The start of a moderate upturn in the economy?

The upswing in the Norwegian economy is related to the slowing decline in demand from the petroleum industry, coupled with the protracted, substantial growth in house building and the fairly high growth in demand from public administration. The growth in household consumption has also risen slightly in the last six months. Going forward, the growth in export and mainland business investments will fuel the upswing, and eventually become the key drivers, while house prices and housing investment are expected to fall in 2018 and the subsequent few years. The growth in public demand will dampen somewhat. Following a record fall in average real wages last year, a slight increase is expected this year, followed by slightly higher growth in the years ahead. This will lead to a degree of growth in household consumption.

Likely shift towards an upturn, but recession expected for some time to come

Activity growth in the mainland economy increased in 2016, and the latest figures from the quarterly national accounts (QNA) show GDP growth for mainland Norway for the first quarter of 2017 of 2.6 per cent, calculated as an annual rate. This is higher than the projected trend growth of 2 per cent, and can thus be defined as a cyclical upturn if this is set to continue. However, it may also just be random. It is therefore too early to determine whether we have observed a shift towards an economic upturn after two and a half years of decline, even though our calculations would suggest this. Many industries have spare production capacity, unemployment is still markedly higher than the average for the last 20 years, and employment measured as a percentage of the working age population is expected to remain at a low level, at almost 2 percentage points lower than in the years 2010-2013.

Lower unemployment due to fall in the labour force

The downturn in the economy that started in 2014 quickly led to a weak development in employment. Unemployment therefore saw a marked increase, reaching almost 5 per cent of the labour force in the third quarter of 2016 according to the Labour Force Survey (LFS). Since then, the unemployment rate has been gradually falling, and the average for February to April 2017 was 4.5 per cent. According to the QNA, employment began to rise slightly at the start of 2016, but the decline in unemployment is primarily due to the fall in the labour force. Our calculations suggest an increase in both employment and the labour force going forward, and unemployment will therefore only see a modest decline. As a yearly average, we expect unemployment rates to be 4.3 per cent this year, before gradually falling to 4.0 per cent by 2020.

Low interest rates and weak krone

The economic downturn has been curbed by a proactive monetary policy. The key policy interest rate has been at a record low 0.5 per cent for more than a year. This has, in isolation, stimulated both investment and consumption. Together with the direct consequences of the decline in oil prices, the low interest rates have contributed to a very weak krone from a historical perspective. This has pushed up production and profitability in the export industries. Rising import costs are also stimulating Norwegian production, which is making it easier to compete with the import market. Typical mortgage rates with credit lines secured on dwellings are expected to fall slightly in the next half-year to less than 2.5 per cent, remaining there until the next increase in the key policy rate in 2020. Euro rates are likely to increase earlier, reducing the disparity with Norwegian interest rates, and with the expected increase in oil prices, this could lead to a stable weak krone throughout the projection period, about 18 per cent weaker than the annual average in 2013.

Marked fall in price growth and higher real wages

A weaker krone and high electricity prices led to growth in the consumer price index (CPI) last year of as much as 3.6 per cent. From a peak in July 2016, price growth has fallen sharply as electricity price growth has declined, not least due to the constantly diminishing inflationary effects of a previously weak krone. Our calculations show CPI growth as an annual average of 2.1 per cent this year, slightly lower in 2018, followed by a slight rise. As last year, the wage settlement in the wage leader sector ended with a ceiling of 2.4 per cent. Wage increases in other industries also appear to be following this ceiling. The growth in average annual wages is estimated at 2.3 per cent, compared with 1.7 per cent last year. This gives real wage growth this year of 0.2 per cent, compared to -1.8 per cent last year. Somewhat lower unemployment and improved profitability in manufacturing will lead to real wage growth gradually increasing in the years ahead to 1.7 per cent in 2020.

Lower house prices and decline in house building

The low interest rates and several years of high income growth have been contributing to substantial growth in housing demand over a long period of time, thereby pushing up house prices considerably. This has led to a strong growth in house building. Our calculations show that the large increase in the housing stock, together with a more restrictive credit policy, will lead to a weak development in house prices going forward, and these will fall in 2018 and the subsequent two years. Thus, the house building will also be reduced, but will remain at a historically high level.

Consumption increasing

The fall in real wages and high tax-motivated dividend pay-outs in 2015 contributed to the marked fall in households’ real disposable income last year. Excluding dividends, real disposable income increased by 1.1 per cent, which is by far the lowest increase in almost 30 years. Consequently, growth in household consumption was quite modest. With real wages now increasing and pushing up income growth, consumer spending is also picking up somewhat. The fall in house prices, however, is causing a weak development in household wealth, which will curb consumer spending.

Reduced decline in oil investments before shift to moderate growth

By the fourth quarter of 2016, investments in the petroleum industry had fallen by almost 37 per cent from the peak in 2013. The preliminary figures from the QNA show a slight increase in the first quarter of 2017, but we expect these investments to generally decline this year. However, the fall is expected to slow down throughout the year, and the launch of numerous new projects will thereafter contribute to a moderate increase. Our estimates here are based on an oil price that gradually rises from 50 USD per barrel at the start of June 2017 to 64 USD per barrel at the end of 2020.

Moderate increase in investment in mainland industries

The investments in the mainland industries increased somewhat in 2016, and following a downturn in the first quarter, our calculations show a cautious upswing going forward. The largest growth is set to stem from the supply of power, aided by upgrades to the transmission grid and old power stations, the development of wind farms and the installation of new smart electricity meters. Improved growth prospects for the Norwegian and the global economy, greater competitiveness and low interest rates and reduced taxes for enterprises are all factors that are pushing up business investment on a relatively broad basis. However, growth is not expected to be strong enough to pull the level of investment in 2020 up from the continued low level before the financial crisis in 2008.

Improved Norwegian export market will push up exports

We assume that Norway’s trading partners have now passed the cyclical bottom and that growth in Norwegian export markets will increase. However, the full repercussions of the financial crisis have not yet been felt, and the high level of private and public debt in many countries means that the upturn is expected to be moderate. Due to the outcome of several European elections this spring, we now consider the uncertainty and downside risk of international economic developments to be reduced compared with our last report on the economy.

After a markedly weak development in Norwegian exports last year, the first quarter of this year saw a significant upturn. This was largely a resetting after a sharp decline in the preceding quarter. Our calculations show that the international upswing coupled with the delayed effects of the improvement in cost competitiveness will drive up exports going forward. 

 

Main economic indicators 2005-2020. Accounts and forecasts. Percentage change from previous year unless otherwise noted

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