Abrupt standstill in the Norwegian economy

Main economic indicators 2010-2023. Accounts and forecasts

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The outlook for the Norwegian economy has changed completely in just a short time. In the last economic report published by Statistics Norway in December 2019, it was assumed that the Norwegian economy would remain approximately cyclically neutral in the years ahead.

‘The coronavirus pandemic has meant that the Norwegian economy is now experiencing a downturn that is likely to last for several years to come. A highly expansive fiscal policy, lower interest rates, the weakest krone exchange rate on record and falling real wages are dampening the effects on the labour market,’ says Thomas von Brasch, a researcher at Statistics Norway.

Norway is likely to see an economic recovery before our trading partners due to Norway’s greater scope for manoeuvrability in fiscal and monetary policy and the depreciation of the krone against most currencies.

‘In our calculations, we have assumed that the most extreme restrictions aimed at reducing the spread of infection will be gradually eased in the second quarter, which is slightly earlier than many of our trading partners. However, there is a great deal of uncertainty about the future course of infection, and some infection prevention measures may need to be continued for much longer than we have anticipated. In such a scenario, the downturn in the economy is likely to be both more severe and last for longer than described in our report,’ points out von Brasch.

Below is a summary of Statistics Norway’s report and the main features of the projections.

Major downturn in the global economy

Our international projection path has been adjusted downward considerably since the last report due to the spread of the coronavirus. However, growth is expected to pick up again towards the end of 2020 and the start of 2021, but our trading partners will remain significantly below the trend growth at the end of the projection period.

Norwegian economy comes to an abrupt standstill

The decline is due to the outbreak of the coronavirus and the subsequent restrictions aimed at reducing the spread of infection worldwide. At the end of March, mainland Norway’s GDP is estimated to be around 14 per cent lower than at the start of the month.¹ Activity in market-oriented businesses and public administration has declined significantly. Closed kindergartens and the cancellation or reduction of a number of healthcare services have led to a decrease in public administration activity. In the market-oriented businesses, the decline is particularly pronounced in certain service industries, such as accommodation and food service and culture and entertainment.

There is great uncertainty about the further development of the Norwegian economy. We assume that the most extreme measures to prevent the spread of infection will gradually be eased during the second quarter, but that some of the measures will continue for longer. Even if the restrictions are gradually lifted, their repercussions and the downturn in the global economy are likely to keep the Norwegian economy in an economic downturn for almost the entire projection period, up to 2023. 

Dramatic increase in registered unemployment

Between 10 March and 24 March, the Norwegian Labour and Welfare Administration’s registered unemployment (100% unemployed) figure increased from around 65 000 to approximately 290 000, where it has remained as of 21 April. On 21 April, this corresponded to 10.2 per cent of the labour force. In these statistics, those who have been laid off full time are counted as unemployed. We assume that many of those who are now laid off will be re-employed when the restrictions are reduced. The Labour Force Survey (LFS) records those who have been laid off full time for less than three months as employed. This means that unemployment as measured by the LFS, which is what we forecast, will be significantly lower than the figures from the Norwegian Labour and Welfare Administration in the coming months.

Thereafter, the LFS figures will increase, since those who have been laid off for three months or more will be counted as unemployed, and new people entering the labour market will not be able to find work. The potentially large growth in young unemployed people is likely to be offset to some extent by an increase in those choosing instead to continue their education, as has been the case in previous economic downturns. According to our calculations, unemployment measured by the LFS will rise to approximately 6 per cent as an annual average in 2020 and then decrease somewhat until 2023. The level of unemployment measured by the LFS is the highest and most persistent we have witnessed since the banking crisis in the early 1990s.

Record-low wage growth expected in the years ahead

The front-runner industries model governs the development in average annual salaries. As a result of the coronavirus pandemic, this year’s wage settlement (a main settlement) has been postponed until 3 August. The deadline for the Federation of Norwegian Industries and the United Federation of Trade Unions reaching agreement is 21 August.

The fall in demand among our trading partners has put intense pressure on the profitability of many internationally exposed industries. A weaker krone and lower energy prices may help to ease the situation for some businesses, but this is little consolation for companies whose demand has disappeared completely. Historically, the front-runner industries model, which is based on wage growth being adapted to what the internationally exposed industries can withstand, has served as a cushion against the downturn in the Norwegian economy. We assume that the front-runner industries model will also play this role in the current economic downturn. Nominal wage growth is expected to be 2 per cent in 2020 and 1.6 per cent in 2021. This means that real wages will be reduced in 2021. In 2022 and 2023, wage growth is expected to pick up to some extent.

Record-high increase in structural non-oil public deficit

The Government and the Storting have introduced several financial measures to offset the repercussions of the coronavirus. The Ministry of Finance estimates that the measures adopted so far, as well as the effect of lower activity in the economy, will weaken the budget by NOK 200 billion in 2020. In total, this represents 7 per cent of Norway’s mainland GDP. The sum of the current measures provides a stimulus of just under 5 percentage points to the Norwegian economy, as measured by the budget indicator. In comparison, the fiscal policy strategy during the financial crisis in 2009 was intended to provide a budget impetus of 2.4 percentage points. The fiscal rule dictates that, over time, the use of oil revenues should constitute 3 per cent of the Government Pension Fund Global but that considerable emphasis should be placed on smoothing out fluctuations in the economy in order to ensure good capacity utilisation and low unemployment. After remaining at just under 3 per cent for several years, the structural non-oil public deficit is expected to be around 4 per cent in 2020 as a result of the financial packages introduced. If new crisis packages are launched, or the existing arrangements are extended, the deficit could be significantly higher than 4 per cent in 2020. We assume that the structural non-oil public deficit will return to around 3 per cent over the next few years, but this estimate is subject to considerable uncertainty.

