The turbulence in the European economy in recent months stands in contrast to developments in the world economy through spring. The upswing in global economic activity continued in 2010 Q1 and into Q2. Manufacturing pro-duction and world trade have continued to expand since the March Monetary Policy Report (see Chart 2.1). A number of short-term indicators suggest continued solid growth ahead. Developments in macro indicators could in isolation point to an upward adjustment of the growth outlook for this year and next, both for emerging market economies and advanced economies.
During the period of strong growth before the financial crisis in autumn 2008, many countries experienced a build-up of considerable domestic and external imbalan-ces, with private and public sector debt rising to high levels. This has resulted in sizeable external deficits (see Chart 2.2). The extensive crisis-related measures and the sharp fall in government revenues have led to a marked deterioration in public finances in most advanced econo-mies. Budget deficits and public debt have shown a pro-nounced increase (see Charts 2.3 and 2.4). In the March Report, our projections were based on fiscal policy tight-ening as from 2011 in the euro area, the UK, the US and Japan.
Since then, there has been growing focus on the negative developments in public finances in some euro area coun-tries, resulting in considerable turbulence in financial markets. Long-term credit premiums have increased sub-stantially, particularly in southern European countries facing current account deficits and rapidly rising sove-reign debt. Governments in several European countries have responded by presenting measures with a view to bringing down budget deficits more rapidly. It is thus likely that government budgets in the euro area and the UK will be tightened more sharply than assumed in the March Report.
The recent weeks’ turmoil has led to a weaker euro. In isolation, this may result in higher demand for goods and services from euro area countries, although this is not expected to outweigh tightening measures, higher interest rate premiums and increased caution among firms and households. The cost level in southern European coun-tries has worsened in relation to their trading partners through the 2000s (see Chart 2.5), making it more difficult to rely on growth to redress the imbalances.
Public sector and labour market reforms now being imple-mented in many countries may increase the economies’
growth potential over time. In the coming years, however, output growth in Europe is expected to be low. Weaker growth prospects for Europe and financial market turmoil are also expected to have an adverse impact on growth in the US and Japan this year and next. The prospects for Asia and the US are, however, considerably better than for Europe.
The setback in advanced economies is also likely to have an impact on emerging market economies in Asia and Latin America, where growth is nevertheless expected to remain solid. Manufacturing production and exports for Brazil, India and China rebounded rapidly after falling sharply in 2008 and 2009 and are now near, or higher than, pre-crisis levels. Both domestic and external demand for goods and services have fuelled the rapid upswing.
High investment, strong productivity growth and con-siderable labour reserves are behind the favourable econ-omic prospects for China and India, among other coun-tries.
For trading partners as a whole, growth projections have been lowered by ¼ percentage point annually as from 2011 compared with the March Report, as a result of sluggish growth in Europe. GDP growth for our trading partners is now projected at 2% in 2010 and 2¼% in 2011 (see Table 2.1).
Inflation is expected to be moderate in the coming years.
Capacity utilisation will probably be lower than normal in advanced economies through the projection period, and the prospects for growth in private consumption are weak.
Wage growth is expected to remain low, partly reflecting continued high unemployment. In the coming year,
un--8
Chart 2.3 General government fiscal balances. As a percentage of nominal GDP. 2000 – 2011. Projections from OECD for 2010 – 2011
-16
Source: OECD Economic Outlook 87
US UK Euro area
Greece Spain Germany
Portugal
Greece Spain Germany
Portugal
Chart 2.4 Government gross debt. As a percentage of nominal GDP. 2000 – 2011. Projections from OECD for 2010 – 2011
0 Source: OECD Economic Outlook 87
90
Spain Germany Portugal
Chart 2.5 Relative labour costs in common currency1). Index, 2000 = 100.
2000 – 2011. Projections from the European Commission for 2010 – 2011
60
1) Relative to the rest of the EU-15 Source: EU Commission
50
Chart 2.7 Oil price (Brent Blend) and prices for Norwegian petroleum exports1). 1 January 2002 – 17 June 2010. In USD per barrel. Oil futures prices (broken lines) MPR 1/10 and 17 June 2010
Chart 2.6 Consumer prices excluding food and energy1). 12-month change.
Per cent. January 2000 – May 2010
2000 2002 2004 2006 2008 2010
1) HICP exluding energy, food alcohol and tobacco for the euro area, UK and Sweden Source: Thomson Reuters
Table 2.2. Projections for consumer prices in other countries (change from previous year, per cent) and oil price. Change from projections in Monetary Policy Report 1/10 in brackets
2010 2011 2012-131) Oil price Brent Blend 4) 77.6 81.7 85.4
1) Average annual rise
2) Weights from Eurostat (each country’s share of euro area consumption) 3) Import weights, 26 important trading partners
4) Futures prices (average for the past five trading days). USD per barrel. For 2010, an average of spot prices so far this year and futures prices for the rest of the year is used
Sources: Eurostat, Thomson Reuters and Norges Bank
tinue to drift down after having fallen considerably in most advanced economies (see Chart 2.6). On the other hand, many European countries are expected to raise in-direct taxes in connection with fiscal tightening. For 2010, consumer price inflation has been revised up somewhat as a result of higher growth in activity and increased in-flation so far this year. Consumer price inin-flation is pro-jected at about 1½% in 2011 and is propro-jected at 1¾% in 2012 and 2013 in annualised terms (see Table 2.1).
The price of oil is around USD 75 per barrel, somewhat lower than at the time of the March Report. Oil prices in euro and krone terms have risen, however. The projections in this Report are based on an oil price in line with futu-res prices (see Table 2.2 and Chart 2.7). These prices imply an oil price in 2011-2013 that is a good USD 5-10 higher than today’s spot prices. This must be seen in con-nection with expectations of continued solid growth in emerging market economies, which are making a growing contribution to global oil demand. Oil prices may ne-vertheless fall if contagion effects on the world economy from the turbulence in Europe should prove to be more severe. On the other hand, oil prices may increase further if growth among emerging market economies proves to be even stronger than envisaged in this Report.
Gas exports account for a rising share of Norwegian pe-troleum exports. Norwegian gas exports have primarily been sold at long-term contracts where prices follow pri-ces for oil products with some lag. A somewhat higher share of gas is currently sold at spot prices. The upswing in oil prices since spring 2009 now seems to be gradu-ally leading to an increase in Norwegian gas prices. UK spot and futures prices for gas show the same tendency.
The average price of Norwegian petroleum exports has increased in recent months (see Chart 2.7). Increased sup-ply of gas in the US and liquid gas in general may ne-vertheless result in lower prices for Norwegian gas if the link to prices for oil products weakens.
The Economist commodity-price index has edged down since the March Report. Commodity prices are neverthe-less expected to remain firm given continued strong growth in emerging market economies.