Economic trends for Norway and abroad
Norway set for economic shift following oil industry slump
The standstill in the second half of last year has been replaced by a weak increase in growth in the mainland economy this year. A reduced decline in oil investments coupled with growth in house-building activity and exports may lead to an upturn in the economy from early next year, assuming no further reduction in interest rates.
Oil prices have risen significantly from very low levels early in 2016, but the negative impulses from the petroleum sector continue to dominate. The fall in oil prices that began in summer 2014 has exacerbated the downturn in petroleum industry investments, which had already begun before the end of 2013. The downturn that followed may now be coming to an end. A weaker krone, low interest rate levels and an expansionary fiscal policy have counteracted the effects of the fall in demand from the Norwegian and international petroleum industries. Our calculations suggest that unemployment has peaked, but will only see a slight fall over the next few years.
Somewhat higher international growth
Economic growth slowed among Norway’s trading partners in 2016. We assume in our projections that future growth will pick up slightly, with Norway’s trading partners as a whole expected to see an end to the economic slump around the turn of the year. The high level of debt in households and the public sector in many countries is leading to weak growth, and is dampening growth prospects over the medium term. The deep and protracted downturn in many OECD countries, with high unemployment and low inflation, implies low interest rates internationally throughout the projection period.
Despite the sharp improvement in cost competitiveness, the traditional exports of goods fell during the first half of the year. Along with some temporary factors, the fall in demand from the international petroleum industry is assumed to have contributed to this development. Lag effects of the improvement in cost competitiveness, strengthened by a slightly higher growth in the global economy, will push exports up going forward. The improved competitiveness will also stimulate the activity in Norway by curbing imports in favour of Norwegian production.
Investment decline in the petroleum industry to slow in 2017
So far this year, the investments in the petroleum industry have fallen by 34 per cent from the peak in 2013. The downturn in the 2nd quarter of this year was 3.7 per cent, which followed a fall in the preceding four quarters of over 5 per cent on average. In our calculations, we assume that oil prices will gradually increase from just under USD 50 per barrel in the first half of September to USD 60 per barrel by the end of 2019. Cost cuts in the wake of the drop in oil prices mean in isolation that several field developments will be profitable. Several developments will stimulate demand from the industry, while cost savings in isolation will reduce demand. We assume that the decline in petroleum investments in terms of volume will be curbed considerably in 2017, and that the volume of investment will increase slightly in 2018 and 2019.
Stable low interest rate
The key policy interest rate has been at a record low over the past year and was last reduced in March, to 0.5 per cent. We believe that the interest rate has bottomed out and that Norges Bank will not change interest rates again until 2019. Mortgage rates have dropped slightly in the first half of the year, but are unlikely to change much in the future. Interest rates on credit lines secured on dwellings as an annual average are therefore expected to be 2.5 per cent in 2017 and 2018, down from 3.2 per cent in 2015.
Measured by the import-weighted exchange rate, the krone appreciated by 5 per cent from the turn of the year to 13 September. However, it is still 23 per cent weaker than the peak level in February 2013, and 15 per cent weaker than the average in the decade before the fall in oil prices. A slight rise in oil prices going forward implies a stronger krone, while relatively high inflation in Norway will have the opposite effect. The interest rate differential with the euro area is expected to remain as it is today, and overall our calculations give a roughly unchanged krone exchange rate going forward.
Expansive fiscal policy to continue in 2017
There has been a marked increase in the budget deficit in the last two years. For 2017, we assume a slightly lower growth in public demand than this year, when excluding the purchase of fighter planes, but the growth in the real value of transfers to households will see a clear increase. It is assumed that the scope of net tax concessions will be about NOK 6 billion in both years. Thus, the fiscal policy will be roughly as expansive in 2017 as in 2016. For 2018 and 2019, we assume a slight contractionary fiscal policy.
Temporary high price growth
The depreciation of the krone has pushed up inflation over a long period of time. An abnormal increase in electricity prices after February this year pushed up growth in the consumer price index (CPI) further, and in August, inflation was at 4.0 per cent. We now expect CPI growth to be 3.4 per cent this year. The effects of the depreciation of the krone will gradually be less significant, and together with low wage growth, will reduce the underlying inflation. We assume that energy prices overall will grow roughly in line with other prices going forward, and the slight increase in environmental taxes is expected to lead to CPI growth of around 2.0 per cent in the next few years.
Marked fall in real wages in 2016
The economic downturn has slowed wage growth. The annual wage growth of 3.9 per cent in 2013 fell to 2.8 per cent in 2015. We now expect the employment decline in highly paid oil-related industries to contribute to growth in annual earnings of 2.3 per cent this year, which is slightly lower than the ceiling for the industry of 2.4 per cent. Average real wages will therefore fall by 1.1 per cent, according to our calculations. Improving economic conditions and clearly lower CPI growth will subsequently contribute to a positive and weak increase in real wage growth.
Moderate consumption growth
Reduced employment and a fall in real wages will contribute to a very modest growth in real disposable income for households this year, despite lower interest rates and tax concessions. Changes in income gradually lead to higher consumption. We therefore expect consumption growth of 1.9 per cent this year, which is only marginally lower than the growth last year. As income growth improves, growth in consumption will increase, reaching 2.6 per cent in 2019.
High activity in the housing market
Aided by steadily falling interest rates – a situation that is expected to continue – house prices have continued to rise markedly in 2016. With the prospect of improved economic conditions, we expect house prices to increase further going forward, but at a slightly slower pace. As an annual average, price growth is set to rise to just over 7 per cent this year and slightly more than 5 per cent next year. The sharp rise in house prices in 2014 and 2015 has contributed to marked growth in house-building activity last year and this year to date. Consequently, the increased supply of housing will curb the growth in house prices in 2018 and 2019.
Our projections generally entail a degree of uncertainty, particularly with regard to house prices. If interest rates were to increase or the criteria for granting credit were to be made much more stringent, the prices could fall. According to our calculations – which in this case are based on stylised assumptions – a potential increase in interest rates faced by households of 2 percentage points in early 2017 would lead to house prices in 2019 that are around 14 per cent lower than in our projection. This implies a drop from the first quarter of 2017 to the fourth quarter of 2019 of almost 11 per cent.
Moderate increase in investment in mainland industries
There has been little movement in investments in the mainland industries over the past eighteen months. Growth in the second quarter is currently registered as 2.1 per cent. We believe this represents the start of a very cautious recovery, but it is not until 2018 that growth is expected to pick up to any great degree. This year it is especially the investments in manufacturing and power generation that will pull investment up. Eventually, growth in service industries will make a clearer contribution to the upturn.
Slight increase in activity growth will lead to modest decline in unemployment
Two years of an economic downturn have pushed up unemployment by 1.5 percentage points to 4.8 per cent, as measured by the Labour Force Survey (LFS). Most of the rise in unemployment took place in the early stages of the downturn, and the increase this year has so far only been 0.2 percentage points.
Economic growth has picked up throughout this year, and from early 2017 we expect mainland Norway’s GDP to increase more than trend growth, which is estimated at approximately 2 per cent.
Our calculations show that employment has fallen slightly over the last three quarters, and will pick up slightly in the second half of this year. Unemployment as an annual average is set to reach 4.7 per cent in 2016, subsequently falling slightly as employment picks up. The fall in the LFS unemployment is, however, expected to cease towards the end of 2017, when labour supply will also start to pick up. This calculation puts unemployment at around 4.3 per cent.