Moderate growth

The Norwegian economy is in a slump, which began in early 2008, and intensified dramatically after the financial crisis reached the global economy with full force in autumn 2008. The downturn in the GDP for mainland Norway during last winter, however, is a distant memory. The increase in the GDP for mainland Norway during the summer is nevertheless not strong enough to be characterised as an upswing. The moderate growth is expected to continue. A cyclical upturn will therefore not be seen until 2011, and the Norwegian economy is expected to be out of the slump by the end of 2012.

Higher unemployment

The downturn in the economy contributes to employment falling by 1.5 per cent from the 3rd quarter in 2008 to the 3rd quarter in 2009. After a clear growth in the second half of 2008, unemployment has nevertheless not seen a major increase this year. The fall in employment has been offset by a reduction in the labour force participation, particularly with an increased influx to higher education. The weak development in employment is expected to continue in 2010 and push up unemployment to a greater extent than this year. As a year average, unemployment is expected to reach 94 000 in 2011 and remain almost unchanged until 2012. This constitutes a good 3.5 per cent of the labour force.

Powerful grip

The slowing down of the economic downturn both abroad and in Norway began after powerful policy intervention aimed at both the problems in the financial markets and in the form of generally expansive monetary and fiscal policies. Increasing public demand and new growth in households’ consumption are key factors behind the activity growth we are now experiencing. The international growth has also contributed to a marked development in activity in the export of traditional goods. The increase was a total of 6.6 per cent in the 3 ^{r d} quarter of 2009 after falling by more than 13 per cent in the four preceding quarters. The strong export growth can be a catching up effect and is not expected to continue. The investment development in the private sector still appeared to be strongly subduing the activity in the mainland economy in the 3 ^{r d} quarter.

Less impetus from the fiscal policy

The fiscal policy is very expansive this year, but the impetus in the form of growing demand will be considerably less next year. In line with the upward movement in the economy, the fiscal policy is expected to shift towards a slight contractionary direction in 2011 and 2012. Public demand will thus increase less than the underlying growth in the Norwegian economy. Higher oil prices and continued improvement in the Norwegian and international economy are expected to contribute to clear growth in the Government Pension Fund – Global, whereby the budget deficit in 2012 can be approximately at the fiscal rule’s 4 per cent course.

Interest rates going up

Due to improved prospects, Norges Bank put the base rate up by 0.25 percentage points in October, from the record low of 1.25 per cent. The money market had already bottomed out at the start of August, by 1.75 per cent, and Norges Bank is expected to increase the key policy rate gradually. The interest rate in the money market is expected to reach 3.1 per cent in the 4 ^{t h} quarter next year, with a further increase to 5.4 per cent towards the end of 2012. The banks’ interest on loans is affected by a time lag by the money market rate. On an annual basis, the average interest on loans in the banks is expected to reach its lowest level in 2010, at 4.1 per cent, and subsequently increase gradually to 6 per cent during 2012.

Consumer growth up in 2010

An increasing housing stock combined with low interest rates, increased incomes and brighter prospects were the main reasons for the upswing in consumption in the 2 ^{n d} and 3 ^{r d} quarters after a year of decline. As a year average, however, the consumption in 2009 will barely see an increase from 2008. Further growth is expected in consumption whereby the growth in 2010 could reach as much as 5.5 per cent. Lower income growth and higher interest rates are likely to contribute to consumer growth declining in 2011 and 2012.

Housing investments lagging behind

After a strong fall in the second half of 2008, housing prices have increased continuously. On average, housing prices in the 3 ^{r d} quarter are higher than ever, although more moderate growth is expected. There are also signs that the enduring downturn in housing investments is nearing an end. The housing price development is contributing to an improvement in profitability of newbuilds, and an upswing is expected in the housing investments throughout next year. As a year average, an increase is unlikely to be seen before 2011.

Fall in industry investments diminishes

The downturn in investments in business in mainland Norway which began in early 2008 will continue into 2010, but at a decreasing rate. These investments are expected to increase through 2011 and 2012. After increasing from 2002, and with strong growth in the 1 ^{s t} quarter this year, the petroleum investments have clearly fallen in the last half year. The investments are expected to remain relatively stable in the years to come.

Reduced wage growth and inflation

The downturn in the economy has contributed to a major reduction in wage growth. Wage growth in 2008 per FTE increased by 6 per cent, while growth this year is expected to fall to 3.9 per cent. In 2010, wages on average are expected to increase by 3.5 per cent. Lower nominal wage growth, however, does not necessarily lead to reduced real wage growth. The economic situation, electricity price development and a strong krone are all expected to contribute to the growth in the consumer price index (CPI), which was 3.8 per cent in 2008, falling to 2.1 per cent this year and 0.8 per cent in 2010. The real wage growth can therefore be somewhat higher in 2010 than in 2008. As the economic trends gradually improve and the strengthening of the krone diminishes, both wage growth and inflation are expected to increase, whereby the CPI growth in 2012 will reach 2.7 per cent.