A Gloomy Economic Future?

Norwegian economy is in a cyclical downturn that started in Q3 2014. Over the past year, from Q2 2014 to Q2 2015, GDP Mainland grew by less than 1 percent. Unemployment measured by the Labour Force Survey (LFS) rose by around 1 percentage point from the summer of 2014. The fall in demand from the petroleum industry, partly caused by sharp decline in oil prices, is a dominant factor behind this development.

Oil prices now seem to remain relatively low for a long time to come. In Statistic Norway’s (SN) latest forecasts from September 2015, investments in the petroleum industry is falling in the coming years so that investment volume is reduced by one third from 2013 to 2018. Despite this, it is estimated that already in the second half of next year, there will be a cyclical turnaround to increased growth. The rate of unemployment would then reach a peak during 2016, with an annual average of 4.6 percent. Economic growth is not expected to be very strong and the unemployment rate, according to Statistics Norway's forecast does not come under 4 percent until after 2018.

A number of factors contribute to end the downturn in SNs forecast. It is mainly due to the sharp depreciation of the Norwegian krone which we already have seen. This implies a very sharp improvement in cost competitiveness spurring the development in the tradeable sectors. Lower interest rates, more expansionary fiscal policy, decreasing drop in demand from the petroleum industry and not least slightly increasing growth in Norwegian export markets, are other factors behind the expected turnaround.

One uncertain factor is the international development. While the SN estimates are a little on the pessimistic side when it comes to development abroad compared with the majority of forecasters, it may clearly also become much weaker. This is the background for the assignment from The Eika group which has resulted in this report. Their request formulated by Jan L. Andreassen was to calculate the consequences for the Norwegian economy of a scenario for global economic developments; "Seven lean years".

Our calculations with SN’s Large Scale Macroeconometric Model KVARTS show that a weaker international development results in a more gloomy outlook for the Norwegian economy as compared to SN's September forecast for the period 2015-2018. There is also no turnaround in the rest of the forecast period and a very weak development continues until 2022.

Export growth in this alternative is substantially lower than in SN's prediction and the same is true for investments in mainland business. With the weak international impulses, the calculations show a GDP growth for mainland Norway at around 0.75 percentage points below trend growth in the projection period. The cyclical upturn does materialize neither in the second half of 2016 nor for the next six years to come. The rate of unemployment will not peak at 4.6 percent in 2016, as in SN's prediction. In the "Seven lean years" scenario it is 4.8 per cent as an annual average in 2016 and after a slight improvement in 2017, the unemployment rate continues to increase throughout the remainder of the period by about ¼ percentage point annually and reaches 6 percent in 2022.