Economic trends for Norway and abroad
Moderate upswing in economy from second half of 2016
A fall in demand from the petroleum industry and low international growth have led to a downturn in the Norwegian economy since the summer of 2014. A sharp increase in public demand and a turnaround in investment growth in mainland industries are key factors behind the expected moderate increase in activity growth going forward.
Despite low growth in activity, employment has continued to increase slightly, while the number of jobseekers has seen higher growth. Unemployment has therefore seen a marked increase since the spring of 2014, and is set to increase even farther before falling towards the end of 2016.
International growth to pick up next year
International economic growth remains low, but the growth profile is mixed. In the euro area, growth has slowed in recent quarters. In the third quarter, growth also fell somewhat in the USA, but the relatively high US growth over a long period means that the first interest rate increase is expected soon. Emerging economies such as Russia and Brazil have been hit hard by the low commodity prices, while growth is still relatively high in India and China. The increased influx of asylum seekers has led to more expansionary fiscal policies in many European countries. This will enhance the prospects for higher growth going forward. Norway's trading partners as a whole are heading towards a new economic upturn next year. However, the recovery is not set to be strong, and we expect a very moderate growth increase in Norwegian export markets going forward. Many OECD countries are still experiencing a major slump, with high unemployment. This will mean continued low interest rates internationally throughout the projection period.
High numbers of asylum seekers leading to high growth in public consumption
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 increase in the structural non-oil budget deficit, fiscal policy was highly expansionary in 2014, and just as expansive this year. There will be significant easing of the direct taxation of businesses and households in 2016, roughly in line with this year. The large influx of asylum seekers in autumn 2015 will mean a further increase in petroleum revenue spending in 2016. Austerity measures aimed at ‘financing’ most of the expenditure increase are expected to have relatively modest real economic effects. Thus, the stimulating effect on the economy is greater than the growth in the budget deficit would suggest. We assume that the orientation of the fiscal policy in 2017 and 2018 will also have an expansionary effect, but to a much lesser extent than in 2016.
Fall in investments in petroleum industry to end in 2018
Investments in the extraction industry up to the third quarter of 2015 have fallen by almost 25 per cent since the peak in the third quarter of 2013. High cost growth and low profitability were partly to blame, but the decline has been greatly exacerbated by the oil price fall since the summer of 2014. At USD 45 per barrel, the oil price at the start of December 2015 was about 60 per cent lower than the level it held for almost three years before the fall. Oil prices are expected to slowly rise to USD 60 per barrel by the end of 2018. We assume that the decline in petroleum investments will be cushioned going forward, and estimate the decline measured as an annual average at 14 per cent both in 2015 and 2016, and considerably less in 2017, before remaining unchanged from 2017 to 2018.
Lower interest rates and weak krone
The key policy interest rate is at a record low and we expect that it will be reduced by 0.25 percentage points by the end of the first quarter of 2016. No changes are then expected before the end of the projection period. Typical mortgage interest rates may therefore come down to 2.5 per cent in 2016 compared to 3.9 per cent as an annual average in 2014. The krone has mostly fallen in value since early 2013, partly as a result of expectations of lower Norwegian interest rates. Over the last year and a half, the trend has been closely linked to the fall in oil prices. Measured by the import-weighted exchange rate, the krone in early December was 26 per cent weaker than in January 2013, having fluctuated at around the same level in the preceding three months. We assume that the krone will remain at this level throughout 2016 before gradually strengthening somewhat as oil prices rise and economic conditions improve. In late 2018, the imported-weighted krone will still be almost 20 per cent weaker 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 increasing activity in Norway.
Higher investment in mainland industries going forward
Investment in the mainland industries has fallen 6 per cent over the first three quarters of this year, but a turnaround is assumed to be imminent. Underlying factors include the weak krone, higher global growth and low interest rates. A number of large industrial projects will contribute to a clear growth in manufacturing investment. The power supply industry is also anticipating high growth in 2016. Improved economic conditions will gradually stimulate further growth in mainland investment. However, strong growth is unlikely given the excess capacity in many industries.
