Economic trends for Norway and abroad
Moderate pace in Norwegian economy
Over the last 18 months, the Norwegian economy has experienced a moderate economic downturn, and the relatively modest GDP growth is expected to continue well into 2015. Unemployment has been fairly stable so far this year, but is expected to increase somewhat going forward.
The petroleum sector is not expected to continue to give strong growth impulses to the Norwegian economy, instead it is envisaged that demand will level out and fall slightly. Slightly higher growth in demand from the mainland and a gradual increase in global growth will, however, contribute more to the activity level.
Slow increase in growth among Norway’s trading partners
Internationally, economic growth has picked up somewhat in the past year. Among Norway's main trading partners, growth has been most evident in the USA, UK and Sweden. The euro area, however, is still experiencing weak growth and inflation has fallen to a very low level. Unemployment is very high but there are signs of improvement in several countries. The continuing restrictive fiscal policy in much of the OECD area means that growth will only increase slowly, and we do not envisage an upturn in the economy among Norway's trading partners as a whole until 2015, and even later in the euro area. This will contribute to continued low interest rates internationally, even though they are expected to increase somewhat in 2016 and 2017.
Improvement in traditional exports in sight
Modest growth in Norwegian export markets, together with diminished cost competitiveness in Norway in the last two years has contributed to a weakening in traditional exports. This trend continued in the first quarter despite a markedly weakening krone improving the cost competitiveness through 2013. The krone, however, has strengthened markedly in recent months. Once international growth picks up, it will, together with the lag effects of the improvement in competitiveness from the weakening krone last year, pull up exports. In 2016 and 2017, we expect exports to grow by 4-5 per cent.
Petroleum investments at a standstill
With two-digit growth rates, petroleum investments have given major growth impulses in the last three years, and in 2013 they rose by as much as 17 per cent. Annualised growth in the first quarter of 2014 was 10 per cent from the previous quarter. Weak investment activity levels in other sectors contributed to a fall in the total business investment. Going forward, we expect no further increase in petroleum investments, while business investments on the mainland could increase slightly, particularly in 2016 and 2017 when the global economic recovery has gained a firmer footing. Investment growth will almost certainly be far lower than during the upturn in the economy in 2004-7, which means the coming upturn will not be particularly strong.
Increase in structural non-oil public deficit
Increased purchases of goods and services in general government, especially investments, will stimulate activity going forward. Tax concessions will help to pull up households’ real disposable income and increase their demand. Measured with the structural non-oil budget deficit as a share of trend GDP, the structural non-oil public deficit will increase this year and the coming years. Measured as a share of the Government Pension Fund Global, the structural non-oil public deficit is nevertheless expected to remain around 3 per cent over the next three years, as in the years 2011-14.
Low mortgage rates
There has been little movement in Norwegian interest rates over the past year. The three-month money market rate has hovered around 1.75 per cent. Typical mortgage rates are far higher than money market rates, but are likely to be reduced slightly going forward. We expect the money market rate to remain more or less unchanged for some time, but a modest increase will start towards the end of 2015. At the end of 2017, we expect the money market rate to increase by 1 percentage point from the current level. As banks meet new and stricter equity requirements by a wide margin, we expect the premium on money market interest rates to be reduced. Mortgage rates in private financial institutions will therefore remain low.
Increased savings and consumption
Household consumption rose markedly in the first quarter after showing modest growth during the last three quarters in 2013. Moderate growth is expected for the rest of the year. A slight increase in income growth, slightly lower interest rates and a new rise in house prices will contribute to a recovery in consumption growth from 2015. Our projections show that household consumption this year and next year will see somewhat lower growth than income. Hence, savings as a share of income will have increased for five successive years. The increase in consumption growth in 2016 and 2017 is expected to take place concurrently with savings remaining more or less unchanged.
Changing housing market
A slightly more restrictive lending policy by the banks and reduced confidence in future developments may have contributed to house prices falling through autumn 2013. Subsequently, more fundamental factors, such as relatively high income growth and low interest rates, in addition to less restrictive lending practices by the banks, contributed to house prices again increasing. The fall in house prices contributed to a weak housing investment through autumn 2013 and particularly in the first quarter this year, when the decline was as much as 3.6 per cent. It takes time for a new rise in house prices to turnaround the housing investments, and we expect this to take place towards the end of this year. Further ahead, we believe increased income growth and continued low interest rates will lead to real house price growth.
Two years with slight increase in unemployment
Growth in mainland Norway’s GDP this year is set to be the same as last year, with 2 per cent, followed by growth. Employment will increase and growth will gradually pick up. The labour supply, however, is likely to increase more than employment in the first coming years. Unemployment is thus expected to go up slightly this year and next year, to 3.8 per cent, falling again in 2017.
Lower inflation ahead
The weakening of the krone in 2013 contributed to pushing up inflation in Norway. Growth in the CPI adjusted for tax changes and excluding energy products (CPI-ATE) has thus increased, and in the first four months of 2014 hovered around Norges Bank's inflation target of 2.5 per cent. However, we expect the strengthening of the krone in February to help secure a slight fall in inflation going forward. Electricity prices are set to be significantly lower than last year, whereby the CPI could fall to around 2 per cent annually in 2014. Inflation is expected to fall further next year, followed by a moderate increase.
Slightly lower wage growth
The main negotiations in many important tariff areas are now over. We expect total wage growth to be 3.6 per cent this year, down from 3.9 per cent last year. This is somewhat higher than what was generally estimated as the framework for negotiations. We believe that the wage drift applied to these estimates is slightly too low. Our estimates show real wage growth of 1.6 per cent this year, which is significantly less than the average over the last decade. Wage growth is unlikely to change much going forward. Lower inflation may, however, mean slightly higher real wage growth in 2015 and 2016.