More marked slowdown ahead

The turbulence in international financial markets has led to significant changes in the prerequisites for the Norwegian economy prognosis published by Statistics Norway at the end of August. Based on the latest development, Statistics Norway has therefore re-analysed the prospects for the Norwegian and international economies. The financial crisis has led to an increase in interest rates and the NOK exchange rate being considerably weakened, while the US dollar in particular has strengthened. Even before the crisis had fully taken off in mid September, the growth in the Norwegian economy had fallen substantially. Unemployment has so far been stable and inflation has notably increased.

Conflicting impetus

While the Norwegian economy continues to be stimulated through the fiscal policy and increased petroleum investments, a clearly weaker international economic trend will contribute to the weakening of future Norwegian exports. In the short term, higher interest on borrowings and difficulties in obtaining loans in private credit institutions will lead to lower investment demand from households and enterprises. In the opposite direction, a poorer NOK exchange rate will improve the competitive power somewhat. In the longer term, we estimate that the investments in the mainland industries will show a poorer development and that a more moderate development in household consumption will continue. The reduction in the commissioning of new housing indicates a continuing fall in investments in housing, a development that will continue for longer than originally anticipated. Overall, this will mean relatively poor growth in the level of activity in the mainland economy through next year and into 2010. Improved international trends and an increase in stimulative measures from both the monetary policy and fiscal policy will help the growth in the Norwegian economy to improve in 2011.

International slump

Internationally, economic growth is now extremely low and the development has become extremely poor with regard to euro countries in particular. The GDP fell in many leading EU countries from the first to the second quarter. The turbulence in the financial markets is expected to deepen the economic decline. In the USA, the crisis in the financial sector is now acute, and it is difficult to estimate the effects in real terms. When the IT bubble burst in 2001, the OECD experienced three years of poor growth. The financial crisis may have more serious consequences for the economic development, but our analyses have been based on the authorities managing to stabilise the financial markets quite quickly. Therefore, production by Norway's trading partners will not fall significantly, but growth will be extremely low for a while to come. Lower energy and raw material prices are expected to curb inflation soon both in the EU and USA. Combined with poorer trends, this is expected to contribute to the interest rates in 2009 being reduced further in the euro countries, amongst others. We have based our analyses on the money market rates in the euro countries being reduced by more than three percentage points hereafter and falling by a good 2 per cent in 2010. Lower interest rates and a normalising of the financial markets are expected to contribute to a new international recovery towards the end of 2011. This is about a year later than originally anticipated.

Lower base rates

We estimate that the money market rate in Norway will change roughly in line with the euro countries, but with a slight time lag. By spring 2010, we estimate it will have fallen to 3.5 per cent. Despite the high interest rates in Norway, the financial crisis has so far contributed to a fall in the NOK exchange rate. A continued high interest rate differential in Norway, together with an assumption that the financial crisis will be resolved, is contributing to an estimated strengthening of the NOK versus the euro, to around NOK 8 in 2010 and 2011. As a year’s average, the import-weighted NOK exchange rate is expected to fall by 3 per cent from 2008 to 2009 and then be correspondingly strengthened in 2010.

Higher unemployment

The economic slump has so far only resulted in a moderate increase in unemployment. Seasonally-adjusted monthly figures from the Labour Force Survey show no clear signs of increased unemployment, but the number registered as unemployed according to the Norwegian Labour and Welfare Administration implies a shift based on the figures from September. As the poor activity development strengthens, employment growth will notably decline and unemployment will increase. A reduced influx of foreign labour could help limit the increase in unemployment, which we now estimate will be 3.8 per cent in 2010 and 2011. This is much higher than previous estimates but remains low in relation to previous slumps.

Lower future wage growth

High profitability in industry and pressure in the labour market have contributed to high wage growth. This trend is about to turn. Poorer prospects internationally and falling prices of traditional Norwegian exports will contribute to the wage growth being reduced in the years to come to around 4.0 per cent in 2010 and 2011.

Higher inflation

Increased growth in wage costs, poorer productivity growth and increased raw material prices have contributed to higher inflation in 2008. The 12-month growth in the consumer price index adjusted for changes in duty and excluding energy goods has been increasing for almost two years, and in September stood at 3.1 per cent. A substantial increase in electricity prices resulted in the growth in the consumer price index (CPI) reaching 5.3 per cent. We estimate that the price growth will remain relatively high in the immediate future before reduced international raw material prices and a flattening out of electricity prices will curb the rise in prices. The 12-month growth in the CPI is likely to notably diminish from October to November due to the development in electricity prices last year. Lower domestic wage cost growth will also gradually reduce inflation in Norway. We now estimate that consumer price growth will reach an average of 4.1 per cent this year, and 3.2 per cent next year. This is only slightly higher than previous estimates. In 2010 and 2011, we expect inflation to be around 2 per cent.

Our prognosis entails the authorities succeeding in quickly restoring the confidence in the credit markets

At the time of writing, the economic situation is fairly complex, both internationally and in Norway. It is not easy to have any clear opinion on what the outcome of the financial crisis will be beyond the short term. The authorities in many countries are currently trying to stabilise the financial markets using lower base rates, supplying credit and in some countries by assuming ownership of financial institutions in order that they meet the requirements for equity. Our revised prognosis requires the authorities to relatively quickly succeed in this monetary policy stabilisation and for the confidence in the markets to be restored to a large degree. If on the other hand the authorities do not succeed with their endeavours, the prospects for the world economy and thereby also the Norwegian economy will be considerably weaker than the basis we have used here.