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Economic trends for Norway and abroad

Major slowdown

Published:

The financial crisis and the backlash in the global economy are contributing to a fall in activity in the Norwegian economy, with the export industry being worst affected. Extensive fiscal policy and monetary policy measures are unlikely to prevent the GDP for mainland Norway from falling in 2009. The economy is not expected to see an upward swing until 2011.

After a considerable slowdown of growth in the first three quarters of 2008, the GDP for mainland Norway fell in the fourth quarter. The fall in the export of traditional goods throughout the second half of 2008 was strongly reinforced in the fourth quarter. Demand from households and the mainland-based industry have also seen a marked fall. The downswing in activity in Norway has, however, been considerably muted by increased demand from the public sector and the oil activity.

Dramatic international slowdown

The global economy is presently experiencing a dramatic slowdown. The banking industry is in crisis in many countries and the credit markets are generally performing poorly. Production and demand are limited by a restrictive lending practice. The effect of the slowdown is broad and synchronic, and no areas or countries are acting as counterweights. The GDP in the OECD area fell almost 2 per cent in the second half of 2008. The authorities in a number of countries have initiated – and given notice of future – stabilisation packages for the credit market, as well as monetary and fiscal policy stimulation measures aimed at the real economy.

Expansive fiscal policy

The Storting has approved extraordinary fiscal policy measures, which together with the fiscal policy part of the national budget for 2009 equates to a stimulus of 2.3 per cent of the GDP for mainland Norway. The expansive fiscal policy is expected to be continued in 2010. Combined with the measures aimed at the financial sector, this will partly curb the slowdown of activity in the Norwegian economy.

Lower interest rates

Increased interest rates curbed the growth in demand throughout 2008. As the strength of the slowdown became clearer, the base rates both home and abroad were dramatically reduced. During the last four months, the base rate in Norway was reduced by a total of 3.25 percentage points, which is partly responsible for the money market rate falling from almost 8 per cent to around 3.5 per cent. The banks’ interest on loans is estimated to have fallen from 7.8 per cent at the end of September 2008, and further to 4.6 per cent on average in the second quarter of 2009. Assumptions are based on the base rate up to the summer being further reduced by 0.5 percentage points and the money market rate bottoming out around the end of the year at 2.5 per cent, with an estimated base rate of 2 per cent. The average bank loan interest rate may thus fall to less than 4 per cent in 2010. In line with improved economic conditions, the base rate is expected to gradually increase throughout 2011 and 2012.

Export industries struggling

The slowdown in the global economy is contributing to a clear downturn in production in many export industries. Large parts of the manufacturing industry are aimed at the oil activity, and domestic demand and the activity in parts of this industry are likely to bear the strain well. This will limit the production slowdown in the manufacturing industry as a whole, but the slowdown is nevertheless expected to be considerable in 2009.

Housing market gradually improving

The price of freehold dwellings peaked in the second quarter of 2008, and has since fallen. This has contributed to a major fall in the number of new homes being built. Despite the lower interest rates, housing prices are not expected to bottom out until the end of 2009. It is estimated that the fall will consequently be in the region of 20 per cent. A slight recovery in housing investments is expected to take place in 2010.

Halt in fall of household consumption

The consumption in households fell considerably in the last three quarters of 2008, particularly with regard to the purchase of durable consumer goods. The fall is set to continue in 2009, but the income growth and fall in interest rates are subsequently expected to aid the reversal of this trend. On a yearly basis, however, the consumption may be somewhat lower this year than last year. Savings as a share of disposable income are expected to increase from 2.1 per cent in 2008 to more than 7 per cent in 2009. The growth in consumption is expected to pick up in 2010.

Impetus from the petroleum sector

Investments in petroleum have increased substantially for many years, and have provided positive growth impetus to the mainland economy. Despite the considerable decrease in the oil price throughout 2008, the petroleum investments are expected to remain high. Assumptions are based on the petroleum investments being at about the same level in the future, but the future development in the petroleum investments is uncertain, and is partly dependent on the oil price.