Higher price growth in 2016
Growth in the consumer price index (CPI) is being pulled up considerably this year by the weak krone, while reduced energy prices are pulling the index down. Next year, energy prices and tax increases will pull the index up, in addition to the lag effects of the krone depreciation that has already taken place. Overall, we expect the CPI to rise by 2.8 per cent in 2016, compared to 2.2 per cent in 2015. Inflation next year will thus be almost one percentage point higher than the average for the last 10-20 years. Exchange rate developments will see a marked fall in inflation in 2017, followed by an even greater fall in 2018.
Low real wage growth
Two factors are driving the profitability of manufacturing in different directions. Supplier activity in the petroleum industry faces a decline in terms of both price and volume, while the traditional competitive activity is thriving due to the depreciation of the krone. The isolated impact of this on wage growth is not apparent. The increase in unemployment, however, means a slightly lower wage growth is expected this year and next year than last year, when the average annual wage increased by 3.1 per cent. Real wage growth is likely to be 0.6 per cent this year, and may be slightly negative in 2016. Although unemployment is likely to decrease slightly in 2017 and 2018, it will remain high, and will curb wage growth. The reduced inflation will nevertheless lead to higher real wages.
Moderate growth in household consumption
Modest growth in employment and low real wage growth will pull the growth in household income down this year and next year. Lower interest rates and tax relief, however, will pull in the opposition direct. Higher inflation will pull down income growth in 2016, when it is expected to be markedly lower than this year and last year. Household consumption saw a marked increase during the first half of this year, followed by a very modest increase in the third quarter. We expect consumption to increase slightly going forward. However, growth in consumption as an annual average will be considerably less in 2016 than this year. Income growth is expected to pick up appreciably in 2017 and 2018, primarily due to higher growth in employment and real wages. Government transfers to households will also increase as a result of the large number of asylum seekers who will by then form part of the population. This will contribute to a marked increase in consumption growth.
Lower growth in house prices
House prices increased considerably from 2014 to the third quarter of this year, but growth has slowed through 2015, mainly due to high income growth and the prospect of steadily lower interest rates. Interest rates are set to continue to fall, while revenue growth is now slowing. Higher unemployment also means greater uncertainty in relation to income, which can also dampen the demand in the housing market. Growth in households’ credit is also showing signs of slowing at the end of 2015. We expect prices to fall somewhat in the remainder of 2015 and into 2016. As an annual average, house prices are nevertheless expected to rise by 5.8 per cent in 2015 and 1.5 per cent in 2016. Higher income growth, improved economic conditions and low interest rates mean that house prices will probably see a clear increase again in 2017 and 2018. Housing investment fell last year, but has increased appreciably so far this year. We assume that growth in house building will remain relatively high going forward and to the end of our projection period.
Activity growth will increase gradually going forward
Growth in the mainland economy has been consistently weak since summer 2014. Measured as an annualised rate, mainland Norway’s GDP increased from the second quarter of 2014 to the third quarter of 2015 by just 1.1 per cent. We expect growth to slowly increase slightly going forward. In our projections, growth in the third quarter of 2016 will be higher than the trend growth, which is currently estimated at 2 ¼ per cent. This would constitute an economic upturn. As an annual average, mainland Norway’s GDP is expected to increase by 1.5 per cent in 2015 and 2.0 per cent in 2016. 0.2 percentage points of this growth is related to the net effect of the surplus influx of asylum seekers. In 2017 and 2018, we expect growth to surpass 2.5 per cent. The weak growth in activity has contributed to unemployment, as reported in the Labour Force Survey (LFS), increasing from 3.2 per cent in the second quarter of 2014 to 4.6 per cent in the period from August to October 2015. We expect unemployment to increase slightly before falling towards the end of 2016. As an annual average, we assume that the unemployment rate will be 4.6 per cent next year and that it will fall to 4.3 per cent in 2018. Our estimates assume that the increased influx of asylum seekers will not markedly affect the labour supply until after the end of our projection period, which is 2018.