Break in the upturn

The low international growth is expected to gradually pick up and stimulate Norwegian exports. Investment in Norwegian mainland industries is also expected to increase from the beginning of next year and fiscal policy will give slightly higher impulses. The moderate Norwegian upturn is therefore expected to continue until around the turn of the year.

Weak global growth

Economic growth among Norway’s trading partners remains very low. In the Euro area, the GDP is falling and unemployment has mostly rocketed and continues to increase. Growth in the US economy is moderate, with a decline in unemployment. The situation among emerging economies is mixed, but growth here is also generally lower than before the global financial crisis. With the exception of Japan, the economic policy in the OECD area remains characterised by cuts in public budgets. The weak development is expected to continue for some time to come and the global economic trend will not improve dramatically over the next few years.

Falling growth impulses from the petroleum sector, slight fall in unemployment

Demand from the petroleum sector has led to strong growth impulses over the past two years. Growth is expected to continue, but to a somewhat lesser extent. Investment in mainland industries, however, is expected to increase. Output growth from 2014 will slightly push up the employment figure the following year. Unemployment is expected to drop slightly going forward, to around 3.4 per cent in 2016.

Mortgage rates set for slight increase next summer

International interest rates are low. A strong krone, low inflation and moderate pressure in the labour market have all contributed to the very low Norwegian interest rates. The money market rate in Norway has fallen considerably over the past year. The impact on interest rates for households has been slower than normal, largely due to the financial institutions’ stricter capital adequacy requirements. Mortgage rates are therefore expected to remain more or less unchanged before gradually increasing in line with higher money market rates from summer 2014. As global growth accelerates, interest rates will also be pushed up internationally. Higher inflation in Norway and a continuation of the upturn in the economy will also contribute to a more moderate increase in the Norwegian money market rate. By the end of 2016, the money market rate will have doubled from the current level, reaching 3.6 per cent. Typical mortgage rates can then be 5.3 per cent, up from 3.8 per cent at the end of the 2nd quarter this year. Higher inflation in Norway than is the case for many of our trading partners is expected to lead to a weaker krone exchange rate.

More expansive fiscal policy than previously projected

The fiscal policy stance from 2014 is particularly uncertain due to the forthcoming autumn election and the prospects of clear changes in the Storting’s composition. Impulses from the fiscal policy are expected to be expansive going forward. 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. We assume some tax cuts from 2014. If oil prices remain high, central government’s oil revenues will also be considerable in the years ahead, thereby increasing the Government Pension Fund Global substantially. The assumed policy can therefore be consistent with the budget deficit remaining approximately unchanged as a share of the Fund during the projection period.

High real wage growth and low inflation

The pressure on profitability in some exported-oriented industries has contributed to a relatively modest wage increase in the spring wage settlements. Growth in average salaries is assumed to be 3.7 per cent, compared to 4.0 per cent last year. Wage growth may pick up gradually over the next few years as the upturn returns. Higher electricity prices contribute to growth in the consumer price index now being expected to reach 1.8 per cent this year. A slightly weaker krone and an improvement in the economic situation are expected to contribute to a slight increase in inflation going forward, thus enabling real wage growth to remain stable at around 1.75 per cent over the next few years.

High income growth in households pushing up consumption

Households’ real incomes are expected to continue to show marked growth. Lower growth in employment and real wages, however, is curbing income growth, while the assumed tax cuts are pulling in the opposite direction. In 2015 and 2016, higher interest rates will contribute to a reduction in income growth of around 0.5 percentage points below the average for 2013 and 2014. A large degree of uncertainty about the future situation is believed to have contributed to an abnormally large proportion of income being saved. It is expected that these precautionary savings will be reduced as the international development improves. A clear growth in consumption is therefore expected in the years ahead.

Declining growth in house prices

High income growth and a large increase in the population, combined with low interest rates and a recovery following the decline due to the financial crisis, have contributed to high growth in house prices over the past four years. The continued relatively high income growth is pushing up prices, while the growing housing stock and gradually higher interest rates are curbing the development. We estimate that average annual house prices will increase by 5.3 per cent this year, and then gradually fall, giving growth in 2016 of 3 per cent. This entails a downward revision in relation to the previous estimate and can be mainly attributed to lower income estimates. House price growth stimulates housebuilding, which will remain high, but growth in the housing investment is likely to be reduced over the next few years.