Lower petroleum investments

Norwegian measures to reduce the spread of infection are having a direct impact on petroleum investments on the Norwegian continental shelf. The pandemic is also indirectly impacting on investments due to the sharp fall in oil prices. The measures have led to lower investment activity on the Norwegian continental shelf since early March. Virtually all activity not dependent on production in the field has been halted in order to minimise the risk of infection. It is likely that the progress of some ongoing developments will be slower than planned, both due to infection control measures and the need to postpone costs. Lower oil prices are likely to result in some investment activity being delayed until next year. We estimate that petroleum investments will be reduced by around 9 per cent in 2020 and around 12 per cent in 2021. This factor alone will push down mainland GDP growth by 0.3 percentage points on average over these two years. In 2022 and 2023, petroleum investments are expected to pick up again in line with a moderate upturn in oil prices.  

Business investment expected to see a marked fall in 2020

Investment trends are highly sensitive to reduced demand, and according to our calculations, business investment will fall by around 20 per cent in 2020. Manufacturing investment is expected to fall even more. Even before the outbreak of the coronavirus, reduced manufacturing investment was expected this year as a result of the completion of several projects in the oil refining, chemical and pharmaceutical industries in 2019. Only slightly reduced investments are expected in power supply. Service investment is also expected to be lower. According to our calculations, business investment will recover somewhat, but will continue to be about 10 per cent lower in 2023 than in 2019.

Slowdown in the housing market has begun

The monthly house price statistics from Real Estate Norway show high seasonally adjusted house price growth in January and February this year of 0.9 and 0.5 per cent respectively. In March, this trend was reversed as house prices fell by as much as 1.4 per cent. This is the most dramatic fall in house prices in a single month since the financial crisis in 2008. The price fall in March this year was broadly based on the nationwide situation, with the strongest decline in Oslo and Trondheim. The housing market also showed subdued activity in March this year, as the number of homes sold and put on the market was around 14.5 per cent less than in the corresponding month last year. Meanwhile, sales of new homes were down 47 per cent in March this year compared to March last year, according to the Norwegian Home Builders’ Association.

It therefore appears that the outbreak of coronavirus and the infection control measures implemented by the authorities affected both the housing prices and the activity in the housing market in March. Although mortgage rates are at a record low, prospects for modest income growth and general uncertainty about the future economic development are likely to lead to continued falling house prices through much of 2020, before a gradual recovery. House prices at the end of 2023 are expected to be about 5 per cent higher than at the start of 2020. This weak development is also likely to mean that housing investment will fall this year and next. According to our calculations, housing investment will account for just under 6 per cent of Norway’s mainland GDP in 2023, which is around the average for the last 20 years.

Major fall in household consumption

Household consumption in some goods and service categories has come to a complete standstill. When some of the restrictions introduced on 12 March are eased at the end of April, parts of the service consumption will pick up again. The ban on staying overnight at holiday cabins outside owners’ municipality of residence has also been lifted, but the public are still being encouraged to avoid unnecessary travel. This may lead to the normalisation of some consumption, but nowhere near the level at this time last year.

Many people have experienced a large loss of income due to the economic crisis. This in turn will lead to weaker consumption development in 2020, even if the authorities’ efforts to fight the virus prove to be successful. Conversely, some households will not have experienced such a fall in income, and these are likely to boost the recovery in consumption. Overall, we estimate that consumption will fall by around 10 per cent in 2020 and that there will be a significant recovery in consumption in the years ahead.

Record-low krone

The import-weighted exchange rate was weakened considerably in March from its already weak level, but about half of the depreciation has subsequently been reversed. We expect the krone exchange rate to remain at the current level going forward.

Key policy interest rate to remain at record low for some time

Norges Bank reduced its key policy interest rate twice in March, by a total of 1.25 percentage points, bringing it down to 0.25 per cent. Norges Bank explained that the latest interest rate cut was to reduce corporate borrowing costs on existing and new loans during the crisis. The expansive effect of the interest rate cuts is not expected to be seen until after the situation has normalised. Since then, the Storting has agreed a temporary grant scheme for businesses experiencing a large drop in turnover, which is aimed at covering part of their unavoidable costs, including net interest expense. The scheme means that Norges Bank’s interest rate cuts will have less significance for the business sector, as some of the interest costs of the hardest hit companies will be covered regardless. When the infection control measures start to ease off, activity in the economy will pick up. In our projections, the current interest rate level is regarded as appropriate for the economic situation that is expected when the measures to stop the spread of the virus are lifted. We assume that the key policy interest rate will remain at around 0.25 per cent throughout 2021 and then gradually increase. In 2023, the key policy interest rate is expected to be around 0.75 per cent. 

Inflation expected to be higher in the years ahead

The weaker krone is pushing up the imported inflation this year, but is also affecting inflation in the longer term due to lags in cost developments and pricing. The impact of the krone depreciation on Norwegian import prices is mitigated by the falling external inflation and by the fact that some import demand will, over time, shift towards countries that have improved their competitiveness in relation to Norway. Low energy prices in the current year will help to reduce price increases, both directly and indirectly. For 2020, we expect CPI growth of 1.2 per cent and 2.8 per cent growth in the CPI-ATE. Growth measured by the CPI is then expected to rise to around 2.0 per cent in 2023.