International economy

• The uncertainty surrounding growth prospects has intensified. Financial market turbulence has increased and household and business confidence has weakened.
• The IMF now forecasts global economic growth at 4.0 per cent both this year and next, marked down from its July forecasts of 4.3 and 4.5 per cent, respectively. The markdowns primarily reflect lower growth in advanced economies.
• In the second quarter, global economic growth slowed more than projected in the June Report. Seasonally adjusted GDP growth in the euro area and the US was 0.2 per cent between the first and second quarter of 2011. In Japan, seasonally adjusted GDP growth fell by 0.3 per cent in the second quarter.
• Manufacturing output has weakened among many of Norway's trading partners, and different expectations indicators suggest that the pace of growth will remain sluggish ahead.
• The twelve-month rise in consumer prices remains high among many of among many of Norway’s trading partners, but has slowed somewhat in the euro area as a result of lower energy and commodity prices. In the euro area, inflation excluding food and energy has also edged down. Core inflation in the US has continued to rise and is now 2 per cent.
• In the US and the euro area, short-term inflation expectations have fallen since the June Report. Long-term inflation expectations have fallen among most of Norway's trading partners.

Financial markets [1]

• In July, the euro area presented a new debt financing package for Greece, with longer maturities and lower interest rates. Portugal and Ireland have been offered the same terms.
• In August, the European Central Bank (ECB )resumed purchases of euro area government bonds. At the same time, loans with a maturity of six months were reintroduced.
• The central banks in the euro area, the US, the UK, Switzerland and Japan have announced coordinated action to supply US dollars to banks.
•  In the US, Congress agreed to raise the federal debt ceiling. At the same time, substantial spending reductions over a ten-year period were approved.
• Despite various measures, financial markets continue to be marked by considerable uncertainty. There have been large movements in equity, bond and foreign exchange markets.

Equities and commodities

• Oil prices are approximately unchanged since the June Report and now stand at USD 115 per barrel.
• The Economist weekly commodity-price index measured in XDR [2] declined slightly.
• Gold have risen by 17 per cent. prices
• Most international stock indices have fallen.

Interest rates

• Standard & Poor's has downgraded the credit rating on US and Italian long-term sovereign debt.
• The ECB raised its key rate in July to 1.5 per cent, but has since kept it unchanged. In addition, the ECB has announced that it would conduct a six-month liquidity-providing operation with full allotment until the end of the year.
• Market expectations concerning key rates among our trading partners have fallen sharply. Interest rates are now expected to be lowered in the euro area towards the end of the year. In the US and the UK, the first key rate increase is expected towards the end of 2013.
• The interest rate differential between Norway and trading partners, as measured by the three-month money market rate, is now 1.6 percentage points. The interest rate differential has widened somewhat since the June Report.
• In Norway, the spread between three-month money market rates and the expected key policy rate (the premium) is approximately 0.9 percentage point. So far in the third quarter, the premium has been somewhat higher than assumed in the June Report.
• According to figures from Norsk Familieøkonomi, the weighted average interest rate on new residential mortgages is 3.77 per cent, approximately unchanged since the June Report. [3] Bank lending margins have declined somewhat.
• Long-term US and German government bond yields have fallen sharply since the June Report. Ten-year government bond yields in the US and Germany are now 2.0 per cent and 1.8 per cent, respectively. Norwegian long-term government bond yields have also fallen sharply.
• The spread against German ten-year government bond yields has widened markedly for Greece and is now 21 percentage points. The spread has also widened for Italy, Spain, Portugal and Belgium, and is now 3.8, 3.5, 9.5 and 2 percentage points, respectively. For Irish government bond yields, however, it has narrowed to 6.9 percentage points.
• Risk premiums on Portuguese, Irish, Spanish and Italian covered bonds have risen since the June Report and now stand at 8.1, 4.5, 3.0 and 2.8 percentage points, respectively. Risk premiums on Portuguese and Italian covered bonds have shown the largest change, increasing by 2.8 and 1.5 percentage points, respectively.
• CDS prices for European financial institutions, as measured by the iTraxx index [4], have risen by 127 basis points.

