanged from 1990, though a continued increase in the production of oil gave the same total GDP growth as in 1990. The weak economic activity caused unemployment to rise to around 5 per cent at the end of last year, a high level for Norway but not internationally. In response to falling production and employment, fiscal policy had been realigned in 1989 and has been expansionary ever since. Monetary policy focused on maintaining a fixed exchange and since the unilateral peg to the ecu in October 1990, Norwegian interest rates have been at much the same level as the ecu rate. Following credit market deregulation in the mid 1980s, a series of problems were detected in the Norwegian banking system; they became acute in 1991 and required major efforts to support the system.

Although the development of income was comparatively favourable, private consumption did not rise in 1991; households consolidated their financial position, having accumulated large liabilities since the mid 1980s. Fixed investment tended to rise as a result of increases in the oil sector; mainland investment went on falling for the fifth consecutive year (since 1986 the volume has dropped about 35 per cent). The volume of exports was maintained by gas and oil, while traditional exports fell. Weak domestic demand pushed the volume of imports down.

Wage and price increases have slackened markedly in recent years and settlements last spring gave very modest wage increases this year. The rise of consumer prices is well below the 3 per cent level this year as well as next.

Household purchasing power is being reinforced substantially this year, partly through the tax reform at the beginning of the year. Private consumption began to rise late in 1991 but fell slightly from the fourth quarter to the first quarter this year. Retail turnover picked up in the second quarter after a weak beginning to the year. The annual level of private consumption is expected to rise 1 3/4 per cent in 1992. The saving ratio is moving up to a somewhat higher level than before the massive expansion of credit.

Residential investment had dropped 25 per cent in 1991 and went on falling sharply in the first quarter this year. A further fall in real-estate prices and a marked drop in the number of housing starts point to a further two-digit contraction of residential investment this year. Low capacity utilization and weak demand are causing other mainland investment to go on falling this year. Together with an increase in oil investment and decreased investment in shipping and oil drilling, this would mean that total investment falls 3.5 per cent this year. Including a positive contribution from stockbuilding, total domestic demand would then rise 1 per cent.

The volume of off exports is being checked from last year but the level is still high. Together with increased exports of traditional goods, this gives a total increase of 3 per cent. Weak demand leaves the level of imports unchanged. Total production is calculated to rise 2 1/2 per cent.

In 1993 the growth of private consumption will accelerate; assuming that the adjustment of liabilities has been mainly achieved, consumption should follow the growth of income more closely. Decreased military procurement will check the growth of public consumption.

Fixed investment is expected to rise strongly in 1993, mainly as a result of very large investment in the oil sector, where the level will then remain high for another couple of years. Field extensions decided at the end of the 1980s are reaching the production stage and extensions begun in 1991 and 1992 incur substantial costs next year. Major construction work is also in progress for the export of gas. Business investment in the mainland economy is also expected to swing and residential investment to stop falling. Domestic demand is estimated to rise more than 3 per cent.

The volume growth of oil exports is expected to slacken next year, so even if exports of traditional products go on rising, total exports will be weak. Expanding demand will step up the volume of imports and the contribution to GDP growth from foreign trade is therefore calculated to be negative at over 2 per cent next year.
Demand and GDP, Norway
Annual change, per cent
 1990 1991 1992 1993
Private consumption 2.9 -0.3 1.8 2.5
Public consumption 2.0 2.3 2.9 0.5
Gross fixed investment -26.6 1.0 -3.5 15.0
Stockbuilding(1) 4.6 -1.0 0.2 -1.0
Total domestic demand -0.8 -0.5 1.1 3.3
Exports, goods and services 8.1 6.3 3.0 1.5
Imports, goods and service 2.3 1.3 0.0 4.0
GDP 1.8 1.9 2.4 2.3
(1) Change in per cent of previous year's GDP.


(1) Japanese statistics use gross national product (GNP), which is GDP plus net external factor income.
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Publication:The Swedish Economy
Date:Sep 22, 1992
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