Two-year oil-driven downturn may come to an end

The sharp decline in demand from the petroleum industry and weak international demand growth continue to characterise the Norwegian economy. The average GDP growth for mainland Norway during the last nine quarters is just 0.8 per cent as an annualized rate. According to the Labour Force Survey (LFS), the unemployment rate rose by 1.6 percentage points to a peak of 5 per cent in the summer. In recent months, unemployment has fallen slightly as measured by the LFS, while NAV’s figures for registered unemployment and participation in employment initiatives have remained stable.

Shifting forces behind expected upturn in the economy

The current economic downturn has been dampened by interest rate cuts and a weaker krone caused by the fall in oil prices. An expansionary fiscal policy has also contributed. In 2017, the decline in petroleum investment will be curbed, leading to a moderate recovery. Continued expansionary impulses from fiscal and monetary policy will contribute to slightly higher growth in household consumption and business investment. Developments in the housing market will also have a large bearing on the growth in activity next year. The Norwegian economy will be boosted by the international economy, although the development here is now experiencing much uncertainty. Overall, we will therefore see a turnaround to higher economic growth through 2017. In the following years, however, the forces behind the economic development are expected to change markedly. We assume that there will be no new material fiscal stimulus, housing investment will eventually fall slightly and a stronger krone will in isolation curb activity. Conversely, the Norwegian economy, with the conditions we have assumed, will be boosted by the oil industry in both 2018 and 2019.

The Trump effect will not overturn prospects of higher international growth, but…

We assume that Norway’s trading partners are also now nearing a cyclical bottom, but the economic recovery is expected to be moderate. High private and public debt levels will dampen growth. Restructuring in China to a more consumer-driven economy is also reducing the stimulus to the rest of the world. In addition, increased protectionism may dampen the development in international demand.

Donald Trump’s victory in the US presidential election on 8 November has created greater uncertainty about future economic developments worldwide. A more protectionist US policy will entail negative impetus to the global economy and could lead to international trade conflicts. Conversely, extensive tax relief for households and businesses as well as large investments in infrastructure may boost the US economy. We do not expect the change in US policy to affect the growth in the global economy significantly, but there is considerable uncertainty nevertheless, and on balance it seems more likely that the situation could get worse instead of better.

Increase in exports

Increased growth in Norwegian export markets together with lag effects of improvements in competitiveness based on the weakening of the krone is expected to push exports up going forward. The weak krone will also help to curb imports in favour of Norwegian production.

Stable low interest rates

The key policy interest rate was reduced in March to a record low 0.5 per cent. We assume that the bottom has now been reached, and that Norges Bank will not change interest rates until after 2019. Mortgage rates fell slightly during the first half of the year, with interest rates on credit lines secured on dwellings at 2.5 per cent for a period, down from 3.2 per cent as an annual average in 2015. Some banks, however, have recently announced a slightly higher interest rate, and we assume the interest rate as an annual average to be 2.6 per cent this year and the next three years.

Weak krone

Measured by the import-weighted exchange rate, the krone was 6 per cent stronger in late November than at the end of last year. It is, nevertheless, almost 10 per cent weaker than the average in the 2000s and 22 per cent weaker than at its strongest in 2013. We expect that higher oil prices will help the krone to continue to appreciate slightly in 2017. At the very end of our projection horizon, the krone will depreciate slightly as a result of the assumed weak increase in interest rates in the euro area, while the Norwegian interest rates will remain unchanged.

Less expansive fiscal policy going forward

There has been a marked increase in the budget deficit over the last three years. For 2017, we base our projections on the government’s budget proposal, which involves a somewhat less expansionary policy than this year. There is little reason to believe that there will be majority support for the government’s budget proposal in Stortinget, but the structural non-oil public deficit is unlikely to see much change. The change within the budget’s limits may, however, also have a clear significance. At the time of writing, there is, therefore, particular uncertainty associated with this in relation to the new year ahead. For 2018, we are assuming an approximately cyclically neutral fiscal policy, and a slightly contractionary direction in 2019. For the last two years, we assume an increase in environmental charges, which in isolation will push up consumer prices by 0.2 percentage points, while public demand will increase roughly in line with the trend growth in the economy. Measured as a percentage of the Government Pension Fund Global, the structural non-oil public deficit will reach about 3 per cent in 2018 and 2019.

