Economic trends for Norway and abroad
Slightly brighter times ahead
The fall in investments in the petroleum industry is waning, exports are increasing and private demand is picking up. These factors combined will soon lead to a cautious upturn in the Norwegian economy. Following a considerable decline last year, real wages will rise slightly this year and in the next few years.
The fall in demand from the petroleum industry since the end of 2013 combined with many years of weak global demand trends continue to impact on the Norwegian economy. The economic downturn has now lasted two and a half years. GDP growth for mainland Norway has picked up somewhat through 2016, following near-zero growth throughout 2015, and we expect growth to increase further going forward. According to the Labour Force Survey (LFS), the unemployment rate rose by 1.7 percentage points from before the economic downturn to peak last summer at 4.9 per cent. In recent months, unemployment has gone down, but according to the LFS this has mainly been because the labour supply was reduced. Employment is set to rise slightly more than the labour force, and we therefore expect a very modest fall in unemployment going forward.
Active counter-cyclical policy
An expansionary fiscal policy and reduced interest rates have been implemented in response to the economic downturn. The fall in oil prices and lower interest rates contributed to the krone depreciating to a historically weak level. This has stimulated profitability in internationally-exposed industries, and Norwegian exports are higher and imports lower than they would otherwise have been. Lower interest rates are also helping to increase household incomes and to stimulate consumption, investment and house prices. High growth in public consumption and investment directly contribute to employment and thereby to household incomes, in addition to boosting demand aimed at the private sector. Tax cuts have also stimulated household consumption somewhat.
Improvement in Norwegian export markets
We believe that Norway’s trading partners are now nearing a cyclical bottom and that global demand is picking up slightly. Substantial private and public debt in many countries will mean a very moderate upturn.
Donald Trump’s victory in the US presidential election has, however, created greater uncertainty about future developments. A more protectionist US policy will entail negative impetus to the global economy and could lead to international trade conflicts. However, we have assumed that this will not happen. We believe the more likely scenario is that the global development will be weaker than expected rather than the upturn being much stronger.
Shift towards increase in exports
Despite the sharp improvement in cost competitiveness, the development in Norwegian exports was very weak throughout 2016, according to preliminary figures from the quarterly national accounts (QNA). As an annual average, traditional exports fell by more than 8 per cent last year. The decline was on a broad basis, but particularly in the markets for oil-related products. However, there is some uncertainty associated with these figures, and some temporary factors have been in play. We do not believe that this trend is a strong indicator of the underlying export trends. Increased growth in Norwegian export markets, together with lag effects of improved competitiveness based on the depreciation of the krone, are therefore expected to push exports up going forward.
Low interest rate
The key policy interest rate was reduced in March 2016 to a record low 0.5 per cent. We assume that Norges Bank will not change interest rates until late 2019. Typical mortgage rates, credit lines secured on dwellings, fell in 2016 by 0.6 percentage points from the year before to an average of 2.6 per cent. Based on the economic upturn gradually taking a hold, interest rates abroad increasing slightly, and the lack of pressure in the direction of a weaker krone, we forecast that the key policy rate will be raised by 0.25 percentage points once in 2019 and once in 2020. According to our calculations, such a scenario will entail a fairly stable exchange rate and a mortgage rate that reaches 3 per cent towards the end of 2020.
Measured by the import-weighted exchange rate, the krone was 6 per cent stronger at the end of 2016 than at the end of 2015. As an annual average, it was, nevertheless, almost 15 per cent weaker than the average for the preceding decade and 1.8 per cent weaker than the average for the year before. The effect of rising oil prices would indicate a stronger krone, but this is offset by relatively high inflation and a gradually smaller interest rate differential abroad. A roughly unchanged exchange rate going forward will strengthen the annual average by 3 per cent in 2017.
