In March 2022, activity in the Norwegian economy was more or less cyclically neutral, having recovered from the decline caused by the infection control measures during the pandemic. In June, Statistics Norway forecast that the Norwegian economy would enter a moderate boom during the course of the year. However, the situation has worsened, and the new forecasts show a moderate downturn in the next few years.
‘Inflation has risen considerably over the summer, heavily impacted by the high electricity prices. Together with the higher interest rates, this has reduced purchasing power and household consumption, which is putting a damper on economic activity,’ says the Director General of Statistics Norway, Geir Axelsen.
Norway's trading partners are also in the same situation. The international economy is characterised by rising prices and falling demand. This is also contributing to the weaker growth outlook in Norway.
Mainland GDP is forecast to increase by 3.2 per cent in 2022, before the growth rate falls to 1.5 per cent in 2023 and 1.3 per cent in 2025.
‘This is a downward adjustment in the growth estimates for the Norwegian economy of around two percentage points for the years 2022 to 2025 combined. This means that the Norwegian economy will be in an economic downturn going forward,’ says Geir Axelsen.
The forecasts nevertheless estimate that Norges Bank will raise the key policy rate by a further 1 percentage point by the end of 2022, to 2.75 per cent; first by 0.5 percentage points in September, then 0.25 percentage points at the next two monetary policy meetings.
‘We assume that Norges Bank will prioritise curbing inflation now, and thus raise the interest rate despite the weak growth in the economy,’ says Geir Axelsen.
Annual growth in the Consumer Price Index (CPI) for 2022 has been revised upwards to 5.7 per cent, which is 1 percentage point more than the June forecast.
‘The contribution from higher electricity prices is a main factor in the increased estimate, both directly and through cost increases being passed on. In general, the price growth is very broad,’ says Geir Axelsen.
Further interest rate cuts towards end of 2023
Electricity price futures indicate that power prices in southern Norway will remain at the current high levels throughout the winter, but will fall from the second quarter of 2023. This will gradually push down inflation, and CPI growth is expected to be 3.5 per cent in 2023. A decrease in electricity prices towards a more normal level will result in a CPI growth rate of just 1.0 per cent in 2024, before rising again to the target inflation rate in 2025.
Throughout 2021 and so far in 2022, employment has increased sharply, and the unemployment rate measured by the Labour Force Survey (LFS) was just 3.2 per cent in the period May–July. Next year, lower economic activity will see this trend reverse and unemployment increase.
‘Towards the end of 2023, according to the forecasts, we will be in a situation where inflation has come down, while unemployment has increased and activity is low. We believe that Norges Bank will then lower the key policy rate again in order to stimulate the economy,’ says Geir Axelsen.
The forecasts estimate four interest rate cuts from the end of 2023 and into 2024, pushing the key policy rate down again to 1.75 per cent. This indicates mortgage interest rates of just over 4 per cent in 2023 and 2024 before falling slightly in 2025.
According to the forecasts, unemployment as measured by the LFS will rise to 4.2 per cent in 2025, which is an upward revision of almost 1 percentage point from the June forecasts.
Higher real wages next year
The estimate for annual wage growth in 2022 has been revised downwards to 3.8 per cent, from 4 per cent in the forecasts from June. The 5.7 per cent CPI growth this year implies a 1.9 per cent fall in real wages.
‘However, we expect wage growth to increase considerably next year, while inflation will come down. This means that real wages, and thus purchasing power, will increase again in 2023,’ says Geir Axelsen.
Annual wage growth is estimated at 4.4 per cent in 2023. With an annual growth in the CPI of 3.5 per cent, this implies a real wage increase of 0.9 per cent. In 2024, real wage growth is expected to be almost 3 per cent.
House prices will fall in 2023 and 2024
The growth in house prices has slowed in recent months, after being high for several years. Statistics Norway’s house price index shows that house prices in the second quarter of 2022 this year were 19.5 per cent higher than the corresponding quarter two years earlier.
Real Estate Norway’s monthly house price index shows weak growth throughout the summer but that the growth rate in August was at the same level as in 2021.
‘We forecast that house prices will fall in 2023 and 2024, mainly due to weaker real income growth as a result of increased prices, lower employment and higher interest rates,’ says Geir Axelsen.
The forecasts estimate that house prices will increase by 5.7 per cent in 2022, and then fall by 2.5 per cent in both 2023 and 2024.
Major challenges in the global economy
‘The global economy is currently facing major challenges. Not only does the war in Ukraine look set to continue, and constant new closures seem to be curbing growth prospects in China, but high food and energy prices seem to be leading the world into a period of economic decline,’ says researcher Roger Hammersland.
In an attempt to prevent high inflation becoming entrenched, Western central banks have recently made major interest rate hikes and stated that they will pursue a far more restrictive monetary policy going forward. Many countries have also advocated the use of more restrictive fiscal policy. Statistics Norway’s forecast for the activity of our trading partners has therefore been subject to a major downward revision since the last report in June.
‘The downward revision of the growth forecasts indicates that Norway’s trading partners will enter an economic downturn in the latter part of this year, which will continue for much of the forecast period,’ says Roger Hammersland.