Economic trends for Norway and abroad
Gradual upswing expected in 2017
Oil investment has been falling sharply for more than two years. The decline will now be curbed. Together with increased public spending, lag effects of the krone depreciation, lower interest rates and gradually improving international economic conditions, this signals somewhat higher growth in the Norwegian economy.
Since the summer of 2014, the Norwegian economy has been experiencing a clear downturn. Oil prices have plummeted and oil investments have fallen markedly. Mainland Norway’s GDP increased in 2015 by just 1.0 per cent; the weakest growth since the financial crisis in 2009. The economic situation was further weakened in the second half of last year by almost zero growth. As a result of the poor activity development, unemployment saw a significant increase. The economic downturn is expected to last until the end of 2016. Unemployment will peak during the year with an annual average of 4.7 per cent of the labour force.
International growth set to pick up
International economic growth remains low. Norway's trading partners as a whole are expected to see an end to the economic slump in 2016. However, growth in Norwegian export markets is expected to be slow going forward, resulting in a moderate economic recovery. Many countries in the OECD area is still experiencing a deep and prolonged recession, with high unemployment and low inflation. Interest rates will therefore remain at very low levels internationally throughout the projection period.
Higher public spending
The orientation of the fiscal policy has long stimulated the Norwegian economy and helped to cushion the downturn we are currently experiencing. Measured by the Ministry of Finance's estimate of the increase in the structural non-oil budget deficit, fiscal policy was also expansionary in 2015, but it now appears that it was less expansionary than previously thought. A more expansionary orientation of the fiscal policy will be applied in 2016 than last year. The large influx of asylum seekers in autumn 2015 will mean an increase in general government spending, particularly in 2016. We assume that the orientation of fiscal policy in 2017 will also have an expansionary effect, but to a much lesser degree than in 2016. In 2018 and 2019, an almost cyclically neutral development in budgetary policy is expected.
Slowing down of the investment decline in the petroleum industry
The dominant factor behind the weak production development in Norway is the sharp fall in demand from the petroleum industry. Oil investment started to fall in the fourth quarter of 2013, and by the fourth quarter of 2015 had fallen by 27 per cent. The development was initially a response to the high cost level and relatively poor profitability. The downturn was compounded by the dramatic fall in oil prices, from USD 110 per barrel for many years until the end of summer 2014 to below USD 30 per barrel at the start of 2016. Oil prices are expected to pick up gradually from the current USD 40 per barrel to USD 50 in 2019. We assume that the decline in petroleum investments will be curbed going forward, but that the decline in the year’s average will be 13.5 per cent in 2016. We assume a moderate increase over the last three years of our projection period.
Further fall in interest rates and slightly stronger krone
The key policy interest rate is at a record low, and we expect it to be reduced by a further 0.25 percentage points twice during 2016. Typical mortgage rates may then come down from 3.2 per cent as an annual average in 2015 to 2.2 per cent in 2017. A small increase in the key policy interest rate is expected in 2018 and 2019, increasing mortgage rates to 2.7 per cent as an annual average in 2019. The value of the krone has shown a clear tendency to fall since early 2013, gradually driven by the decline in oil prices. Measured by the import-weighted exchange rate, the krone in early January was nearly 30 per cent weaker than three years earlier. By 8 March, the krone had appreciated by 3 per cent. We assume that the krone will see a moderate appreciation going forward. At the end of 2019, the import-weighed krone will still be nearly 20 per cent lower than in January 2013. The weak krone will lead to a marked improvement in cost competitiveness, which will push up exports and reduce imports, thereby increased activity in Norway.
Higher investment in mainland industries going forward
Investment in mainland industries has, overall, fallen slightly in 2015, but a turnaround to moderate growth is assumed to be imminent. A number of large industrial projects and various projects within power supply are providing clear impetus for growth. We also assume that investment in the service industries will increase going forward. Investment growth in mainland industries is expected to peak locally in 2017, but will be at a much lower level than before the financial crisis.
Higher price growth in 2016
The effects of a weak krone and lower energy prices have recently offset one other, giving a consumer price index (CPI) growth as a yearly average of 2.0-2.1 per cent over the last three years. In 2016, however, both energy prices and certain tax increases will pull the CPI up slightly, in addition to lag effects of the krone depreciation that have already taken place. Overall, we expect the CPI to rise by 2.4 per cent in 2016, while inflation will fall again to around 2.0 per cent over the next three years.
Low real wage growth
The weak krone has improved profitability in manufacturing, but activity in the supplier industry is falling sharply and unemployment is rising. We expect growth in annual earnings to fall to around 2.5 per cent this year and next, from 2.8 per cent in 2015. Real wage growth is thus estimated at just 0.1 per cent in 2016 and 0.4 per cent in 2017. If this is realised, this will be the lowest real wage growth for almost 30 years. Improved economic conditions will contribute to wage growth in both nominal and real terms picking up slightly towards the end of the projection period.
Low income and consumption growth in 2016
Despite reduced interest rates and tax relief, we expect low growth in employment and real wages to reduce real income growth in households from 2015 to 2016. Growth in household consumption will consequently fall, from 2.0 per cent last year to 1.2 per cent this year. Higher employment and real wages, however, will lead to a significant increase in income in the years ahead, and in 2017 will be strengthened by further interest rate cuts and a slightly stronger growth in benefits as a result of the increase in the settlement of refugees. Low interest rates and strong growth in household wealth due to rising house prices mean that the consumption may also increase more than incomes as from next year.
Lower growth in house prices
House prices rose sharply through 2015 up to January this year. We expect the weak economic outlook, with rising unemployment and weak real wage increases, as well as tighter bank lending practices this year, to signal more than the interest rate decline for house prices going forward. The indication of a price fall in February may therefore be set to continue this year, but as an annual average, house prices will nevertheless increase slightly from 2015 to 2016. Higher income growth, even lower interest rates and a shift towards slightly lower unemployment may push house prices up again markedly in 2017 and the following two years. Housing investment is already at a historically high level. The high inflation we have experienced, reflecting the high demand, means investment will continue to see clear growth in 2016. House building is then expected to remain high, but growth will be curbed.
Gradual increase in activity growth and fall in unemployment after 2016
From early 2017, the increase in demand will yield new production growth in most industries, and growth in mainland Norway’s GDP may exceed the trend growth, which is estimated at around 2 per cent. Employment will therefore increase and unemployment will gradually fall to 4.1 per cent at the end of 2019.