Further slowdown expected

Growth has slowed down considerably in the first three quarters of 2008, and from the 2 ^nd to the 3 ^rd quarter a clear fall in household consumption, housing investments and investments in mainland industries could be seen. Strong growth in public demand has nevertheless contributed to an increase in the production in the mainland economy, albeit only a slight increase. According to the most recent figures from the quarterly national accounts, the GDP for mainland Norway increased during the first three quarters of the year by 0.8 per cent, calculated as annual growth. Thereby ending almost five years of strong growth.

Considerable international slowdown

The international economic slowdown is in full swing and is expected to be strong. The GDP in many OECD countries fell during the summer months. Inflation increased during the same period as did the base rates in many countries. Since mid September, the confidence in and to the financial markets, which had already worn thin, was further impaired. Share prices in stock exchanges worldwide have fallen dramatically. The banking industry in many countries is experiencing a crisis and the credit markets are generally performing poorly. This is leading to production and demand being limited by a more restrictive lending practice. The authorities in a great many countries have initiated – and given notice of future – stabilisation packages for the credit market, as well as monetary and fiscal policy stimulation measures on a large scale.

More stringent lending practice strengthens the slowdown

The international financial crisis also affects the development in Norwegian financial institutions. The banks have had problems in refinancing their market loans both home and abroad. They have also made losses on their security reserves. With the international backlash also having a negative impact on the Norwegian economy, there is reason to believe that the banks will reduce the balances and increase the equity ratio by tightening up the lending practice aimed at industry and households in the future.

Fall in private mainland demand

Households are expected to start increasing their financial savings, and their demand will continue to fall well into 2009. As yearly average, consumption is estimated to fall by 1 per cent and housing investments by more than 17 per cent in 2009. The mainland industries are also expected to reduce fixed capital investments considerably from this year to next. The international economic slowdown will further contribute to a poor development for export-oriented activities. The fall in demand is broadly based and many industries must therefore expect a reduction in the level of activity for a while to come.

Positive impetus from the petroleum sector

The oil price has fallen considerably in the last half year and the oil companies’ expectations of future oil prices have no doubt also fallen considerably. This may have led to some projects being postponed. We assume that the oil price will increase in the second half of 2009 and that the investment activity in the sector will remain high and partly increase somewhat. This will thereby have a stabilising effect on the Norwegian economy.

Lower interest rates and expansive monetary policy

The Norwegian authorities have better prerequisites than the authorities in other countries for limiting the effects of the crisis, as they have developed considerable room to manoeuvre in the economic policy. The policy rate was reduced by 1 percentage point in October. This has contributed to the banks’ interest on loans seeing a clear reduction in recent months. We assume that the money market interest rate will see a further rapid fall and will bottom out at 2.75 per cent around the end of 2009/start of 2010. The government’s current fiscal policy will stimulate the economy, and there are indications that it is planned to make fiscal policy more expansive in 2009. Our calculations are based on an increase in the government spending of NOK 15 billion in 2009 and a further NOK 15 billion in 2010.

Higher unemployment

We assume that the stimulation measures will contribute to the end of the production slowdown later on next year. The international slowdown will also be curbed towards the end of 2009 and transcend into an economic recovery towards the end of 2010 or the start of 2011. Unemployment, however, is likely to increase for some time to come. We believe that the number of unemployed persons will reach more than 100 000 in 2009 and that unemployment will correspond to 4.6 per cent of the work force in 2010, but that employment will fall somewhat during 2011.

From high to low inflation

Price growth in Norway has increased and the strong growth in the energy prices in particular has contributed to the 12-month growth in consumer prices (as per the Consumer Price Index (CPI)) in October reaching 5.5 per cent. The last month has seen a considerable fall in energy prices, which is likely to contribute to the growth in the CPI in November falling below 4 per cent, followed by a further fall in December. On an annual basis, we estimate that the CPI growth will be 3.9 per cent in 2008 and 2 per cent in 2009.

Reduced wage growth

High pressure in the labour market and recent years’ high profitability in industry led to high tariff increases this spring, and contributed to the wage growth on an annual basis being estimated at 5.9 per cent for this year, which would make it the highest wage growth since 1998. With a weakened labour market expected in the future, as well as poorer profitability, the wage growth will fall considerably next year. A high carry-over into 2009 will, however, help the wage growth to reach 4 per cent on an annual basis.