Near the bottom of the cycle?

The latest GDP figures from the Quarterly National Accounts (QNA) showed slightly lower growth in GDP for Mainland Norway than the trend in the Norwegian economy. We are expecting domestic consumer demand to pick up this autumn and business investment to increase. Weak growth in international demand and reduced growth impulses from fiscal policies will dampen the rise in activity.

Weak international prospects

Fiscal policy measures to counteract the recession ensuing from the financial crisis have produced large national deficits in many countries. The financial markets’ fear of defaults on government debt has led to increased interest rates on government bonds, and many European countries have issued warnings on the tightening of fiscal policies. These restrictions have only marginally impacted the macro-economic indicators observed to date, but they, and their effects, will become more evident in the time ahead. The recent high growth figures in a number of EU states cannot therefore be seen as an indication of a robust reversal in economic trends. In the USA, the incipient upswing of last winter gave way to a new downturn. In Asia, too, growth is declining, although from a high level. The assumption is therefore that growth among Norway’s trading partners in the next couple of years will be modest. The USA is expected to be in recession until some way into 2012, while the recovery in the Euro zone will arrive in the year after that.

Moderate export growth

Weak international growth combined with reduced Norwegian cost competitiveness will result in a relatively modest rise in exports in the next few years. Exports of traditional goods are not expected to return to their 2008 levels until 2012.

Tighter fiscal policy

The growth impulses from fiscal policy will be appreciably less significant than last year and we are expecting this trend to continue next year and the year after. The budget deficit in 2012 is expected to be in line with the 4 percent fiscal rule. This may set the stage for a more expansive fiscal policy in 2013.

Normalisation of interest rate levels not until 2013

The key interest rate was last raised in May, to 0.75 percentage points above the bottom level of summer last year. The three-month money market rate has increased somewhat more than that over the last year and was recently around 2.6-2.7 per cent. Prospects of very low interest rates internationally, moderate growth in the Norwegian economy and low inflation underpin our estimation that the key interest rates will remain unchanged until the summer of 2011. We anticipate a gradual increase in the money market rate from the second half of next year, to reach 5 per cent at the end of 2013.

Increased business investment

Following two years of decline, there was a clear increase in investment in mainland industries in the second quarter. We are expecting this to continue to rise in the time ahead. Investment in petroleum activities has also moved upwards after a period of decline, and a moderate increase is anticipated throughout the forecast period up to 2013.

High house prices stimulate investments

The marked fall in house prices through the latter half of 2008 was rapidly reversed last year and the real price of houses is now approaching the all-time high of 2007. We are expecting a more moderate future increase in prices. Nearly three years of falls in residential investments were turned into a weak increase in the previous quarter. High house prices stimulate housing starts and we anticipate that investment in housing will pick up notably in the time ahead.

Increased consumption to come

Four quarters of high growth in household consumption were followed by a small fall in the second quarter. We consider that this was due to special circumstances, and that increased home equity, low interest rates and higher incomes will promote growth in the time ahead. Consumer spending is expected to increase by 3.3 per cent this year and then grow by nearly 4 per cent per annum. This is combined with a moderate fall in domestic savings, which will nonetheless comprise 5 per cent of disposable income in 2013.

Slight increase in unemployment

According to the seasonally-adjusted QNA, employment has fallen for nearly two years, but reduced growth and periodic decline in the labour force has restrained the increase in unemployment. Adjusted for normal seasonal variations, unemployment as a proportion of the labour force was 3.5 per cent for May-July this year, an increase of 1.2 percentage points from the level in February-April 2008. For next year, we anticipate that growth in activity will contribute to increased employment, but that the labour force will rise somewhat more. We estimate that the unemployment rate will be up to 3.8 per cent in 2012 and will then fall.

Lower wage and price increases

The recession has helped to clearly restrain wage increases. Annual wage growth last year was 4.2 per cent, down from 6.3 per cent in 2008. For this year and the two following years, it is expected to be around 3.5 per cent. Price increases are estimated at 2.5 per cent this year, making the rise in real wages 1 per cent. Lower growth in energy prices is expected to contribute to a reduction of 1.5 per cent in the rise in consumer prices next year. The rise in real wages will therefore nearly double in 2011.