Economic trends for Norway and abroad
Norwegian economy boosted by increase in petroleum investment
The Norwegian economy experienced an economic upturn throughout 2017. Going forward, the upturn will be driven by an increase in investments in the petroleum industry and higher international growth, but will be slowed down by falling housing investments, higher interest rates and a stronger krone.
Upturn in the international economy set to be strengthened
The international upturn in the economy is increasing both in strength and scope. Based on a shift in global trade and investment, an expansive fiscal policy in the USA and favourable financial conditions, we have therefore adjusted our international growth projections. However, in the medium term, we still envisage a gradual decline in growth, partly due to the negative repercussions of the expansionary monetary policy that has been followed since the financial crisis, as well as high debt and underlying weak productivity performance.
Towards new growth for petroleum investments
Investment in the petroleum industry continued to fall throughout 2017, but the decline appears to be at an end. Lower investment prices and an oil price that has hovered at around 65 USD per barrel this winter make more petroleum investments profitable. Operators on the Norwegian continental shelf plan to increase their investment by NOK 125 billion over the next few years, and a substantial part of this will be invested in 2018. The estimates for field development and fields on stream account for most of the growth. The expected upturn in investment in the petroleum industry in 2018 will be significant and will boost the Norwegian economy going forward.
More neutral fiscal policy
The expansionary fiscal policy is shifting towards a roughly cyclically neutral policy. Since 2014, the fiscal policy has been markedly expansionary, but the increase in the latitude in fiscal policy is set to be considerably smaller going forward. Fiscal policy as a whole is expected to be roughly neutral, with the structural non-oil public deficit as a share of trend GDP for mainland Norway remaining more or less constant throughout the projection period.
A stronger krone
The exchange rate will also be less expansionary in the years ahead. The depreciating krone since 2014, in line with the fall in oil prices, has given positive impetus to the Norwegian economy. Since the turn of the year, the krone has strengthened, and we assume that it will continue to appreciate moderately in the coming years. The reduction in cost competitiveness due to the stronger krone makes the situation for internationally exposed industries less favourable and moderates the economic upturn. In 2021, which is the last year in our projection period, it is assumed that one euro will cost around NOK 9.0.
Interest rates to rise, but remain at a low level
The government has recently decided to change the monetary policy regulation by reducing the target inflation rate from 2.5 per cent to 2.0 per cent. Inflation, measured by CPI growth, has remained at around 2 per cent since the target inflation rate was introduced in 2001. Norges Bank has signalled that the new regulation will not lead to significant changes in the exercising of the monetary policy. During the next four years, interest rates are expected to rise by around 1.25 percentage points. Despite this interest rate hike, real interest rates will remain at historically low levels; borrowing will still cost next to nothing, even when the recession has ended.
The bottom of the housing market is in sight
In contrast to many previous economic upturns, developments in the housing market are now dampening the upturn. According to Statistics Norway’s second-hand house price index, house prices began to fall in the second quarter of 2017, with the Oslo area seeing the greatest fall. The falling house prices are primarily due to a large housing supply, higher prices, moderate wage growth and a decline in immigration. In addition, the mortgage regulations may have contributed to the shift, but it is the development in the aforementioned more fundamental conditions that lead us to believe that house prices will also fall throughout the first half of 2018 and then level off during the second half of the year. However, the fall is likely to be modest. If our projections are correct, house prices will be barely 5 per cent lower at the end of 2018 than the peak in the first quarter of 2017.
Mainland business investment will also increase
The economic upturn in 2018 is expected to be particularly reflected within oil refining and chemical and pharmaceutical manufacturing due to some large stand-alone projects. Growth is also expected in the food industry, machining and equipment industry and other workshop industry. Further investments are planned in the power supply industry, both through the development of wind power generation and the distribution of electricity. We expect growth of around 6 per cent this year in mainland business investment. Growth is subsequently expected to decline somewhat as a result of higher interest rates and as the economic upturn matures. Compared with previous upturns in the economy, where the growth percentage in business investment has typically been in double figures, this is a very moderate upturn in Investment.
Household consumption continues to increase
Consumption has given positive growth impulses to the economy for six consecutive quarters, and is expected to increase further going forward, with continued low interest rates and increased real income growth as contributing factors. Although the weak development in house prices is dampening consumer growth, we expect it to increase by 2.5 per cent, or slightly more, on an annual basis. This will help to keep growth in the mainland economy above trend growth.
Slight increase in wage growth
In 2016, annual wage growth was just 1.7 per cent, which meant a real wage decline of 1.8 per cent. This was the lowest wage growth in Norway in 70 years and was partly attributable to the lower employment in petroleum-related industries reducing the average wage growth. However, in 2017, wage growth rose again roughly as expected, increasing both nominally and in real terms. We expect the nominal wage growth to increase further in line with the improved economic situation. With relatively stable inflation at just below 2 per cent, this corresponds to an average annual real wage growth from 2018 to 2020 of almost 1.5 per cent.
Number of job vacancies increases and unemployment continues to fall
After peaking at almost 5 per cent in mid-2016, unemployment has now fallen to 4.1 per cent, according to Statistics Norway’s Labour Force Survey (LFS). This fall is observed in many parts of the country. As a yearly average, we expect unemployment of 3.9 per cent in 2018, with a further fall to 3.7 per cent in 2019. It will then remain at this level for the next two years. In a historical perspective, this must be regarded as an almost normal level of unemployment.
Stable inflation at around 2 per cent
For 2018 as a whole, the CPI-ATE is set to increase by 1.7 per cent, while the growth in the CPI is estimated to be 2.0 per cent. Wage growth will increase somewhat during the upturn in the economy and, in isolation, will push up price rises, while a stronger krone will pull in the opposite direction. After 2018, we estimate stable growth in the CPI-ATE of almost 1.7 per cent. According to the assumptions underlying the development in special duties and energy prices, CPI growth will vary slightly more than the CPI-ATE growth in the projection period, increasing from 1.6 per cent in 2019 to 2.0 per cent in 2021.