Almost cyclically neutral Norwegian economy

Main economic indicators 2009-2021. Accounts and forecasts. Percentage change from previous year unless otherwise noted

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Upturn in the international economy set to continue

The upturn in the international economy is set to continue, but at a more moderate pace than at the start of 2018. The growth in our international market indicator, which is based on our trading partners’ imports, has therefore been revised downwards since the last projection. In the medium term, we expect, as before, international economic growth to gradually decline. The growth has been revised down, particularly in the euro area. However, the phasing out of the expansive fiscal policy next year will also lead to somewhat weaker growth in the USA in the next few years than previously projected. 

Economic upturn moving into a new phase

The Norwegian economy is experiencing a moderate economic upturn. The start of the upturn was characterised by an expansive fiscal policy, lower interest rates, wage moderation and a weak exchange rate. Going forward, we expect fiscal policy to remain neutral, interest rates to rise and wage growth to increase, as well as a somewhat stronger krone. Many of the driving forces that previously gave a positive impetus are therefore expected to yield a neutral or contractive impetus in the years ahead. The picture is reversed for investments in the petroleum industry, where growth is expected, particularly in 2019. Combined with a continued moderate economic upturn in the international economy, this indicates that the upturn in the Norwegian economy will continue, albeit at a moderate pace. We estimate that the Norwegian economy will be in a roughly cyclically neutral situation in 2020. 

Neutral fiscal policy going forward

We expect average growth in public investment and consumption to fall below the trend growth for mainland Norway during the projection period, which extends to 2021. Nevertheless, we estimate a more or less neutral fiscal policy in the years ahead, as the ageing population combined with real wage growth push up expenditure for state pensions and other welfare benefits. We envisage small changes in tax levels in the years ahead, in line with the budget settlement for 2019. The budget impetus, measured as the change in the structural non-oil public deficit as a share of trend GDP, is expected to remain almost constant throughout the projection period, and the petroleum revenue spending will be in line with the fiscal rule. 

Exchange rate expected to strengthen somewhat  

We expect a somewhat stronger krone in the years ahead. Today’s weak krone and an oil price that is expected to remain at over USD 60 per barrel signify a stronger krone. In addition, we expect a somewhat faster interest rate increase compared with market expectations. At the time of writing, one euro costs NOK 9.6. We expect one euro to cost around NOK 9.2 kroner in 2021. Although a stronger krone will temper the upturn in the economy by weakening the competitiveness of internationally exposed industries, the cost of one krone will still be around 10 per cent lower than the average krone rate measured against the euro from the introduction of the currency in 1999. 

More balanced housing market  

The negative impetus from the housing market is expected to end soon. Housing investment has seen a constant decline over the past year, but the fall has slowed more recently. According to our calculations, housing investment will shift to an upturn during the first half of 2019. There are also signs of further house price growth in the years ahead, and more housing projects will therefore be profitable. House price growth is driven by higher incomes, but is dampened by higher interest rates and lower population growth. Consequently, the moderate growth in house prices will mean that in real terms house prices will remain virtually unchanged until 2021. Compared with the last five years, which were characterised by large fluctuations in house prices and housing investment, the housing market now seems to be more balanced. 

Petroleum investment expected to show marked growth in 2019

Since 2016, the fall in petroleum investments has gradually levelled off and the investment has increased slightly in recent quarters. Higher investments are expected, according to the operators on the Norwegian continental shelf. Although oil prices have fallen somewhat since the start of October, lower costs and an assumed oil price of just over USD 60 per barrel will make many petroleum investments profitable in the years ahead. We believe petroleum investment will increase considerably from 2018 to 2019, largely due to the development projects Johan Sverdrup Phase 2 and Johan Castberg. In 2020 and 2021, the investment level is expected to remain close to the level in 2019, which is almost 19 per cent lower than the record level in 2013. 

Wage growth increasing

From record low growth in average annual salaries of 1.7 per cent in 2016, wage growth has risen in 2017 and 2018. Although the nominal annual wage growth is expected to be 2.8 per cent this year, increased energy prices will reduce real wage growth to almost zero in 2018. Going forward, an improved economic situation, lower unemployment and lower energy prices will boost wage growth, both nominally and in real terms. In 2021, the nominal annual wage growth is expected to reach around 4 per cent. Consequently, the labour cost share in manufacturing will be approaching the average for the past 20 years. 

End of the major decline in unemployment

After a peak of just over 5 per cent at the start of 2016, unemployment is now 4.0 per cent, according to Statistics Norway’s Labour Force Survey (LFS). The decline in unemployment is broadly based throughout the country. As a yearly average, we expect unemployment to be 3.9 per cent in 2018, gradually falling to 3.7 per cent in 2021. The increase in labour supply will lead to a levelling off of the unemployment rate. The proportion of the population in work is expected to increase from 70 per cent last year to around 71 per cent in 2021. Labour migration is not expected to show any significant change in the years ahead, and will therefore be considerably lower than five years ago. 

Higher underlying inflation

The CPI and CPI-ATE growth rate are estimated at 2.7 and 1.5 per cent respectively for 2018. The fall in oil prices will curb the strengthening of the krone in 2019 that was forecast in our last projection. This is the main factor behind the upward adjustment of the estimate for CPI-ATE growth to 1.9 per cent. The CPI is expected to increase by 1.8 per cent in 2019 as a result of lower energy prices and duties. For the years 2020 and 2021, the underlying price growth is estimated to be somewhat lower than in 2019, and below Norges Bank’s target inflation rate. 

Key policy interest rate up one percentage point

There are indications that the upturn in the Norwegian economy will continue, albeit at a moderate pace. With a somewhat more tightened labour market, it is reasonable to assume that wage growth, and thereby domestic cost growth, will increase. Underlying inflation is expected to increase, approaching the target inflation rate in the years ahead. With this cyclical picture, Norges Bank is also expected to continue to increase the key policy rate. We have assumed five interest rate hikes of 0.25 percentage points by the end of 2021. The interest rate on credit lines is therefore expected to reach around 4 per cent in 2021. Despite these developments, real interest rates will remain at a historically low Level. 

Moderate consumption growth and higher savings rate

The consumption is driven by the course of household income, wealth and interest rates. Wage earnings, which are the main source of income for households, are expected to increase in the years ahead. The ageing of the population will also push up the cost of welfare benefits. Conversely, net unearned income will dampen real income growth, as the interest rates faced by households are set to increase in the next few years. The weak development in real house prices is also expected to curb consumption growth. Overall, this will mean considerably lower consumption growth in the years ahead compared to previous economic upturns. Nevertheless, growth will still be higher than the trend growth in mainland Norway.