Norway Is NOT An Island!

Here’s Chief Economist Øystein Dørum at DnB NOR Markets’ latest commentary. In this edition he focus mostly on the Norwegian economy, and the fact that Norwegian workers have negotiated a wage agreement that is “somewhat better than the headline figures suggest.” Adjusted for inflation the general wage growth for Norwegians will be 1% this year.

“It highlights the difference between surplus-heavy Norway and the debt-ridden countries further south.”

Øystein Dørum

Mr. Dørum seem to be happy for the Norwegian employees, specially for those working in local governments; after a two-week strike they finally achieved a net 3 -4% wage growth this year, almost as much as those in the private sector. And compared with most public employees in Europe, they should consider themselves lucky, according to the article called “Island In The Sun.”

“The two-week long strike in the local government sector ended yesterday, with an agreement giving the employees 3.4% wage growth this year, i.e. on a par with central government employees, and not too far off from results in the private sector,” Øystein Dørum, Chief Economist DnB NOR Markets, writes.

In addition to commenting on the latest Norwegian key figures, he also comments on Europe, USA and China.

Here’s the rest on the article “Island In The Sun”

With an expected inflation of 2½%, the agreement gives a real wage increase of 1%, low by Norwegian standards, but surely a considerable way off from the wage cuts seen in the public sector elsewhere in Europe. Thus, it highlights the difference between surplus-heavy Norway and the debt-ridden countries further south.

Also, the wage agreement is somewhat better than the headline figures suggest. Total wages are set to increase by about 3.2%, but with 2.1% given from July 1st, 0.8% from August 1st and 0.25% from January 1st next year. Late wage increases reduce this year’s wage bill, but have similarly larger effects on next year’s wage growth. Without any central and local wage increases next year, local government wages will increase by 2.7% from 2010 to 2011.

In a world where competitors’ wages are cut, or at best, standing still, Norwegian manufacturers must deliver substantial productivity improvements to maintain competitiveness with 3% wage growth. Therefore; If competitiveness is to be maintained, and the exposed sectors are to set overall wage growth (as is the Norwegian model for wage formation), there is no room for further wage increases in local government next year. Alternatively, if tariff increases and wage drift should be similar to the mid-term negotiations in 2009, local government will end up with 5% wage growth next year.

The big earthquake of the financial crisis and the following great recession is still causing large shivers around the world. According to the Financial Times, European banks have for the last six weeks raised the lowest levels of capital in new medium- to long-term loans since 1995. The drought reflects investors’ worries about banks’ balance sheets, and their exposure to weak government bonds, other banks and to private sector debtors in a stagnating Eurozone that will continue to suffer with tighter fiscal policies going forward.

Banks that can not raise money through long-term loans may have to finance themselves with short-term loans, hence increasing their vulnerability should a new financial crisis evolve. Such a risk may lead banks to borrow less, and in the next round lend less, thus keeping credit tight and costly. Echoing this, the Portuguese state borrowed €0.8 bn on a ten-year basis yesterday, paying 5.23%, or 0.7% more than in a similar auction just a month ago. Portuguese authorities deny that they will seek assistance from the EU/ IMF facility to finance their deficits – but nothing should be outruled these days.

The US Federal Reserve published their Beige Book yesterday, going through the situation in the US economy before the next Fed meeting 22/23 June. The different districts report that activity is increasing, but at a “modest” pace. News from the other side of the Pacific were of a different kind: China’s statistics bureau reported that exports and imports rose by over 48% y/y in May, beating all expectations. The trade balance surplus was an astonishing $20bn. Strong export growth shows that some parts of the world economy must be growing strongly. Somebody is buying the Chinese export goods. Healthy import growth tells that those that have warned about a hard landing in China (like myself) will have to wait. And the huge surplus will renew the discussion about the undervalued yuan and possible protectionist measures to counteract this.

Much on today’s agenda as well. Statistics Norway will release consumer prices for May. Norges Bank expects core inflation at 1.5%, as does the consensus, while we expect 1.6%. Normally, deviations from consensus move the market, but at the current stage our tolerance for small deviations should be considerable. It is much more important what happens with growth going forward. Inflation is low, will be trending lower, and stay below target for several years ahead.

By Øystein Dørum

Chief Economist

DnB NOR Markets


Well, Mr.Dørum is of course entitled to his opinions, and I won’t go into the assumptions on with he build his analysis.

However, I must point out that Norway is NOT an island!


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