The abrupt halt in house building will exacerbate the decline in the construction industry next year, leading to a further cooling of the Norwegian economy. Mainland growth has been lower than normal in 2023. The labour market has been relatively tight, but this has also eased somewhat from last year. Statistics Norway expects the growth in mainland GDP this year and next year to be slightly below the estimated trend growth of around 1.6 per cent.

‘We expect housing investment to fall by more than 30 per cent this year and next year overall. This will contribute to a further cooling of the Norwegian economy in the coming period’, says Statistics Norway researcher Thomas von Brasch.

Housing investment has fallen by nearly 20 per cent in the first three quarters of this year. This is the sharpest fall ever recorded in the national accounts, which date back to 1978. Housing investment makes up around 20 per cent of mainland investment as a whole.

‘General uncertainty about the economic situation, lower second-hand home sales, higher interest rates and increased construction costs are all driving the decline in house building’, says Thomas von Brasch.

Interest rate cuts in 2024

The key policy rate has been raised from 0 to 4.25 per cent in a period of less than two years. Norges Bank sets the interest rate primarily to stabilise inflation at around 2 per cent and to ensure financial stability. It also takes into account that a higher interest rate impacts on activity in the Norwegian economy.

‘The abrupt halt in house building and weak growth prospects, combined with falling interest rates and inflation among our trading partners, mean that interest rates have most likely peaked. We expect the key policy rate to remain at its current level until mid-2024 before gradually decreasing’, says Thomas von Brasch.

By 2025, the money market interest rate will have come down to 3.5 per cent from the current level of 4.7 per cent.

Weak krone will keep inflation high for a while longer

The significant upward revision of the price growth estimate for 2024, as measured by the Consumer Price Index (CPI), is primarily attributed to the further weakening of the krone. Wage growth and power prices for the business sector are also higher this time than previously estimated.

‘Norway is a small, open economy, and the exchange rate plays an important role. The depreciation of the krone so far this year means that it will take a bit longer for Norway to return to more normal levels than many of our trading partners’, says Thomas von Brasch.

Changes in the krone exchange rate will primarily affect import and export prices measured in Norwegian krone, which in turn will impact on domestic price growth. Statistics Norway has analysed the effects of krone depreciation on price and wage growth. A weaker krone will push up consumer price growth as a result of increased import prices. However, increased export prices will result in greater profitability in the wage-leading tradable sector. This gradually translates into higher wages, keeping inflation elevated.

Without a further depreciation of the krone and with relatively rapidly declining international price growth, inflation will eventually fall. Annual growth in the CPI is expected to fall from 5.8 per cent last year to 5.6 per cent this year, and then to around 4.5 per cent in 2024. Inflation will fall considerably in 2024, and in 2025 it will approach Norges Bank’s 2 per cent target rate.

Increased real wage growth in the years ahead

Last year, annual wage growth was 4.3 per cent, a full 1.5 percentage points lower than consumer price growth. In the wage settlement framework this year, overall wage growth for industries represented by NHO was estimated at 5.2 per cent.

‘The labour market is still tight, and profitability in parts of the wage-leading tradable sector is good. This will push wages up’, says Thomas von Brasch.

Statistics Norway estimates that the overall annual wage growth in the economy will be 5.6 per cent this year. As inflation is also estimated at 5.6 per cent, this means roughly unchanged real wages. Looking ahead to 2026, the forecasts indicate a decline in inflation, with real wage growth rising to around 2 per cent in 2026.

Unemployment set to rise

Unemployment as measured by the Labour Force Survey was 3.2 per cent last year. The pressure in the labour market has eased and unemployment has hovered at around 3.6 per cent so far this year.

‘We expect unemployment to rise going forward. The abrupt halt in house building will result in higher unemployment in the construction industry. Unemployment is also expected to rise as a result of more Ukrainians entering the labour market’, says Thomas von Brasch.

According to Statistics Norway’s forecasts, unemployment will rise to just over 4 per cent in 2025.

What happens to the Norwegian economy if the Oil Fund falls by 30 per cent?

At the start of December 2023, the Oil Fund was valued at around NOK 16,000 billion. This is more than four times the value of mainland GDP per year. Next year, more than 1 in every 5 kroner in the national budget will be financed by the Oil Fund. As a large and growing portion of the national budget comes from the Oil Fund, fiscal policy and the Norwegian economy have become more vulnerable to a decline in the Fund’s value. Statistics Norway has analysed the repercussions of a sustained 30 per cent decline in the Oil Fund for the Norwegian economy, as manifested through reduced public demand.

‘A fall in the international value of the Oil Fund will reduce Norway’s economic prosperity. Although the calculations are uncertain, a large and sustained decline in the Oil Fund will likely create a challenging situation with both higher unemployment and higher inflation’, says Thomas von Brasch.

Trading partners’ economic downturn

Norway’s trading partners are experiencing an economic downturn. Increased interest rates, inflation and the uncertainty as a result of the wars in Ukraine and the Middle East are affecting economic activity and financial markets.

‘We still anticipate a weak international economic trajectory in the coming year. Large parts of Europe are experiencing an economic downturn as a result of strong competition from the Chinese market, high inflation and rising interest rates, in addition to the ongoing war in Ukraine’, says Statistics Norway researcher Roger Hammersland.

The estimates suggest that GDP growth among Norway’s trading partners will be around 0.5 per cent next year, gradually rising to around 2 per cent in 2025. Inflation in the euro area is expected to be around 2.5 per cent until next year, decreasing to 2 per cent in 2025.