Higher unemployment

Employment growth has never been as high as in 2007. This trend was reversed in 2008, and seasonally adjusted national accounts figures show a fall in employment of 0.4 per cent from the third to fourth quarter of 2008 when adjusted for normal seasonal variations. Unemployment has increased sharply since August 2008, and is expected to increase in many industries in 2009. The fall in employment is likely to be particularly marked in manufacturing, and the building and construction industry is also expected to face manpower reductions. The increase in public sector employment has curbed the fall in employment as a whole. Projections are based on reduced net immigration to Norway. However, unemployment is expected to increase from 2.6 per cent in 2008 to 4.7 per cent as a yearly average in 2010 and 2011. This corresponds to 125 000 unemployed persons.

Reduced wage growth

Wage growth has been high for several years. Large wage increases late last year have ensured a higher average wage level for many this year than last. The increases in the 2009 pay settlements are likely to be low. The increase in unemployment and the special difficulties for export-oriented companies also mean that wage growth will be moderate in 2010 and 2011, and is expected to fall to the levels of the early 1990s.

Lower inflation

Reduced wage growth and higher productivity growth are expected to reduce inflation in the next two years. Considerably lower energy prices in 2009 than 2008 are contributing to estimates that the CPI will grow by 1.4 per cent on a yearly basis in 2009, compared with 3.8 per cent in 2008.

Main economic indicators 1999-2012. Accounts and forecasts. Percentage change from previous year unless otherwise noted
 
  1999 2000 2001 2002 2003 2004 2005 2006 2007* 2008* Forecasts
  2009 2010 2011 2012
 