Final year of expansive fiscal policy
There has been a marked increase in the budget deficit over the last three years. For 2017, we base our projections on the approved fiscal policy, which involves an expansionary policy, but the increase in the structural non-oil budget deficit is significantly lower than in 2016. For 2018, we are assuming an approximately cyclically neutral fiscal policy, and a slightly contractionary direction in 2019 and 2020. We assume a further reduction in corporate taxes in 2018 and an increase in environmental charges, which in isolation will push up consumer prices by 0.2 percentage points annually in the next three years. Public demand is expected to increase roughly in line with trend growth in the economy. Measured as a percentage of the Government Pension Fund Global, we estimate that the oil revenue spending will continue to remain at around 3 per cent throughout the period up to 2020, in line with the redefined fiscal rule for oil revenue spending.
Curbed fall in oil investments before new moderate growth
As of the fourth quarter of 2016, investment in the petroleum industry has fallen by one-third from the peak in 2013. It appears that the decline will be less steep throughout 2017. We assume that oil prices will gradually rise from 55 USD per barrel in the first quarter of 2017 to 64 USD at the end of 2020. Together with significant cost-cutting, we believe this will cautiously push up petroleum investments throughout 2018 and up to the end of 2020.
Moderate increase in investment in mainland industries
The investments in the mainland industries increased in 2016, and we expect them to further increase somewhat going forward. Improved growth prospects for the Norwegian and global economy, greater competitiveness and low interest rates and reduced taxes for enterprises are all factors that point in this direction. Meanwhile, low capacity utilisation in many industries coupled with a lack of prospects for strong economic growth in the Norwegian or global economy will curb the upturn in investment.
Marked fall in price growth
The significant depreciation of the krone until year-end 2015-2016 was a main contributor to the increase in the inflation rate up until July last year. Last year’s moderate appreciation of the krone has subsequently led to a marked fall in inflation up to January 2017. A considerably high increase in electricity prices, nevertheless, helped push up the consumer price index (CPI) as an annual average to 3.6 per cent 2016, while the 12-month growth in January 2017 fell to 2.8 per cent. Continued negative impulses from the appreciation of the krone, low wage growth and lower growth in energy prices this year than last year are pulling down inflation further this year. As an annual average, the energy prices will nevertheless pull CPI growth up in 2017 and contribute to pushing up the CPI to 2.0 per cent, which is 0.3 percentage points higher than growth in the CPI adjusted for tax changes and excluding energy products (CPI-ATE). Overall, energy prices excluding taxes are expected to largely follow the general price development in the coming years, while the increase in environmental taxes will push the CPI growth up to just over 2 per cent in the years 2018 to 2020.
Marked fall in real wages in 2016
The economic downturn has slowed wage growth considerably. In 2016, the growth in average annual salaries was a mere 1.7 per cent, which is the lowest wage growth since World War II. Average real wages thereby fell by 1.8 per cent. Fewer jobs in highly paid industries associated with the petroleum industry is one factor behind the fall, and wage growth in most industries is considerably higher than 1.7 per cent. The expected upturn, with slightly lower unemployment and significantly lower inflation, is expected to result in higher nominal wage growth and positive real wage growth from this year and in the coming years.
Almost unchanged employment, a fall in real wages, high inflation and not least high tax- motivated dividend payouts in 2015, contributed to the fall in households’ real disposable income last year, despite lower interest rates and some tax cuts. Excluding dividends, however, there was an increase of 1 per cent, which is by far the weakest growth in at least 14 years. This also meant a fairly modest increase in consumption last year. Income growth is set to improve in the coming years due to the rising real wages and employment, which will push up consumer spending.
Housing market reaches its peak
Low interest rates, high population growth and several years of solid income growth have led to considerably high growth in demand for housing and thus to high growth in house prices. Over the past two years, house building has also seen a sharp increase. We expect house prices to continue to increase slightly this year, but less than last year given the growing number of homes on the market. The prospect of slightly higher interest rates may also curb demand. Together with a more restrictive credit policy, our calculations show that nominal house prices may fall slightly over the next few years. Housing investment may also see a slight decline, but will nevertheless remain at a high level.