Economic trends for Norway and abroad
Boom period coming to an end
After five years of economic prosperity there are now signs of a more moderate development in the Norwegian economy. The main drivers behind this development is a marked decline in economic growth among our trading partners, a stronger krone and several interest rate hikes in the past year.
The boom of the past five years has been a result of strong growth in corporate investments, favourable development in Norwegian export markets and high household demand. The consumption in households and non-profit organisations rose by a substantial 6.4 per cent last year - the strongest annual growth since 1985. We assume that the recent interest rate hikes and reduced growth in household income will dampen the consumption growth in the time ahead.
Marked international decline
There are signs that the US economy is entering an economic slump. We expect this slump to spread to the rest of the OECD area. High-growth economies such as China and India will be affected by the international decline, although the growth in these economies is expected to remain at a relatively high level. Combined with reduced Norwegian competitiveness, this results in a halving of the growth in exports of traditional goods from 2007 to 2008, followed by a further decline to 2009.
Lower interest rates
The Federal Reserve has already made substantial cuts in its key rate. We expect the European Central Bank to follow suit and cut its key rate by 1 percentage point during the second half of 2008 and the first half of 2009. The prospects of lower interest rates internationally and reduced pressure in the economy lead us to expect that there will be no further interest rate hikes in Norway for the time being. The interest rate difference between Norway and the rest of the world has increased. Combined with high oil prices, this has contributed to a strengthening of the krone. A further cut in interest rates internationally is expected to strengthen the krone further. When this materialises, we expect Norges Bank to cut the interest rate by 0.75 percentage points. Nevertheless, we still expect a further strengthening of the krone exchange rate this year as well as next year.
Slight increase in unemployment
GDP for Mainland Norway rose by a substantial 6.0 per cent last year - the highest growth since the beginning of the 1970s. The upswing in the Norwegian economy has resulted in record growth in employment in the past two years. Furthermore, the level of unemployment has not been lower in 20 years. We expect a marked slowdown in economic growth in the next few years. This will translate into markedly lower growth in employment. The labour immigration that has made this growth possible is expected to decrease in the period ahead. We therefore only expect a moderate increase in unemployment, and that it will remain lower than in the cyclical peak of the late 1990s.
High wage growth and higher inflation in 2008
Strong profitability in trade and industry and a very tight labour market have contributed to marked wage growth in the past five years. Measured as wages per man-year, we expect the wage growth to reach 6.0 per cent in 2008. Measured by the twelve-month growth in the CPI adjusted for tax changes and excluding energy products (CPI-ATE), inflation has risen slightly in the past one and a half years, and was 1.9 per cent in January. We expect inflation to rise to 2.2 per cent on average in 2008, followed by a decrease as a result of the stronger krone and eventually lower wage growth. On average, the price of electricity was very low in 2007, and a normalisation of prices in the current year therefore contributes to an expected growth in the consumer price index from a meagre 0.8 per cent in 2007 to 3.5 per cent in 2008. As a result, the growth in real wages is expected to be lower than last year despite higher nominal wage growth.
Lower growth in investments
There has been a strong increase in investments in the past five years, which has resulted in a major build-up of capital stock in mainland industries. Together with weaker economic growth, this is likely to result in lower investment growth in the years to come. There has been a moderate increase in petroleum investments in the past two years, and this development is expected to continue. The considerable increase in housing investments at the start of the current boom has continued, albeit at a slower pace. We expect the housing investments to decrease somewhat in the time ahead, but in a historical perspective the housing development is likely to remain at a high level. We expect a somewhat lower growth in house prices than in general prices in the next few years.
