Marked, but brief economic downturn

The projected fall in activity growth in 2015 will follow two years of an almost cyclically neutral development, where the underlying growth in mainland Norway’s GDP has fluctuated around what we perceive to be the trend growth in the Norwegian economy. A weakening krone, lower interest rates, a continued expansionary fiscal policy, minor falls in petroleum investments and improved international economic conditions will all contribute to the growth in activity in the Norwegian economy picking up again in 2016.

Fall in demand from the petroleum activity

After falling somewhat during last winter, investment in the petroleum industry was virtually unchanged in the third quarter and is expected, on an annualised basis, to fall by just 1 per cent in 2014. This represents a significant turnaround after many years of strong growth. The sharp fall in oil prices in the autumn has strengthened the oil companies’ focus on reducing costs and means that several investment projects have been put on hold. We assume that oil investment will fall by almost 13 per cent in 2015 and a further 7 per cent the following year. The estimate is based on the oil price remaining at around USD 70 per barrel before gradually increasing from spring 2015. In 2017, we estimate an oil price of USD 80 per barrel. The reduction in activity in the oil industry will push GDP growth down considerably, both directly and through knock-on effects in the form of curbed demand from households and many of the large suppliers to the petroleum industry.

Moderate international economic upturn in 2016

Overall, economic growth among Norway's trading partners has slowed in 2014, following a positive development during the previous year. The fall in oil prices alone pulls in the direction of higher growth among most of Norway's trading partners, but the upturn is curbed by high debt in the public sector as well as in households in many OECD countries. We expect the activity to pick up slowly going forward, and the import growth among our trading partners is not expected to increase until 2016. The weak development will contribute to the interest rates abroad remaining at a consistently low level throughout the entire projection period, although these rates are expected to increase somewhat from 2016.

Weak krone improves competitiveness

The krone weakened considerably during the second half of 2013, thereby helping to improve cost competitiveness. This explains much of the relatively high export growth in the second and third quarter of 2014. The fall in oil prices in the autumn has contributed to the krone again weakening considerably. We assume that the krone will remain relatively weak but will strengthen slightly from spring 2015. Thus, the cost competitiveness will also improve in 2015 and contribute to growth in Norwegian exports increasing slightly. In 2016 and 2017, the Norwegian exports will also benefit from the cyclical improvements internationally, with a further slight increase in growth.

Stimulating monetary and fiscal policy

We estimate that the prospects of a clearly weaker economic situation will lead to the key policy interest rate being reduced by 0.5 percentage points rather quickly, and the money market rate subsequently falling to 1.2 per cent from the second quarter next year. We also expect banks’ interest margins to be reduced, whereby typical mortgage rates will fall somewhat more than this. We have assumed that fiscal policy for 2015 is in line with the budget agreement that was recently reached in the Storting. The proposal involves roughly similar expansionary fiscal impulses in 2015 as in 2014. The contribution to growth from public consumption and investment alone is estimated at ¾ of GDP growth for mainland Norway in 2015. We assume a clear increase in the structural non-oil public deficit also in 2016 and 2017, with tax relief at around the same level as in 2014 and 2015, but with a slightly lower growth in expenditure.

Lower real wage growth curbing consumption

We assume that the economic situation will contribute to annual wage growth falling to 3.1 per cent in 2015, compared with 3.3 per cent this year and 3.9 per cent in 2013. At the same time, the weakening krone will push growth in the consumer price index up from 2.1 per cent this year and last year to 2.6 per cent in 2015. This will lead to a reduction in the real wage growth from last year to this year, with a further reduction next year. This is holding consumption growth in households back, and despite reduced interest rates, growth will fall from 2.1 per cent in 2014 to 1.4 per cent in 2015. Higher incomes in line with improved economic conditions are subsequently expected to push up consumption growth in 2016 and 2017. Saving is expected to increase throughout the period.

House prices to fall in the short term

Weakened confidence in the future among households is likely to pull demand in the housing market down for a period. Housing prices are therefore expected to fall somewhat during the next half year, and as an annual average will be at the same level in 2015 as this year. Roughly unchanged real house prices are subsequently expected. The calculations show a modest decline in housing investment in 2015, which is also likely to be the case in this year. Housing investment will also pick up when economic conditions improve in 2016.

Higher unemployment

The weak production development going forward will contribute to a slight increase in employment over the next two years. Reduced labour force participation and slightly lower immigration will curb the rise in unemployment, which is expected to reach 4 per cent in 2016, followed by a slight decline.