Clear upturn in economy on the horizon

The cyclical upturn in the economy is likely to contribute to a fall in unemployment in the next few years. Wage growth will increase, but interest rates and underlying inflation will also rise.

Weak growth in many OECD countries

The economic development in the OECD countries in 2010 was characterised by a “catching up effect” after the dramatic fall during the financial crisis. Nevertheless, unemployment has remained firmly at a high level, and the OECD as a whole is still in a deep slump. High growth in developing economies, such as China and India, contributed to a strong increase in demand from Norway’s trading partners in 2010. The growth in demand fell markedly towards the end of 2010. Public debt problems in a number of OECD countries have resulted in a more restrictive fiscal policy. This is being implemented before normal growth processes are properly underway, and is therefore contributing to a relatively moderate growth. The growth and prospects in China and a number of other countries outside the OECD are far brighter. Overall, however, the growth in Norwegian export markets is expected to be relatively low for the next two years, but with an upswing in 2013, which is intensified in 2014.

Moderate export growth

A strong import growth among Norway’s trading partners in 2010 helped push Norwegian exports up. When the growth from abroad is reduced and Norwegian cost-related competitive power is weakened, traditional exports will experience moderate growth in the period ahead. Towards the end of the projection period, higher growth in the global economy is expected to play a role in pushing Norwegian exports up further.

Increased business investments

Investments are key components in economic trends. After two years with a downturn in the economy, a clear trend emerged for increased investments in Norwegian mainland industries in 2010. This development is expected to continue. The petroleum investments were substantially lower in 2010 than the year before, but a strong increase was seen in the fourth quarter. We now expect these investments to increase clearly in 2011 and 2012, while subsequent growth is expected to be moderate.

Limited impetus from the fiscal policy

We estimate that money spent from petroleum activities (SOBD) in 2010 constituted around 4 per cent of the capital in the Government Pension Fund Global at the start of the fiscal year. A rapid improvement in the economic situation in Norway points solely towards a continuing restrictive fiscal policy. However, we expect that the continued high and gradually increasing oil price will lead to a rapid increase in the Government Pension Fund Global. This means that the fiscal rule’s 4 per cent path is pointing towards a more expansive fiscal policy. We assume, however, that public demand will increase to around the same extent, or slightly more than trend growth in the Norwegian economy. According to our calculations, the structural oil-adjusted budget deficit (SOBD) as a share of the trend in the GDP for mainland Norway will remain more or less unchanged. Thus, the fiscal policy can be described as neutral in terms of the economic cycle. This means that money spent from petroleum activities will be lower than the 4 per cent path in the period ahead, and in 2014 will fall below 3 per cent of the Government Pension Fund Global according to our calculations.

Increasing interest rates

The base rate was last increased in May 2010, and was subsequently 0.75 percentage points higher than the lowest level in 2009. The three-month money market rate has been in the region of 2.6 per cent in recent months. Prospects of a stronger upturn in the Norwegian economy are an indication of increased interest rates in the period ahead. Low interest rates abroad and low inflation in Norway indicate the opposite. Based on a balancing of stability in inflation and the real economy, we expect the base rate to be raised by 0.25 percentage points each quarter from June 2011 until the end of the projection period. The money market rate is expected to change roughly in line with the base rate, and to exceed 6 per cent by the end of 2014. The average interest on loans in the banks is thus expected to reach 7.5 per cent.

Increased house prices

Measured as a yearly average, house prices increased by a good 8 per cent in 2010 according to Statistics Norway’s quarterly statistics, despite a slight fall during the second half of the year. A considerable increase in the population, an improvement in the economic situation with high real income growth and continuing low interest rates mean potential for growth in house prices of around 6 per cent on an annual basis for the next four years. As house prices rise markedly, housebuilding becomes more profitable and we expect housing investments to make a clear recovery in the period ahead.

High growth in household consumption

We expect the economic situation of households as a whole to continue to improve. A real wage growth of almost two per cent this year, followed by higher growth rates, is leading to a considerable increase in households’ real income despite increasing interest rates. Combined with a growing housing wealth, this will be partly responsible for the consumption increasing almost as much as in the second half of 2010. The interest rate increases will mean a limited fall in savings.

Lower unemployment from 2012

According to quarterly national accounts , employment has shown a certain increase since the first quarter of 2010. We expect this development to intensify in the period ahead. However, the workforce is also likely to increase. Thus, the unemployment level may remain roughly unchanged in 2011. The upturn in the economy will subsequently play a role in the employment growth increasing to such an extent that unemployment will start to fall. In 2014, unemployment is expected to fall to 2.5 per cent of the workforce.

Low wage growth and inflation for some time to come

Wage growth in 2011 is expected to be the same as in 2010; 3.6 per cent. A more restrictive labour market and improvement in profitability in industry will subsequently lead to increased wage growth. In 2014, wage growth is expected to reach in the region of six per cent. The underlying growth in consumer prices was very low in January 2011. We expect increased food prices to contribute to pulling this up in the period ahead. The increased wage growth will also gradually aid this process, and in 2014 we expect the consumer price index to be adjusted for changes to duties, and excluding energy goods (CPI-ATE) will reach 2.5 per cent. Increased energy prices will contribute to the overall growth in the consumer price index being somewhat higher than growth in CPI-ATE in 2011, with growth of 1.8 per cent and 1.5 per cent respectively.