Upturn moderates

Our projection of economic trends in the years ahead is slightly more negative than previously. According to the Labour Force Survey, unemployment increased towards the end of 2012, and growth in mainland Norway’s GDP in the fourth quarter was lower than the trend growth despite adjustments for random events in the form of lower growth in power production. However, growth is expected to increase again slightly in 2013 and surpass trend growth.

Norway’s trading partners in long-term downturn

The international downturn intensified towards the end of 2012. In the Euro area, the GDP has fallen for the last five quarters, while the USA is experiencing moderate growth. Unemployment is high in both the USA and the Euro area. Near zero interest rates and an expansive liquidity policy have been implemented in an attempt to offset the negative effects of a restrictive fiscal policy on activity levels. The public debt interest rates in the most indebted countries in Europe have seen a marked fall since last summer, and the fear that some countries will leave the monetary union has subsided. Growth has also fallen in many emerging economies, leading to a further curb in developments in the OECD area. Overall, the economic downturn among Norway’s trading partners is set to continue well into 2015. Together with continual losses of cost-competitiveness in Norwegian businesses, this will lead to a weak development in traditional Norwegian exports. From 2014, however, growth in demand in Norwegian export markets will gradually pick up, leading to higher growth in traditional Norwegian exports going forward.

Mortgage rates set to fall further

Low international interest rates stemming from the weak global economic situation, in addition to a strong krone, low inflation and moderate pressure in the labour market, have resulted in a very low base rate in Norway. Together with increased confidence in the interest rate market and an absence of expectations of higher base rates in the short term, this has stabilised the money market rate at around 1.9 per cent for the past year and a half. This level is set to remain roughly the same throughout 2013. The krone is, nevertheless, expected to strengthen going forward. Mortgage rates follow the money market rate to a large extent with a time lag, but the premium on the money market rate has increased recently. Thus, the interest rates faced by households will fall only slightly at the start of 2013, while mortgage rates as a yearly average could fall just below the 2012 level. The base rate is expected to gradually rise in the next few years, and the money market rate will reach at least 4 per cent in 2016. The premium on the money market rate is expected to gradually be reduced from the current level, leading to an estimated annual average mortgage rate of 5.5 per cent.

High real wage growth and low inflation

Following several years of relatively high wage growth, a strong krone and weak demand, various export-oriented industries in the manufacturing sector are now struggling with profitability. Combined with a slightly less tight labour market, this could mean a further fall in wage growth from last year’s 4.0 per cent. A substantial carry-over means that wage growth is unlikely to fall below 3.8 per cent. However, with an estimated 1.5 per cent rise in consumer prices, there will also be a considerable increase in real wages in 2013. Wage growth is then expected to climb in pace with improvements in the global economy and a gradually weaker krone. Inflation, however, is also set to increase. Real wage growth may thus remain at around this year’s expected level of 2.3 per cent in the next three years.

High income growth in households leads to high growth in consumption

The high growth in households’ real incomes is expected to continue, but higher interest rates will eventually curb the development. A considerable share of household incomes is saved, but the ratio of savings to income is likely to fall slightly in the years ahead. A clear growth in consumption is therefore expected going forward. The marked population growth in Norway is expected to increase both income and consumption per capita by over 1 percentage point less than for the households as a group, as shown in the tables.

Declining growth in house prices

High income growth, prospects of continued low interest rates and a large increase in the population have all been key drivers of the substantial growth in house prices in recent years, and will remain so for their future growth. Going forward, however, higher interest rates and housing capital will curb house price growth somewhat. The real price of houses is expected to increase throughout this period, which will stimulate house building. Building activity levels will remain high, but the growth in housing investments is expected to gradually decline.

Falling growth impulses from the petroleum sector

Investments in the petroleum sector have increased by more than 14 per cent in the past two years, and although oil prices are expected to fall, investments will continue to increase, but at a slower rate. Investment in mainland industries is also expected to increase somewhat, but much less than in previous economic upturns due to the weak international impulses.

Moderately expansive fiscal policy

Projections show moderately expansive impulses from the fiscal policy for the coming years. Public consumption is likely to grow less than mainland Norway’s GDP, while the real growth in public investment and in transfers to households is expected to remain high. Central government’s oil revenues will continue to be high in the years ahead, thereby increasing the Government Pension Fund Global substantially. The structural non-oil public deficit may therefore drop to between 2.5 and 3 per cent of the Fund’s value, both in 2013 and in the years ahead.

Growth in employment and low unemployment

Employment has risen substantially during the upturn, but growth slowed markedly during the second half of 2012. Employment is set to continue increasing at a moderate pace. Unemployment has increased somewhat recently, and is expected to worsen slightly on an annualised basis compared to last year, remaining at around the same level to the end of the projection period.