Curbed fall in oil investments before new moderate growth in 2018

Investments in the petroleum industry have so far fallen by a third from the peak in 2013. We assume that the decline will be less steep through 2017. The OPEC meeting on 30 November was held the day after our report was printed. We assume in our forecasts that there was consensus on moderate production limits. Consequently, oil prices will quickly stabilise at around 53 USD per barrel, before gradually rising to 60 USD by the end of 2019. We believe this will lead to a moderate increase in the petroleum industry investments in 2018 and 2019. Estimates suggest that an oil price trajectory that is 10 USD lower than assumed will virtually cancel out the expected upturn.

Moderate increase in investment in mainland industries

The investments in the mainland industries have shown a positive trend for four successive quarters, and we expect them to increase somewhat going forward. Improved growth prospects for the Norwegian and global economy, greater competitiveness and low interest rates and reduced taxes for enterprises are all factors that point in this direction. Meanwhile, low capacity utilisation in many industries will curb the recovery.

Temporary high price growth

The depreciation of the krone has been pushing up inflation for some time. An abnormal increase in electricity prices after February this year pushed the consumer price index (CPI) up to a peak of 4.4 per cent in July. Since then, the underlying inflation has fallen, with CPI growth in October dropping to 3.7 per cent. As an annual average, we assume that the CPI growth will be 3.6 per cent this year. The depreciation of the krone will progressively become less significant, while the recent appreciation with low wage growth will push down the underlying price increases. Energy prices are also expected to raise CPI growth in 2017. Excluding taxes, energy prices are then expected to largely follow the general price development, while the increase in environmental taxes will push CPI up to slightly more than 2 per cent in the years 2017 to 2019.

Marked fall in real wages in 2016

The economic downturn has slowed wage growth. Available information indicates a very low wage growth this year. The fall in employment in highly paid oil-related industries will contribute to lower growth in average annual salaries this year, and our estimate is now 2.2 per cent. Our projections show that average real wages are therefore expected to fall by 1.4 per cent, but the individual wage increase for large groups will be higher. The expected upturn in the economy, with slightly lower unemployment and significantly lower CPI growth will then contribute to a positive and weak increase in real wage growth.

Moderate growth in consumption

A small decline in employment, a fall in real wages and high inflation appear to be contributing to a slight drop in households’ disposable real income this year, despite lower interest rates and some tax cuts. Changes in income take time to affect consumption levels. We therefore still expect growth in consumption of 1.5 per cent this year, which is slightly higher than the population growth. When income growth improves in the years ahead, consumption growth will only see a modest increase to about 2 per cent. The high level of house building will eventually contribute to pushing the development in house prices significantly down. We then expect the real house prices to fall slightly from 2018. This will curb consumer spending.

Weak economic upturn and lower unemployment

Growth in mainland Norway’s GDP has been low so far this year, and as an annual average is expected to be just 0.7 per cent, while the trend growth in the economy is projected to be about 2 per cent. Growth is expected to surpass the trend growth early next year, creating a cyclical upturn per definition. On an annual basis, mainland Norway’s GDP may then reach 1.7 per cent, and just over 2 per cent in the following two years.

According to our calculations, employment, which has remained stable in the first three quarters, is set to increase as activity picks up next year. However, the labour force will also increase, which will curb the fall in unemployment. As an annual average, unemployment is set to reach 4.7 per cent in 2016, gradually falling to 4.3 per cent in 2019.

  

Main economic indicators 2004-2019. Accounts and forecasts. Percentage change from previous year unless otherwise noted

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