Heading for cyclical upturn in economy

The activity in the Norwegian economy has increased considerably since the summer. With growth in the GDP for mainland Norway in the third quarter that is above trend, the Norwegian economy appears to be experiencing a cyclical upturn. It is primarily the development in domestic demand that is driving the development. Moderate growth in the international economy is expected for a period, and the cyclical upturn is first expected to be experienced in the euro zone in 2013. However, we consider the level of uncertainty in the international development to be high, and a poorer development abroad can temper or delay any further upturn in the Norwegian economy.

Spreading out

After a marked “catching up effect” in the wake of the financial crisis, the growth in the USA in the last half year has been moderate. Large debts and a weak labour market are expected to lead to a weak growth in households’ demand in the period ahead. Together with the expected tightening of the fiscal policy, this will contribute to moderate growth, but a cyclical upturn is expected in 2012. Growth has been high in some European countries recently, but weak in other countries, and the activity level has even fallen in some countries. The tightening of the fiscal policy is on the agenda of many euro zone countries, and the money market interest rates have increased somewhat. In addition, some countries are facing major challenges in relation to public finances. This signals a weak development in the euro zone for a considerable period of time. 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 in the years ahead, but with an upswing in 2013.

Moderate export growth

Norwegian exporters’ propensity for markets with strong growth is playing a role in pulling export growth up, while the weakened Norwegian cost-related competitive power has a subduing effect. The export of traditional goods is expected to increase annually by 3-4 per cent in the years ahead. The “catching up effects” after the dramatic fall in exports in connection with the financial crisis have contributed to this export being placed to increase by almost 6 per cent in 2010.

Increased house prices mean higher investments

The marked fall in house prices during the second half of 2008 was quickly reversed in 2009, and the price growth as a yearly average is expected to be 8.6 per cent in 2010. Looking ahead, we expect the price growth to be moderate. A considerable increase in the population, high real income growth and relatively low interest rates may play a role in increasing the house price by almost 5 per cent in each of the next two years, and even higher in 2013. After almost three years of falling housing investments, a certain increase was experienced during the first three quarters of 2010. Growth is expected to make a further recovery in the period ahead.

Increased consumption expected

After special conditions in connection with tax payments, temperatures and volcanic activity contributed to households’ consumption falling in the second quarter this year, an increase was seen in the third quarter of well in excess of 5 per cent calculated as an annual rate. An increased housing stock, low interest rates and high real income growth are expected to contribute to relatively high consumer growth in the period ahead, but slightly less than in the previous quarter. The consumption is expected to increase somewhat more than income, with households’ savings thereby reducing somewhat during the projection period.

Increased business investments

After two years of falling business investments, a clear increase was seen in the mainland industries’ investments in the second quarter. Despite a slight relapse in the third quarter, we believe the investment situation has bottomed out and that investments will continue to increase. The petroleum investments are likely to be somewhat lower in 2010 than last year. However, considerable growth is expected in the years ahead.

Slight increase in unemployment

After a year of stagnation, a slight increase in employment was seen from the second to third quarter, according to the quarterly national accounts. The cyclical upturn in the economy is expected to lead to higher growth in employment. However, we also believe that the workforce will increase. Thus, after remaining very stable so far in 2010, unemployment may increase slightly to 3.7 per cent of the workforce in 2011. Unemployment will subsequently fall, and the rate of unemployment is expected to be reduced to 3.2 per cent in 2013.

Reduced wage growth and inflation

Wage growth is estimated at approximately 3.5 per cent for 2010 and the next two years, compared with 4.2 per cent in 2009. Consumer price growth is expected to be 2.4 per cent this year, falling to 1.4 per cent next year. A real income growth of roughly 1 per cent this year may thus be doubled next year. Wage growth and inflation are subsequently expected to recover, while the real income growth may remain more or less unchanged.

Tighter fiscal policy

Growth impetus from the fiscal policy will be reduced next year compared to this year. In accordance with the higher growth in the private part of the economy, the policy impetus is expected to be further reduced in the years ahead. The budget deficit in 2012 is expected to fall in line with the fiscal rule’s 4 per cent path, or somewhat lower.

Return to normal interest rate level in 2013

The base rate was last increased in May, and was subsequently 0.75 percentage points higher than the lowest level last summer. The three-month money market rate in recent months has been in the region of 2.5 per cent. Prospects of a moderate upturn in the Norwegian economy, even with an extremely low interest rate internationally and low inflation in Norway, are an indication of a certain increase in the interest rates in the period ahead. However, we believe that the base rate will not be changed until June 2011, at which point it is expected to increase by 0.25 percentage points. We subsequently envisage a further two increases in the interest rate next year, which are expected to be of the same magnitude. A gradual increase will take the money market rate closer to 5 per cent at the end of 2013.