Economic Outlook for 2002 and 2003

The national economic forecast has now been revised in light of economic developments since the forecast was last issued in March. A preliminary forecast for 2003 has also been prepared based in part on the Minister of Fisheries' decisions regarding quotas for the coming fishing year.

The main results are as follows:

• GDP is expected to contract by 0.8 per cent in 2002, largely unchanged from before. Preliminary estimates for 2003 suggest that the contraction will be short and that growth will be 2.4 per cent.
• Inflation is declining rapidly. The price level is projected to rise by 5 per cent between 2001 and 2002, and by 2.7 per cent between 2002 and 2003.
• The current account deficit is expected to be 1 per cent of GDP in 2002, compared with 4.3 per cent in 2001. For 2003, the current account deficit is foreseen to widen again as economic activity strengthens and be 1½ per cent of GDP.

The Outlook for 2002
The economic outlook for 2002 has changed little since the national economic forecast was issued in March. GDP is now expected to contract by 0.8 per cent, compared with 0.5 per cent in the previous forecast. Indications are that the downturn that began last year is about to come to an end and there are signs of expanding activity in the economy, although it is too early to reach a definitive conclusion.

Private consumption contracted rather more during the first half of the year than had been expected, but there are signs that consumption has begun to increase again. On the whole, private consumption is estimated to contract by 1.3 per cent between 2001 and 2002, whereas earlier a contraction of 1 per cent was expected. The estimated increase in public consumption of 2.8 per cent is unchanged from the last forecast, as developments in Treasury finances have been in line with the expectations of the National Economic Institute. Investment is still expected to decline sharply, or by 14½ per cent, or by 1½ percentage point more that projected earlier.

National expenditure is now expected to contract more in 2002 than had been forecast earlier, or by 3.2 percent rather than the previously projected 2.6 per cent. On the other hand, the current account balance is now projected to turn out better than before, with the deficit amounting to 8.1 billion krónur, or 1 per cent of GDP, whereas the earlier projection pointed to a deficit of 2 per cent of GDP.

Exports are now expected to grow faster than previously estimated, mainly marine exports. Exports of manufactures, other than products of power intensive industry, have also been considerably higher during the first months of the year than they were over the corresponding period in 2001. On the other hand, the contraction in merchandise imports is now expected to be smaller than previously projected and the surplus on trade in services even larger.

Price developments have been fairly favourable in the recent period for mainly two reasons: First, measures aimed at keeping the consumer price index below the red line in May have contributed to lowering inflation, and second, the strengthening of the exchange rate of the króna has also had a significant impact. There may be a built up need for price increases in some sectors but this is partly offset by the exchange rate appreciation. In view of the current circumstances, consumer prices are estimated to increase on average by 5 per cent between 2001 and 2002 and by 2.3 per cent in the course of 2002.

Unemployment developments so far in 2002 have been in line with the National Economic Institute's earlier forecast, and the unemployment forecast for the year as a whole is unchanged at an average rate of 2.3 per cent. Wage developmens have also been in line with the earlier forecast and the wage index is projected to increase by 6.9 per cent between 2001 and 2002. Real disposable income is now projected to rise by 1 per cent between 2001 and 2002, a nearly unchanged prediction from before.

Preliminary Asssessment of Prospects for 2003
The current downturn is expected to come to an end in 2002 to be replaced by moderate growth in 2003. The Minister of Fisheries has already decided on quota allocations for the fishing year running through end-August 2003. On this basis, marine production is not expected to increase in 2003. Also, the projections presented here do not include any further expansion of power intensive industry as no decisions to that effect have been taken.

Inflation is expected to slow further, to 2.7 per cent both between 2002 and 2003 and in the course of 2003. Most wage agreements remain in effect until late 2003 or longer. On that basis, the wage index is estimated to rise by 4.5 per cent between 2002 and 2003, and real wages therefore by 1.8 per cent. Real disposable income is expected to increase by a similar percentage, or by 1½-2 per cent. Unemployment is expected to remain about the same as in 2002, or just above 2 per cent.

Private consumption is expected to begin to pick up again in 2003, although high household indebtedness will hold back the rate of expansion. Private consumption is estimated to grow by 1 per cent as households use a portion of the increase in disposable income to lower their debt. Public consumption is projected to expand by 3 per cent, or slightly faster than this year. In 2003, investment is forecast to recover following a contraction over the two preceding years, with growth of 10 per cent.

The outlook is not bright for an increase in merchandise exports in 2003. Neither output of marine products nor of power intensive products is expected to increase. Exports are, therefore, projected to increase by less than 1 per cent in this forecast. On the other hand, increased consumption and investment would be reflected in increased imports, and merchandise imports are estimated to increase by almost 5 per cent in 2003. This leads to a substantial narrowing in the trade balance between 2002 and 2003. On the other hand, revenue from export of services are expected to rise in 2003 so that, despite an increase in service imports, the service balance is projected to record an overall surplus. All in all, the external current account deficit is expected to increase over 2002, to 11.7 billion krónur, or 1.4 per cent of GDP.

Table 1. Output and expenditure 2000-2003

Table 2. Export production and foreign trade 2000-2003