NEWS / Foreign Exchange

Norway: Labour market on the verge of overheating

We have just seen the release of a bunch of Norwegian numbers, all of which were exceptionally strong. In this note, we focus on the labour market numbers as we think the answer to how much tightening Norges Bank will deliver going forward will be found in the labour market. Yesterday, the LFS for March might have given the impression that the unemployment rate was reaching a bottom. However, this was certainly not confirmed today when the more fresh registered unemployment figures for May were released. The non-seasonal unemployment rate fell to 1.7% from 2.0% in April. The seasonal effect can only explain 0.2 percentage points. Hence, the labour market has become even tighter during May. If we look at the number of unemployed and on labour market measures it fell to 56,700 from 58,500. During the past 12 months the number of unemployed has fallen by 18,700 or 30%. Considering that only 45,000 are in fact ready to take a job tomorrow as approx. 10,000 are in labour market measures, the number of vacancies is very high at 24,000. In other words, there are just two unemployed for every vacant job. A clear indication that the labour market is extremely tight.

Yesterday, Norges Bank stated that employment growth was stronger than it had expected, but that the results of this year??™s wage negotiations are consistent with the projections in the March monetary policy report. However, this was before the central bank knew the wage numbers for Q1. They showed a very significant jump in wage growth in Q1 of almost 6% in the major private sectors ex. oil. In the oil sector wages rose 9.5%. Hence, the current wage forecast of Norges Bank of 5.25% for annual wage growth in 2007 including 0.25% to pension costs seems to modest. While some of the wage growth is due to extraordinary bonuses, it can be concluded that the tight labour market is now affecting wage growth. In that respect, we are pretty sure that Norges Bank would have concluded that wage growth is now higher than expected if they had known the Q1 numbers. We think the Norwegian labour market is on verge of overheating - if indeed that is not already the case.

We believe the numbers mean that the market will continue to buy into our long-held story that Norges Bank will revise its baseline scenario higher in June, indicating that the sight deposit rate will hit 5.25% at year-end 2007 and rise further in 2008. In line with this view, we still expect Norwegian policy rates to hit 5.25% at the end of this year and peak at 5.50% in March 2008. However, there is certainly a growing risk that rates will peak at a significantly higher level. We are considering revising our forecast for the leading policy rate to 6% during 2008, as we see a growing risk that Norges Bank will be forced to introduce a restrictive monetary policy in 2008. We will write more on this issue next week.