Economic trends for Norway and abroad
Pronounced upturn ahead
After a year and a half of moderate developments in the Norwegian economy, clear higher growth is expected. The development is expected to be driven by a broad increase in domestic demand. Growth impetus from abroad is expected to be more moderate in the next few years.
The cyclical upturn in the economy will contribute to an increase in employment and gradually lower unemployment. The real wage growth is set to increase going forward, but a clear increase in interest rates is also expected.
Clear growth in household consumption going forward
High electricity bills due to low temperatures and high prices towards the end of 2010 were partly responsible for household consumption not increasing from the end of 2010 and into 2011. The development in the consumption of power in isolation also pulled down consumer growth in the first quarter.
A marked increase in consumption is expected going forward. Real wage growth and higher employment will lead to a net increase in households’ incomes despite higher interest rates. A growing housing wealth will pull in the same direction, while the higher interest rates will curb growth.
Housing market is gaining pace
House prices and housing investments have seen a clear increase for some time. A large increase in the population, an improvement in the economic situation with high real income growth, and continuing low interest rates for some time to come all indicate a potential for further growth. The housing investments are expected to increase by almost 17 per cent in 2011, and will continue to increase in the coming years albeit at a slightly slower rate. The annual growth in house prices is estimated at approximately 7 per cent during the projection period.
Increased business investments
The petroleum investments are expected to increase by 12 per cent in 2011, after a corresponding decline last year. These investments are expected to increase in the longer term, but to a far lesser extent than in 2011. There has been a trend of strong growth in investments in Norwegian mainland industries over the past year, and this development is expected to continue going forward.
Expansive impetus from the fiscal policy
We estimate that money spent from petroleum activities in 2011 will be lower than 4 per cent of the capital in the Government Pension Fund Global. A continued high oil price will contribute to a clear increase in the Pension Fund. Thus, the fiscal rule’s 4 per cent path will give scope for a very expansive fiscal policy. On the other hand, a rapid improvement in the economic situation in Norway points towards a restrictive fiscal policy going forward. There will consequently be a trade-off between the consideration to stabilisation and the consideration to businesses exposed to competition on the one hand and the desire to exploit the large scope afforded by the 4 per cent path to increase public spending on the other. No change is expected in real taxes and duties and it is assumed that public demand will increase more dramatically than the trend growth in the Norwegian economy. The fiscal policy can therefore be characterised as expansive. Despite this, the money spent from petroleum activities will, according to our calculations, be reduced as a share of the Pension Fund, and in 2014 will constitute around 3 per cent.
The clear turnaround in the activity development that started a year and a half ago has contributed to an increase in employment in the past year. This development is expected to intensify going forward. However, the workforce is also likely to increase, both as a result of a higher share of the population in different age groups wanting to work and the population growth. Unemployment has fallen slightly this year. No further significant reduction is expected in unemployment until well into 2012. In 2014, unemployment is expected to fall to 2.8 per cent of the workforce.
Increased real wage growth and inflation for some time to come
Growth in average salaries in 2011 is expected to be 4.1 per cent, compared with 3.7 in 2010. Reduced unemployment and an improvement in profitability in industry will subsequently lead to a slight increase in wage growth going forward. In 2014, wage growth is expected to reach 5.6 per cent.
The underlying growth in consumer prices has been very low so far this year. Going forward, domestic cost impetus will pull up, but a stronger krone in the longer term will pull in the direction of lower inflation. As a year average, we expect the growth in the consumer price index adjusted for changes in duties and excluding energy goods (CPI-ATE) to gradually increase from 1.3 per cent this year to 2.5 per cent in 2014. High energy prices this year will contribute to the total growth in the consumer price index being slightly higher than the growth in the CIP-ATE this year. The consumer price index will see growth of 1.9 per cent, while growth next year will be lower at 1.3 per cent. This implies a tendency towards higher real wage growth going forward.
Higher interest rates
The base rate was last increased in May, and was subsequently 1.0 percentage point higher than the lowest level in 2009. The three-month money market rate has been in the region of 2.8 per cent in recent months. Prospects of a stronger upturn in the Norwegian economy are an argument for increasing interest rates. Low interest rates abroad and low inflation in Norway are arguments for the opposite. According to our calculations, we expect the base rate to be raised by a further 0.25 percentage points twice during 2011 and a further 0.25 percentage points in each quarter until the end of the projection period. The money market rate is expected to change roughly in line with the base rate, and the year average will reach 5.8 per cent in 2014. The average interest on loans in the banks is thus expected to reach at least 7 per cent.
Weak growth in many OECD countries
The economic development at an international level varies considerably. Growth is moderate in most OECD countries. Since the start of 2011, growth has tailed off in the USA, and the public debt crisis in Europe has worsened. On the other hand, growth in developing economies has been strong. These countries have been a key driver in the global economy since the financial crisis, which has contributed to a dramatic increase in raw material prices. The high and rapidly increasing public debt is necessitating a more restrictive fiscal policy in many countries, which will curb future growth. The European Central Bank (ECB) has also started raising interest rates. This carries a certain risk in such a fragile economic situation with high unemployment and falling house prices, and irrespective of this will curb economic growth. We do not, therefore, expect any marked upturn in the global economy until near the end of 2013.
