Oil and interest rates behind upturn

The weak international growth in demand is contributing to disparities in production development between industries. It is also curbing investments in the mainland economy, which is nevertheless set to increase somewhat going forward, but not as much as has normally been the case during economic upturns. Overall growth in domestic demand is set to increase somewhat in 2013, followed by a slight fall. This will be offset by a slight upturn in international growth.

Norway’s trading partners in long period of weak growth

The Euro area is now experiencing its second period with a fall in production since 2008. One important reason for this is the restrictive fiscal policy aimed at suppressing increases in public debt. New measures by the European Central Bank have helped curb the turbulence in the financial markets. Economic growth is expected to gradually increase. Economic growth in the USA is somewhat higher, but the country is also facing a growing public debt crisis. In the event that the Democrats and Republicans are unable to agree on the budget by the end of the year, major expenditure cuts and tax increases will automatically be triggered, a move that has the potential to take the US economy into another recession. However, the most likely scenario is that the parties will unit on a more moderate tightening of the fiscal policy. Growth in a number of emerging economies is also waning. This is leading to a further curb on development in the OECD area. Overall, the economic downturn among Norway’s trading partners is set to continue well into 2014, and with a low level of capacity utilisation until the end of 2015. Together with continual losses of cost-competitiveness, this will contribute to low growth in traditional Norwegian exports of goods going forward.

Mortgage rates set to fall further

Low international interest rates stemming from the weak global economic situation, in addition to a strong krone, low inflation and moderate pressure in the labour market have resulted in a very low base rate in Norway. Together with increased confidence in the interest rate market, this has led to the money market rate falling more than 1 percentage point in the course of a year, reaching 1.9 per cent at the start of December. This level is expected to remain roughly the same throughout 2013. Mortgage rates follow the money market rate to a large extent with a time lag. According to our calculations, a floor will be reached at the end of 2013 that is around 0.25 percentage points lower than the current level. The base rate is expected to gradually rise through 2014 and 2015, and the money market rate will reach at least 4 per cent by the end of 2015, when mortgages rates are expected to exceed 5 per cent.

High real wage growth and low inflation

At 4.3 per cent, annual salary increases in 2012 are expected to be about the same as last year. Widespread weak profitability in the internationally-exposed manufacturing industry, partly as a result of a stronger krone, is expected to lead to somewhat lower wage growth in 2013. Improvements in global economies will subsequently contribute to a slightly higher wage growth. A strong krone, price impulses from abroad and moderate growth in Norwegian unit costs have contributed to low inflation over a long period. Low electricity prices will be partly responsible for a fall in average annual growth in the consumer price index to just 0.8 per cent this year. Higher electricity prices in 2013 will contribute to higher price growth, but a further strengthening of the krone will curb developments next year and part of 2014. Gradual increases in price impulses from abroad and slightly higher wage growth will also lead to a gradual increase in inflation. This will be strengthened by a slightly weaker krone, with inflation subsequently surpassing 2 per cent in 2015. Consequently, real wage growth will be high this year, and remain at about the same level as the average over the past 10 years, which is 2.6 per cent.

High income growth in households pushing consumption up

High growth in real wages, employment and transfers will lead to a clear increase in households’ real incomes in 2012 and the following two years. A substantial part of income goes towards savings, and according to projections, these savings will make up more than 9 per cent of disposable income in 2014. However, there is still room for clear growth in consumption in the years ahead. Higher interest rates will nevertheless curb income growth, but slightly lower savings will lead to consumption remaining high.

Continued high growth in house prices

High growth in households’ income, low interest rates and a large increase in the population have all been key drivers behind the substantial growth in house prices in recent years. This led to a major increase in the number of new houses built in autumn 2010, which is dampening price growth. Prospects of relatively low interest rates and high income growth going forward mean that house prices are likely to see a clear increase, but still somewhat lower growth than in recent years.

Growing demand from the petroleum sector

Investments in the petroleum sector increased by more than 14 per cent in 2011, with the same level of growth expected this year. The level of these investments is likely to remain high in the years ahead, but with somewhat lower growth rates. Demand for goods and services will steadily increase.

Moderately expansive fiscal policy

Growth in public demand appears to be relatively modest this year, and well below the growth in mainland Norway’s GDP. This also holds true for the 2013 projections. High growth in the transfers to households, however, means that the fiscal policy will be roughly neutral this year, and slightly expansive in the following years. Even with an assumed fall in the oil price going forward, central government’s oil revenues are considerable. The Government Pension Fund Global is therefore growing, and calculations show a fall in the structural non-oil public deficit to around 2.5-3 per cent of the Fund’s value in the years ahead.

Growth in employment and low unemployment

Employment has risen substantially during the upturn, with an increase of almost 100 000 persons in the past two years. The labour force has also increased considerably, leading to a more moderate fall in unemployment. Since the financial crisis in 2008, unemployment has never exceeded 3.7 per cent, and the projected annual average is 3.1 per cent for 2012. The upturn in the economy will mean a continued increase in employment. The large increase in population and the growing labour force participation are, however, expected to lead to the labour force increasing slightly more than the employment in the year ahead. Unemployment may therefore see a slight increase in the years ahead.