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The Mainland economy is recovering slowly from the extended period of contraction experienced from 1987 to 1989. After growing by 0.7 per cent in 1990, Mainland GDP showed renewed weakness in the first half of 1991 and was only about 0.2 per cent higher than in the same period a year earlier. The reduced value of the tax-deduction of interest payments, high real interest rates and poor employment prospects have led to further financial consolidation in the household sector, resulting in weakness in both private consumption and residential construction. Slow growth in important export markets, such as Sweden and the United Kingdom, led to a deceleration in exports of traditional goods and a subdued business climate. The current account surplus continued to increase, mainly as a result of increased oil and gas exports and reduced imports of ships. While pressures to readjust wages after the termination of the direct wage control in April 1990 led to rapid wage growth in 1990, increasing labour market slack (unemployment has risen to about 5 1/2 per cent) contributed to a rather modest wage increase in the first half of 1991. With weak domestic demand, slow growth in wages and stagnant import prices, consumer price rises continued to trend downwards, reaching a historically low rate estimated at 3.8 per cent in 1991.

Fiscal easing by the central government has amounted to a cumulative increase of 5 1/2 percentage points in the oil- and cyclically-corrected budget deficit in relation to Mainland GDP from 1989 to 1991, and the central government oil-corrected deficit is expected to reach close to 12 per cent of Mainland GDP in 1991, including the cost of bank rescue operations (estimated at about 2 per cent of Mainland GDP). Announced budget plans for 1992 foresee a further discretionary easing of fiscal policy by 1 1/4 per cent of Mainland GDP, mainly reflecting increased expenditure on public investment projects and tax reliefs. An increase by about 3 per cent is planned in the total purchase of goods and services in volume terms. Including oil revenues, general government net borrowing is expected to fall slightly from around 1 per cent of GDP in 1991 to about 1/2 per cent in 1992. The government's policy of pegging the exchange rate to the ecu since October 1990 has gained credibility in international capital markets, and the differential between domestic interest rates and ecu-rates has become negligible(1).


1. Norway linked its currency to the ecu in October 1990, with a fluctuation band of 2 1/4 per cent.

With growing foreign demand and the completion of households' financial consolidation, Mainland economic activity is expected to revive in the first half of 1992. The expansion is projected to gain strength towards the end of 1992 and in 1993. In particular, business investment is expected to grow vigorously in 1993, after several years of retrenchment. Due to the current excess supply of dwellings, residential construction will probably be relatively slow to respond to a gradual strengthening of housing demand. Offshore output should expand strongly and total GDP is projected to grow at a higher rate than Mainland GDP over the whole projection period. Buoyant oil exports will also result in an increasing current account surplus, reaching close to 6 per cent of GDP in 1993. With productivity rising, output growth is expected to result in only a slow decrease in the unemployment rate, which should be reflected in further disinflation: consumer prices are likely to decelerate further, growing by less than 3 per cent in 1993. Difficulties in the financial sector, where heavy loan losses have resulted in substantial problems for several financial institutions, constitute a downward risk to the projections. Financial fragility could lead to a "credit crunch", thereby slowing the recovery.
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Title Annotation:Developments in Individual Countries; economic statistics
Publication:OECD Economic Outlook
Date:Dec 1, 1991
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