Demand and output                            
Consumption in households etc. 3.7 4.2 2.1 3.1 2.8 5.6 4.0 4.8 6.0 1.5 -0.4 3.1 4.3 4.6
General government consumption 3.1 1.9 4.6 3.1 1.7 1.5 0.7 1.9 3.4 3.7 5.3 4.8 3.3 2.7
Gross fixed investment -5.4 -3.5 -1.1 -1.1 0.2 10.2 13.3 11.7 8.4 3.3 -9.2 -2.7 0.9 5.6
Extraction and transport via pipelines -13.0 -22.9 -4.6 -5.4 15.9 10.2 18.8 4.3 5.5 7.1 1.2 0.5 2.2 -3.3
mainland Norway 0.2 -1.4 3.9 2.3 -3.6 9.3 12.7 11.9 9.3 1.9 -11.5 -3.4 1.9 6.5
Industries -1.0 -0.4 2.5 4.0 -11.6 8.4 19.2 17.1 12.2 6.6 -17.3 -9.8 1.5 8.5
Housing 3.0 5.6 8.1 -0.7 1.9 16.3 10.8 4.1 5.3 -8.9 -17.7 -9.9 5.8 11.4
General government 0.4 -11.2 2.7 1.7 10.4 2.5 1.3 11.6 7.9 5.2 12.1 15.3 -0.2 -0.5
Demand from Mainland Norway 1 2.9 2.6 3.0 3.0 1.4 5.0 4.6 5.3 6.0 2.1 -1.1 2.4 3.6 4.4
Stockbuilding 2 -1.1 1.2 -1.3 0.1 -0.2 1.2 0.4 0.0 -1.5 0.2 0.0 0.0 0.0 0.0
Exports 2.8 3.2 4.3 -0.3 -0.2 1.1 1.1 0.0 2.5 0.9 -4.4 -1.4 0.7 1.2
Crude oil and natural gas 0.4 3.8 6.6 2.4 -0.6 -0.5 -5.0 -6.5 -2.6 -2.3 -1.9 -0.4 -1.1 -1.9
Traditional goods 2.3 3.3 1.8 0.6 2.9 3.4 5.0 6.2 8.7 4.8 -6.6 -1.9 3.6 5.5
Imports -1.6 2.0 1.7 1.0 1.4 8.8 8.7 8.4 7.5 4.2 -4.4 2.4 4.0 6.9
Traditional goods -1.9 2.5 4.5 3.0 5.2 10.9 8.1 11.5 6.7 3.2 -6.0 1.9 5.7 8.0
Gross domestic product 2.0 3.3 2.0 1.5 1.0 3.9 2.7 2.3 3.1 2.0 -1.7 0.5 1.9 2.1
Mainland Norway 2.6 2.9 2.0 1.4 1.3 4.4 4.6 4.9 6.1 2.4 -1.7 0.9 2.6 3.4
Manufacturing 0.1 -0.6 -0.5 -0.4 3.0 5.7 4.2 3.1 5.4 2.9 -4.5 -3.8 -0.3 2.4
Labour market                            
Total hours worked, Mainland Norway 0.7 -0.7 -1.6 -0.9 -2.1 1.7 1.4 3.1 4.3 3.4 -1.1 0.2 0.7 1.3
Employed persons 0.9 0.6 0.3 0.3 -1.0 0.4 1.1 3.6 4.1 3.2 -0.4 -0.2 1.0 1.7
Labor force 3 0.9 0.9 0.5 0.7 -0.4 0.5 1.4 2.4 3.2 3.3 0.7 0.9 0.9 1.2
Participation rate (level) 4 74.2 74.4 74.5 74.6 73.8 73.6 74.0 74.9 76.1 77.4 76.7 76.2 75.7 75.5
Unemployment rate (level) 3.2 3.4 3.6 3.9 4.5 4.5 4.6 3.4 2.5 2.6 3.7 4.7 4.7 4.2
Prices and wages                            
Wages per standard man-year 5.4 4.6 5.3 5.4 3.7 4.6 3.8 4.8 5.6 5.7 3.8 3.2 3.5 4.3
Consumer price index (CPI) 2.3 3.1 3.0 1.3 2.5 0.4 1.6 2.3 0.8 3.8 1.4 1.0 2.2 2.7
CPI-ATE 5 .. .. 2.6 2.3 1.1 0.3 1.0 0.8 1.4 2.6 2.3 1.1 2.0 2.6
Export prices, traditional goods -0.5 11.8 -1.8 -9.1 -0.9 8.5 4.1 11.4 2.5 2.3 -4.2 -2.8 3.3 5.3
Import prices, traditional goods -2.9 6.5 -1.6 -7.2 -0.4 4.0 0.5 4.0 3.7 3.2 -2.0 -3.1 0.8 2.4
Housing prices 6 9.4 14.1 7.1 4.0 1.6 10.1 7.9 12.9 12.3 -1.1 -12.1 -2.1 3.5 7.8
Income, interest rates and excange rate                            
Household real income 2.4 3.4 -0.3 7.9 4.1 3.5 7.5 -6.5 5.9 3.1 4.5 3.1 2.6 4.0
Household saving ratio (level) 4.7 4.3 3.1 8.4 9.1 7.4 10.2 0.1 0.4 2.1 7.2 7.1 5.6 4.9
Money market rate (level) 6.5 6.8 7.2 6.9 4.1 2.0 2.2 3.1 5.0 6.2 3.1 2.5 3.4 4.6
Lending rate, banks (level) 7 8.4 8.0 8.8 8.4 6.5 4.2 3.9 4.3 5.7 7.3 4.8 3.8 4.4 5.7
Real after-tax lending rate, banks (level) 3.7 2.7 3.3 4.8 2.2 2.5 1.3 0.7 3.3 1.5 2.0 1.7 1.0 1.3
Importweighted krone exchange rate (44 countries) 8 -1.2 2.9 -3.1 -8.5 1.3 3.0 -3.9 0.7 -1.8 0.0 2.2 -4.4 -2.0 -0.2
NOK per euro (level) 8.3 8.1 8.1 7.5 8.0 8.4 8.0 8.1 8.0 8.2 8.5 8.2 8.0 8.0
Current account                            
Current balance (bill. NOK) 69.5  222.4  247.5  192.3  195.9  221.6  316.6  372.1  362.3  448.9  217.7  186.4  218.8  238.2
Current balance (per cent of GDP) 5.6 15.0 16.1 12.6 12.3 12.7 16.3 17.2 15.9 17.7 9.3 7.9 8.7 8.9
International indicators                            
Exports markets indicator 6.9 11.7 0.8 2.4 3.5 8.3 6.9 8.9 5.5 1.9 -5.2 -0.9 3.8 7.0
Consumer price index, euro-area 1.1 2.1 2.3 2.3 2.1 2.1 2.2 2.2 2.2 3.3 -0.2 0.4 0.9 1.8
3 mths. interest rate, euro 2.9 4.4 4.2 3.3 2.3 2.1 2.2 3.1 4.3 4.6 1.6 1.5 1.9 2.8
Crude oil price NOK (level) 9  142  252  219  197  205  257  351  414  423  527  293  324  372  426
 
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.
6   Freeholder.
7   Yearly average.
8   Increasing index implies depreciation.
9   Average spot price Brent Blend.
Source:  Statistics Norway. The cut-off date for information was 17 February.