|Demand and output|
|Consumption in households etc.||2.8||3.7||4.2||2.1||3.1||2.8||5.6||4.0||4.7||6.4||3.9||3.2||3.2||3.8|
|General government consumption||3.4||3.1||1.9||4.6||3.1||1.7||1.5||0.7||2.9||3.2||3.2||3.0||3.1||2.7|
|Gross fixed investment||13.6||-5.4||-3.5||-1.1||-1.1||0.2||10.2||13.3||7.3||9.6||3.5||1.1||1.4||2.7|
|Extraction and transport via pipelines||22.2||-13.0||-22.9||-4.6||-5.4||15.9||10.2||18.8||2.9||6.6||7.6||6.3||6.4||5.0|
|Demand from Mainland Norway 1||4.2||2.9||2.6||3.0||3.0||1.4||5.0||4.6||4.8||6.1||3.5||2.5||2.6||3.2|
|Crude oil and natural gas||-5.8||0.4||3.8||6.6||2.4||-0.6||-0.5||-5.0||-6.6||-2.4||-3.4||1.4||0.9||1.9|
|Gross domestic product||2.7||2.0||3.3||2.0||1.5||1.0||3.9||2.7||2.5||3.5||1.8||1.6||2.1||3.0|
|Total hours worked, Mainland Norway||2.5||0.8||-0.7||-0.9||-0.9||-2.1||1.7||1.4||2.6||4.0||2.0||0.9||1.0||1.3|
|Labor force 3||1.7||0.9||0.9||0.5||0.7||-0.4||0.5||1.4||2.2||2.9||1.5||1.2||0.9||1.1|
|Participation rate (level) 4||73.9||74.2||74.4||74.5||74.6||73.8||73.6||74.0||74.7||76.0||76.4||76.5||76.5||76.5|
|Unemployment rate (level)||3.2||3.2||3.4||3.6||3.9||4.5||4.5||4.6||3.4||2.5||2.7||2.8||3.1||3.0|
|Prices and wages|
|Wages per standard man-year||6.5||5.4||4.6||5.3||5.4||3.7||4.6||3.8||4.9||5.6||6.0||4.7||4.3||5.2|
|Consumer price index (CPI)||2.2||2.3||3.1||3.0||1.3||2.5||0.4||1.6||2.3||0.8||3.5||1.5||1.6||2.6|
|Export prices, traditional goods||1.9||-0.5||11.8||-1.8||-9.1||-0.9||8.5||4.1||11.4||2.4||-6.3||-3.5||4.2||7.1|
|Import prices, traditional goods||0.7||-2.9||6.5||-1.6||-7.2||-0.4||4.0||0.5||4.7||3.5||-3.9||-2.4||1.9||3.1|
|Housing prices 6||9.7||9.4||14.1||7.1||4.0||1.6||10.1||7.9||12.9||12.3||2.9||0.2||0.3||4.8|
|Income, interest rates and excange rate|
|Household real income||5.3||2.4||3.4||-0.3||7.9||4.1||3.5||7.5||-6.5||5.5||4.8||4.2||4.2||2.8|
|Household saving ratio (level)||5.8||4.7||4.3||3.1||8.4||9.1||7.4||10.2||0.1||-1.2||1.0||2.0||3.0||2.2|
|Money market rate (level)||5.8||6.5||6.8||7.2||6.9||4.1||2.0||2.2||3.1||5.0||5.7||5.1||5.1||5.8|
|Lending rate, banks (level) 7||7.4||8.4||8.0||8.8||8.4||6.5||4.2||3.9||4.3||5.7||6.6||6.2||6.0||6.6|
|Real after-tax lending rate, banks (level)||3.1||3.7||2.7||3.3||4.8||2.2||2.5||1.3||0.7||3.3||1.2||3.0||2.7||2.2|
|Importweighted krone exchange rate (44 countries) 8||2.5||-1.2||2.9||-3.1||-8.5||1.3||3.0||-3.9||0.6||-1.7||-3.9||-4.2||-0.9||2.3|
|NOK per euro (level)||8.5||8.3||8.1||8.1||7.5||8.0||8.4||8.0||8.1||8.0||7.8||7.5||7.4||7.6|
|Current balance (bill. NOK)||-3.6||69.5||222.4||247.5||192.3||195.9||221.6||316.6||373.4||390.6||406.2||343.5||350.9||415.2|
|Current balance (per cent of GDP)||-0.3||5.6||15.0||16.1||12.6||12.3||12.7||16.3||17.3||17.0||16.6||13.9||13.6||14.9|
|Exports markets indicator||8.3||6.9||11.7||0.8||1.5||3.5||7.5||6.9||8.4||7.6||4.1||2.2||5.1||8.5|
|Consumer price index, euro-area||1.1||1.1||2.1||2.3||2.3||2.1||2.1||2.2||2.2||2.2||2.4||2.0||2.0||2.0|
|3 mths. interest rate, euro||4.2||2.9||4.4||4.2||3.3||2.3||2.1||2.2||3.1||4.3||4.1||3.3||3.6||4.2|
|Crude oil price NOK (level) 9||96||142||252||219||197||205||257||351||414||423||444||382||397||440|
|1||Consumption in households and non-profit organizations + general government consumption + gross fixed capital formation in mainland Norway.|
|2||Change in stockbuilding. Per cent of GDP.|
|3||Unemployed (Labour Force Survey) and employment (NA) exclusive of foreigners in foreign shipping.|
|4||Unemployed (Labour Force Survey) and employment (NA) exclusive of foreigners in foreign shipping as a share of the average population.|
|5||CPI adjusted for tax changes and excluding energy products.|
|7||Households' borrowing rate in private financial institutions. Yearly average.|
|8||Increasing index implies depreciation.|
|9||Average spot price Brent Blend.|
|Source: Statistics Norway. The cut-off date for information was 19 February 2008. Published 21 February 2008.|