Protracted but moderate recession

The financial crisis, which hit with full force in the autumn of 2008, led to a major slump in the global economy and intensified the downturn in Norway. The decline was however limited by strong political intervention in the finance markets and expansive monetary and fiscal policies. Both the Norwegian and the global economies have been growing for a while now, but there is not expected to be a strong recovery in the next few years.

Large growth in exports this year

A marked increase in traditional goods exports throughout the latter half of last year, combined with an increase in demand in Norwegian export markets, means that this year’s annual growth may well be relatively large. However, in subsequent years, weakened cost competitiveness will contribute to reduced market shares and hence only very moderate growth in exports.

Higher unemployment

Despite a marked fall in the number of hours worked and a slightly smaller decline in the number of people in employment, unemployment has so far increased only moderately. The fall in employment has been offset by a reduction in labour force participation, particularly due to an increased influx to higher education and a greater transition of older workers onto various types of pension schemes. Employment is expected to increase very moderately in the next few years, while the labour force may pick up somewhat more. According to the seasonally adjusted figures of the Labour Force Survey, unemployment is therefore expected to increase, from 3.2 per cent in the 4 ^{t h} quarter of last year, to an average for 2011 of 3.9 per cent, or just over 100 000 individuals. A clear economic upswing may bring unemployment down a little in 2013.

Tighter fiscal policy

The growth impetus due to fiscal policy will be noticeably less this year than last. We expect fiscal policy in subsequent years to shift to a weakly contractionary direction, in that the growth in public expenditure will be less than the underlying growth in the Norwegian economy, while taxes and duties will be adjusted for inflation. Higher oil prices and continued improvement in the Norwegian and global economies are expected to provide a clear boost to the Government Pension Fund – Global. The budget deficit in 2012 may therefore approach the 4 per cent level of the fiscal policy rule to which the Fund is subject.

Interest rates going up

Due to an improved economic outlook, Norges Bank put up the base rate by 0.5 percentage points towards the end of last year. The money market had therefore bottomed out in early August, when the rate was down to 1.75 per cent. It is anticipated that Norges Bank will continue to gradually increase the base rate. We expect the money market rate in the 4 ^{t h} quarter of this year to be 2.9 per cent. In 2013, we estimate that the money market rate on an annual basis will reach 5.2 per cent, while the bank lending rates will be around 6.4 per cent.

Improvement in the housing market

The marked fall in house prices through the latter half of 2008 was more than reversed last year and Statistics Norway’s house price index reached an all-time high in the latter half of 2009. We are expecting a more moderate future increase in prices. This high price level is helping to improve the profitability of new construction and we anticipate investment in housing will increase this year, after having fallen for two and a half years. We may however have to wait for 2011 for an increase in the annual average.

Growth in consumer spending

A one-year fall in household consumption ended early last year. Increased home equity, low interest rates and higher income all contributed to the reversal. Growth in consumer spending is estimated to be a full 5.5 per cent this year. Lower growth in income and higher interest rates are however expected to make growth in consumer spending fall off subsequently.

Decline in business investment is subdued

The decline in investment in Norwegian mainland industries, present for the last year and a half, is expected to flatten out over the course of the year, and we estimate that investment will then pick up. Investment in petroleum activities reached a peak in the 1 ^{s t} quarter of last year, after nearly 7 years of growth. We are anticipating a modest fall this year and next, which will be reversed in 2012 and 2013. This assumes underlying growth in oil prices throughout the forecast period, reaching USD 94 a barrel by 2013.

Lower wage and price increases

The recession has brought about a strong reduction in wage growth. Annual wage growth last year was 4.1 per cent, down from 6.3 per cent in 2008. This year and next, it is expected to be 3.4 per cent, increasing slightly after that. Inflation is however also expected to be lower, despite higher power prices this year. A strong Norwegian krone, which is likely to strengthen further next year, combined with low wage growth and improved productivity, means that we are anticipating CPI-inflation of 1.7 per cent in 2010 and 1.3 per cent in 2011. Towards the end of the forecast period, we expect the krone to weaken somewhat and for inflation to increase. From our calculations, real wage growth will be nearly 2 per cent during the forecast period.