Further economic downturn, but not a crisis

Reduced demand from the petroleum industry after years of strong growth, together with a modest growth in household demand, were key factors behind the shift to a moderate economic downturn in the second half of 2014. A sharp fall in crude oil prices in autumn 2014 and into 2015 will reinforce the negative impulses from the petroleum industry going forward.

Moderate increase in international growth

Economic growth among Norway’s trading partners picked up towards the end of 2014. The fall in oil prices seems to be positive for most of Norway's trading partners, but growth is weakened by high debt in the public sector as well as in the households. Many OECD countries are experiencing a major slump, with high unemployment. Fears of deflation are leading to low interest rates globally. Growth in Norway’s export markets is expected to be roughly unchanged this year, followed by gradually higher growth thereafter.

Counter impulses

Expansionary fiscal and monetary policy have dampened the economic downturn in Norway, and will continue to do so. The key policy interest rate is expected to be reduced by 0.5 percentage points towards the summer months. The fall in oil prices and prospects of even lower interest rates have contributed to a marked weakening of the krone, by 5.3 per cent in 2014 from the year before. A similar situation is envisaged in 2015, which will contribute to a significant improvement in cost competitiveness. This will stimulate exports and reduce the share of domestic demand covered by imports, thus having a positive effect on the activity in the mainland economy. Higher international growth, fewer negative impulses from the petroleum industry and a slight increase in private domestic demand are all expected to play a role in reversing the economic trend to a modest upturn from 2016.

Low oil price means reduced investment in petroleum industry

After two and a half years with an oil price of around 110 USD per barrel, the price began to fall in autumn 2014, and by 10 March was almost halved. The oil price is expected to increase gradually going forward, reaching 75 USD per barrel by the end of 2018. Reduced profitability in the petroleum industry will contribute to a fall in the industry’s investment by nearly 16 per cent this year and a further 8 per cent next year. However, there is considerable uncertainty about future developments.

Prospects of some increase in the investment in mainland industries

Investment in mainland industries saw a particularly modest increase last year. The weak krone and low interest rates will lead to internationally-exposed industries increasing their investment going forward. The economic upturn from 2016 will also contribute to higher investment in other industries.

Lower real wage growth

Growth in average wages fell from 3.9 per cent in 2013 to 3.1 per cent in 2014. Higher unemployment means that wage growth this year will fall further, to an estimated 2.9 per cent. Growth in the consumer price index (CPI) was 2.0 per cent last year. Despite the low oil price pushing prices down, the weakened krone is expected to have a major impact on inflation, resulting in CPI growth this year of 2.3 per cent. Thus, real wage growth, which was 1.8 per cent in 2013 and 1.1 per cent last year, will fall to 0.6 per cent this year - the lowest real wage growth in 25 years.

Moderate growth in household consumption

Interest rates for households fell throughout 2014. The lag effects of the fall in interest rates in December and the further fall expected in the next half year will contribute to markedly lower rates going forward. As an annual average, we assume that typical mortgage rates will fall from 3.9 per cent in 2014 to 3.0 per cent in 2016. This, together with lower taxes, will increase household income, which in turn will counteract the fall in growth in real wages and employment. Notwithstanding, income growth in households is expected to fall slightly from last year, but this year we expect consumption to rise in line with incomes, and thus grow at the same rate as last year. The moderate upturn is then expected to contribute to higher income growth, leading to a slight recovery in consumption growth, but with savings also seeing an increase.

Turnaround in house prices

Housing prices have increased considerably over the past year, driven by low interest rates and prospects of steadily lower rates. Additionally, relatively few properties have been put on the market recently. We believe house prices are higher than fundamental factors imply and the economic downturn will lead to declining house prices later this year. The government is also expected to implement measures that will contribute to this fall. As an annual average, prices are nevertheless expected to increase by 3.6 per cent. Slightly higher income growth will contribute to house price growth gradually moving towards the level of general inflation, before higher interest rates curb growth towards the end of the forecast path.

Housing investment fell somewhat during 2014, and a continued weak trend is expected in 2015 before a reversal, giving a 2.2 per cent fall in the annual average this year. The high level of house prices will contribute to a degree of growth in housing investment in the period 2016-2018.

Higher unemployment

Slow economic growth implies little growth in employment this year and next. A reduced participation ratio and slightly lower immigration will help to limit the rise in unemployment, which may nevertheless reach 4.1 per cent in 2016. This is well below the level from the beginning of the 2000s. The subsequent economic recovery is then expected to lead to a stronger development in employment, with unemployment falling to 3.8 per cent in 2018.