Economic trends for Norway and abroad
Economic boom in sight
The Norwegian economy has been in a moderate upturn for about a year and a half. The upturn is being further driven by increased investments in the petroleum industry and weak positive international impetus.
Upturn in the international economy set to continue
The upturn in the international economy is set to continue, but at a somewhat more moderate pace than at the start of 2018. However, the weaker international demand in the first half of this year is thought to be temporary. In the medium term, we expect, as before, economic growth to gradually decline, mainly as a result of a gradual tightening of the monetary policy, high debt and an underlying weak productivity performance.
Petroleum investments increasing
Since 2016, the fall in petroleum investments has gradually levelled off and higher investments are expected, according to the operators on the Norwegian continental shelf. The main contributor to this growth in investment is the development of Johan Sverdrup Phase 2. Lower investment costs and expectations of high oil prices mean more profitable petroleum investments. New developments are now in the planning stages, but in many cases no dates have been set. We believe investment in the petroleum industry will see a marked increase in the next few years, making it one of the key drivers behind the moderate economic upturn. However, the fall in investments in the petroleum industry in recent years means that the investment peak we expect in 2020 will be around 17 per cent lower than the record level in 2013.
Modest impetus from fiscal policy
In the period 2014–2017, public consumption and investments grew on average by around 2.5 per cent on an annualised basis, leading to marked growth in public demand. The budget impetus, measured as the change in the structural non-oil public deficit as a share of trend GDP, amounted to 1.6 percentage points over this period. We expect markedly lower growth in public consumption and investments going forward. Nevertheless, we estimate a more or less neutral fiscal policy in the years ahead, as the ageing population combined with real wage growth push up expenditure for state pensions and other welfare benefits. According to our calculations, the budget impetus will remain almost unchanged throughout the projection period, and the petroleum revenue spending will be within the scope of the fiscal rule.
A stronger krone in the years ahead
The depreciating krone from 2013 to the start of 2016 has given positive impetus to the real economy. Today’s weak krone and an oil price that is expected to remain at around USD 75 per barrel signify a stronger krone. A stronger krone will moderate the upturn in the economy by weakening the competitiveness of internationally exposed industries. We assume that one euro will cost around NOK 9 in 2021. This is around 60 øre less than the current level, but 90 øre higher than the historical average since the introduction of the euro in 1999.
Cautious rise in house prices
After several years of sharp rises in house prices, leading to a high level of house-building activity, house prices fell throughout most of last year. According to our calculations, both housing investment and house prices will grow at a moderate pace in the years ahead. The rise in house prices is driven by higher incomes, but is dampened by somewhat lower population growth and higher interest rates. Although house prices are likely to see a nominal increase, real house prices are expected to be at a lower level in 2021 compared with the peak in 2017.
Interest rate set to increase
The key policy interest rate has remained unchanged at a record low 0.5 per cent since March 2016, but the rate is likely to be increased at the monetary policy meeting in September. We have estimated six interest rate hikes of 0.25 percentage points by the end of 2021. According to our calculations, the lending rate for credit lines will be 3.8 per cent in 2021, which is a good one percentage point higher than the 2017 level.
Modest growth in business investment expected
Higher investments are expected this year in the power supply industry, mainly due to the development of several wind farms, but also as a result of further upgrades in the power grid and the installation of smart meters. In manufacturing, a marked increase in investments is expected this year and next year, which can largely be linked to the oil refining, chemical and pharmaceutical manufacturing industry group. There will also reportedly be an increase in investments in the service sector, according to Norges Bank’s regional network. We estimate growth in mainland business investment of around 5 per cent in the next few years.
Moderate household consumption growth
After a lull in the first quarter of the year, consumption growth has risen again. The weak first quarter must be viewed in light of the weak development in car purchases during the first three months of the year. Rising real income growth will boost consumption, but weak developments in wealth and higher interest rates will keep the annual growth rate below 3 per cent in the years ahead. The growth we envisage is in line with the average consumption growth over the last 30 years, but considerably lower than in previous upturns in the economy.
Wage growth increasing
We expect the nominal wage growth to increase further in line with the improved economic situation, higher levels of activity in oil-related industries and lower unemployment. In 2018, real wage growth will be almost zero as a result of higher energy prices pushing up inflation. As profitability improves in the industries, real wage growth will reach 2 per cent in 2021.
Unemployment to fall somewhat more
After a peak of just over 5 per cent at the start of 2016, unemployment has now fallen below 4 per cent, according to Statistics Norway’s Labour Force Survey (LFS). The decline in unemployment is broadly based throughout the country. As a yearly average, we expect unemployment to be 3.9 per cent in 2018, gradually falling to 3.7 per cent in 2021. The increase in the number entering the labour market is the main factor behind the levelling off of the unemployment rate. The proportion of the population in work is expected to increase from 69.7 per cent last year to a good 71 per cent in 2021.
Energy prices pushing up CPI
Developments in energy prices have been the main contributor to the marked increase in the 12-month growth in the consumer price index (CPI) throughout the year. Measured against last year, electricity prices including grid rental rose 37 per cent in July. Fuel prices rose 10 per cent over the same period. Our estimated development in energy prices and special duties shows CPI growth in 2018 of 2.8 per cent, which is 1.3 percentage points higher than the growth in the consumer price index adjusted for tax changes and excluding energy products (CPI-ATE). In line with our estimates for developments in import prices, wages and productivity growth, underlying inflation is expected to be somewhat higher in the years ahead. The CPI-ATE growth rate is estimated at 1.7 per cent in 2019 and 2020, rising to 2.0 per cent in 2021. CPI growth is projected to be 1.7 per cent next year. Lower energy prices will push CPI growth down to 1.5 per cent in 2020, while the CPI will grow at the same rate as the CPI-ATE in 2021.
Economic situation characterised by shift in pace between industries
The activity level in the construction industry has been increasing for some time as a result of major government investment projects and high growth in house building. Going forward, however, markedly lower growth rates in both housing and public investment will dampen the activity in this industry. Meanwhile, manufacturing has been characterised by low activity levels for several years due to lower demand from the petroleum industry. In the years ahead, manufacturing will experience an upturn, both as a result of many manufacturing businesses switching production to new markets and a growing demand from petroleum companies. A stronger exchange rate, rising wage growth, weak growth in interest rates, and almost neutral international economic development will nevertheless mean that the upturn in the Norwegian economy as a whole will be moderate. Our estimates indicate that the Norwegian economy will enter a boom period after the end of next year.