Continued downturn means low interest rates

A weak development in the global economy, particularly in the euro zone, will contribute to the interest rate in Norway and abroad remaining at a low level for some time to come.

From financial crisis to public debt crisis

The financial turbulence this spring has once again affected the global economy. The financial crisis and measures to counteract the crisis have resulted in a major strain on public finances in a number of countries. The financial markets’ fear of defaulting on public debt has resulted in a marked increase in interest rates on several countries’ government bonds. This has made it necessary to enforce a far more tighter fiscal policy than the economic situation dictates.

Prolonged international slowdown

In the last quarters, there has been “catching up effects” in the international economy after the fall in production in autumn 2008 and spring 2009. In some countries, where growth in the past year has been high, temporary stimulative factors such as an expansive fiscal policy, reduction in interest rates and inventory corrections have been key drivers. When the fiscal policy does not only stop giving expansive impetus, but is also tightened, any positive development in the economy will be delayed. It is therefore assumed that growth among Norway’s trading partners will be modest for the next few years, and not until 2012 will there be signs of a moderate cyclical upturn in the economy internationally.

Moderate export growth

Catching up on earlier slumps resulted in a marked increase in the traditional export of goods in the second half of 2009. This contributes to the relatively high growth on an annualised basis this year. Weak international growth combined with an impaired cost-related competitive power in Norway will contribute to a modest increase in exports. Growth in the export of traditional goods is not expected to reach the average for the past 30 years until 2013.

Tighter fiscal policy

Growth impetus from the fiscal policy will be significantly reduced this year compared to last year. Growth in the public purchase of goods and services in the forthcoming years will be somewhat less than the trend in the Norwegian economy, and taxes and duties will be adjusted in line with inflation. Higher oil prices are expected to contribute to a clear growth in the Government Pension Fund Global. The budget deficit in 2012 is expected to be in line with the fiscal rule’s 4 per cent path.

One year without interest rate increases

Improved prospects have led Norges Bank to increase the base rate by 0.75 percentage points from the lowest level last summer. The money market bottomed out at the start of August, when the 3-month rate reached 1.75 per cent, and has recently been in the range of 2.6-2.7 per cent. Based on the prospects of moderate growth in the Norwegian economy, low inflation and extremely low interest rates internationally, Norges Bank is not expected to increase the interest rate anytime soon. Projections indicate that the money market rate will remain more or less unchanged until the end of the first half of 2011. A gradual normalisation of the money market rate is then envisaged, reaching 5 per cent at the end of 2013.

Fall in business investments diminishes

Investments are key drivers in economic trends. The investments in Norwegian mainland industries fell, in just over 2 years, by a rate corresponding to 3 per cent of the GDP for mainland Norway. The fall continued in the first quarter of 2010, but is now expected to flatten out. These investments are expected to increase throughout next year. The petroleum investments are also expected to increase somewhat in the times ahead, and will therefore also contribute to increased activity.

Improvement in housing market

The strong recoil in housing prices after the fall in the second half of 2008 has ended, and projections indicate a moderate real price growth in housing in the times ahead. The fall in housing investments, which has lasted almost three years, is lessening, and the trend is expected to turn fairly quickly to a moderate upswing.

Growth in consumption

The one-year fall in household consumption came to a halt early last year. An increased housing stock, low interest rates and increased revenues led to a development that produced strong growth throughout 2009. The development in the consumption of goods since January indicates a weaker development than was previously expected. As a yearly average, it is nevertheless assumed that household consumption will grow by 4.1 per cent this year. Growth in households’ real disposable income is expected to remain relatively high in the years ahead, with over 3 per cent annually until 2013. This economic development can diminish the households’ perception of uncertainty relating to own income and wealth, and thereby contribute to reducing the desire for financial consolidation. Consumer growth is therefore expected to remain at approximately 4 per cent, with savings thereby reduced somewhat in the years ahead.

Higher unemployment

Despite a marked fall in the number of man-hours, unemployment has only seen a moderate increase to date. A reduced average of working hours has reduced the fall in employment. The workforce, which fell for most of 2009, has only seen a moderate increase since then. Future production growth is expected to take some time before it leads to higher employment of any significance. Productivity growth and increased average working hours are reducing the increase. Conversely, the development in the size and composition of the population is pulling in the direction of increased labour supply. Unemployment is therefore expected to show a moderate increase in the next few years and peak in 2012 at 4.0 per cent of the workforce.

Reduced wage growth and inflation

The downturn in the economy has contributed to a major reduction in wage growth. Wage growth in 2009 was 4.5 per cent; down from 6.3 per cent in 2008. The wage growth in both 2010 and 2011 is expected to be 3.4 per cent, before rising slightly in 2012 and 2013. A marked increase in energy prices this year has contributed to the overall inflation increasing slightly from 2009 to 2010. Nevertheless, a positive real wage growth took place in 2010. Increased productivity and reduced growth in the energy prices are expected to contribute to lower price growth in the next two years, as well as an increase in the real wage growth.