Moderate export growth
Modest growth in demand among Norway’s trading partners will reinforce the effects of reduced cost-related competitive power and contribute to moderate growth in traditional Norwegian exports. At the end of the projection period, higher growth in the global economy is expected to play a role in pushing Norwegian exports up.
|Demand and output|
|Consumption in households etc.||2.1||3.1||2.8||5.6||4.0||4.8||5.4||1.6||0.2||3.7||3.4||5.1||5.5||4.5|
|General government consumption||4.6||3.1||1.7||1.5||0.7||1.9||3.0||4.1||4.8||2.2||2.4||2.9||2.6||2.8|
|Gross fixed investment||-1.1||-1.1||0.2||10.2||13.3||11.7||12.5||2.5||-6.8||-7.4||8.7||7.8||7.1||5.6|
|Extraction and transport via pipelines||-4.6||-5.4||15.9||10.2||18.8||4.3||6.3||5.1||5.8||-12.4||12.1||6.4||3.8||3.2|
|Demand from Mainland Norway 1||3.0||3.0||1.4||5.0||4.6||5.3||6.7||1.7||-1.0||2.0||4.2||5.0||5.3||4.5|
|Crude oil and natural gas||6.6||2.4||-0.6||-0.5||-5.0||-6.5||-2.4||-2.0||-0.9||-7.4||-1.7||-0.9||-1.2||-0.8|
|Gross domestic product||2.0||1.5||1.0||3.9||2.7||2.3||2.7||0.7||-1.7||0.3||2.3||2.8||3.0||2.8|
|Total hours worked, Mainland Norway||-1.6||-0.9||-2.1||1.7||1.4||3.1||4.3||3.4||-1.9||0.5||1.6||2.2||2.2||2.4|
|Labor force 3||0.5||0.7||-0.1||0.3||0.8||1.6||2.5||3.4||0.0||0.5||1.1||2.5||2.4||1.9|
|Participation rate (level) 3||73.5||73.5||72.9||72.6||72.4||72.0||72.8||73.9||72.8||71.9||71.5||72.1||72.7||73.0|
|Unemployment rate (level) 3||3.5||3.9||4.5||4.5||4.6||3.4||2.5||2.6||3.2||3.6||3.3||3.2||2.9||2.8|
|Prices and wages|
|Wages per standard man-year||4.8||5.7||4.5||3.5||3.3||4.1||5.4||6.3||4.2||3.7||4.1||4.3||4.5||5.6|
|Consumer price index (CPI)||3.0||1.3||2.5||0.4||1.6||2.3||0.8||3.8||2.1||2.5||1.9||1.3||2.0||2.5|
|Export prices, traditional goods||-1.8||-9.1||-0.9||8.5||4.1||11.4||2.7||2.4||-6.2||3.7||10.2||3.4||2.1||3.2|
|Import prices, traditional goods||-1.6||-7.2||-0.4||4.0||0.5||4.0||4.0||4.7||-1.4||-0.2||4.5||-0.5||1.0||2.0|
|Housing prices 5||7.0||5.0||1.7||7.7||9.5||13.7||12.6||-1.1||1.9||8.3||6.9||6.8||6.8||8.1|
|Income, interest rates and excange rate|
|Household real income||-0.3||8.0||4.4||3.6||7.6||-6.4||6.3||3.5||4.4||4.1||4.0||5.2||4.4||3.9|
|Household saving ratio (level)||3.1||8.4||9.1||7.4||10.2||0.1||1.5||3.8||7.5||7.6||8.4||8.5||7.6||7.2|
|Money market rate (level)||7.2||6.9||4.1||2.0||2.2||3.1||5.0||6.2||2.5||2.5||2.9||3.8||4.8||5.8|
|Lending rate, banks (level) 6||8.8||8.4||6.5||4.2||3.9||4.3||5.7||7.3||4.9||4.5||4.8||5.4||6.2||7.1|
|Real after-tax lending rate, banks (level)||3.3||4.8||2.2||2.5||1.3||0.7||3.3||1.5||1.4||0.9||1.6||2.6||2.5||2.6|
|Importweighted krone exchange rate (44 countries) 7||-3.1||-8.5||1.3||3.0||-3.9||0.7||-1.8||0.0||3.3||-3.8||-1.9||-1.4||0.2||0.6|
|NOK per euro (level)||8.05||7.51||8.00||8.37||8.01||8.05||8.02||8.22||8.73||8.01||7.81||7.74||7.76||7.81|
|Current balance (bill. NOK)||247.5||192.3||195.9||221.6||316.6||372.1||320.5||443.2||274.9||310.0||339.6||303.6||277.4||274.7|
|Current balance (per cent of GDP)||16.1||12.6||12.3||12.7||16.3||17.2||14.1||17.7||11.8||12.4||12.6||10.8||9.3||8.7|
|Exports markets indicator||0.8||1.2||3.4||7.0||6.3||8.6||5.4||0.7||-11.2||10.0||5.0||4.2||5.6||7.9|
|Consumer price index, euro-area||2.3||2.3||2.1||2.1||2.2||2.2||2.2||3.3||0.3||1.7||2.6||1.9||1.9||2.0|
|Money market rate, euro(level)||4.2||3.3||2.3||2.1||2.2||3.1||4.3||4.6||1.2||0.7||1.4||2.0||2.7||3.4|
|Crude oil price NOK (level) 8||223||198||201||255||355||423||422||536||388||484||598||558||580||608|
|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||According to Statistics Norway's labour force survey(LFS). Break in data series in 2006.|
|4||CPI adjusted for tax changes and excluding energy products.|
|5||Break in data series in 2004.|
|7||Increasing index implies depreciation.|
|8||Average spot price Brent Blend.|
|Source: Statistics Norway. The cut-off date for information was 7. June.|