Exchange rates

• Since the June Report, the effective exchange rate of the US dollar (USD) has appreciated by 1.4 per cent, while the euro (EUR) effective exchange rate has depreciated by 4 per cent. The Japanese yen (JPY) has appreciated by 7.3 per cent. Commodity currencies, such as the Canadian (CAD) and Australian dollar (AUD), have depreciated.
• On 6 September, the Swiss National Bank set a minimum exchange rate between the euro and Swiss franc (CHF). The immediate effect of this action was a weakening of the Swiss franc.
• The import-weighted krone exchange rate (I-44) appreciated markedly in the days following the decision of the Swiss National Bank to set a minimum exchange rate against the euro, but has since weakened again. The krone exchange rate is approximately as projected in the June Report.

Norwegian economy

Prices

• In the year to August 2011, the consumer price index (CPI) rose by 1.3 per cent, 0.6 percentage point lower than projected in the June Report.
• Adjusted for tax changes and excluding temporary changes in energy prices (CPIXE), consumer prices rose by 0.9 per cent in the year to August 2011, down from 1.3 per cent in July. This is 0.5 percentage point lower than projected in the June Report. Inflation adjusted for tax changes and excluding energy products (CPI-ATE) was 0.8 per cent in August, 0.4 percentage point lower than projected. Other indicators of underlying inflation were between 1.0 and 1.9 per cent in August.

Output and demand

• According to preliminary seasonally adjusted figures from the quarterly national accounts, mainland GDP grew by 1.0 per cent from the first to the second quarter. This was somewhat weaker than projected in the June Report.
• Private consumption has been weaker than projected. Seasonally adjusted household spending on goods fell by 1.0 per cent from June to July, after falling by 1.4 per cent the previous month. Car sales fell in June, but rose again in August.
• TNS Gallup's trend indicator, which measures households' assessments and expectations concerning their financial situation and the Norwegian economy, fell during the third quarter.
• Seasonally adjusted manufacturing output was 1.2 per cent lower in the period from May to July than in the three-month period to April. Working-day adjusted manufacturing output fell by 5.0 per cent in the year to July 2011.
• Adjusted for seasonal patterns, the Norwegian PMI (Purchasing Managers Index) fell from 56.8 in July to 55.5 in August. The majority of purchasing managers report a pickup in output and new orders from July to August.
• According to Statistics Norway's investment intentions survey, the value of investment in manufacturing, mining and electricity is estimated at NOK 39.9 billion in 2011. This is 12 per cent higher than the comparable estimate for 2010, and 16 per cent higher than the final investment figure for 2010. The survey also indicates that investment in manufacturing, mining and the power sector will increase further next year.
• According to Statistics Norway's investment intentions survey for oil and gas production, the value of investment in petroleum activities is estimated at NOK 151.7 billion in 2011. This is 9 per cent higher than the comparable estimate for 2010 and 21 per cent higher than the final investment figure for 2010. The survey also indicates that petroleum investment will increase further next year.

Labour market and wages

• Registered unemployment was a seasonally adjusted 2.6 per cent of the labour force in August, unchanged on July. Registered unemployment in August was slightly higher than projected in the June Report.
• According to Statistics Norway's Labour Force Survey (LFS), seasonally adjusted unemployment was 3.3 per cent of the labour force in the period May-July, unchanged from the period April-June. Both employment and the labour force increased in the same period by 3 000.

Domestic credit and house prices

• Gross domestic debt in the private and municipal sector (C2) rose by 6.3 per cent in the year to July 2011, up from a year-on-year rise of 6 per cent in June. Household debt increased by 7.1 per cent in July, unchanged from June. Debt growth for non-financial corporations was 3.6 per cent.
• According to house price statistics from the real estate industry, house prices rose by 9.4 per cent in the year to August 2011, the year-on-year rise unchanged from July. In August, seasonally adjusted real house prices, deflated by the CPI, were 4.7 per cent above their previous peak in June 2007.

Footnotes

1) All figures are changes since 22 June 2011, unless otherwise specified. All market data are as at 19 September 2011

2) Special drawing rights, IMF. As of 19 September, XDR 1 = NOK 8.91

3) Weighted interest rates from the 20 largest banks for new variable-rate residential mortgages of NOK 1 million, within 60 per cent of the purchase price

4) iTraxx financial index contains the CDS spreads of 25 major European financial institutions