Unemployment down slightly in 2017

The downturn in the Norwegian oil industry continues, despite an appreciable rise in oil prices from the bottom level in January 2016. The demand from the petroleum industry started to tail off towards the end of 2013, and the trend was compounded by the sharp drop in oil prices during the autumn of 2014. The current economic downturn began at the same time oil prices plunged. In 2015, mainland Norway’s GDP rose by just 1.0 per cent, and we expect even slightly lower growth this year. Unemployment rose sharply from spring 2014 to autumn 2015, but the increase has since levelled off. Slightly higher economic growth going forward will mean that unemployment is likely to peak during the year, with an annual average of 4.7 per cent of the labour force.

Strong forces at work in several directions

The activity related to the petroleum industry at home and abroad has constituted a significant share of the market-oriented part of the Norwegian economy, and continues to do so. The oil downturn, and particularly the sharp drop in oil investments, thereby implies considerable negative impulses for virtually all industries throughout the country. Some industries and some regions are, however, affected considerably more than others.

Oil prices directly affect the exchange rate of the krone. Consequently, the price fall combined with lower Norwegian interest rates and the interest rate outlook contributed to the sharp depreciation of the krone up to January this year. This improved the cost competitiveness significantly and represents a major stimulus to the economy throughout the country in all industries that compete in the export and import markets.

Interest rate cuts and low interest rates also stimulate the economy beyond the effects of the currency market. Alone they push up households’ real disposable income and counteract the effects of higher consumer prices caused by the weaker krone. Reduced borrowing rates are pushing up the housing demand and consequently the house-building activity, and are stimulating business investment. Lower interest rates are a direct stimulus on households’ consumption, but also work indirectly through higher house prices and income.

A growing budget deficit over several years has had direct positive effects on the labour market through increased public sector employment and increased buying from market-oriented business. Marked reductions in corporate taxation can have a positive effect on investment in the mainland industries, but the effects are probably modest in the short term. Personal tax cuts for their part are improving household incomes and have to some extent contributed to an increase in consumption.

The oil downturn affects regions differently. With the exception of some regional measures in fiscal policy, the aforementioned positive impulses have an effect on the entire country. Overall, these strong impulses will thus also entail regional imbalances, making the macroeconomic situation more blurred.

International growth set to pick up

International economic growth remains low, but a weak increase in growth is expected. Norway's trading partners as a whole are expected to see an end to the economic slump in 2016. Private and public debt is dampening growth in many countries, while their economies to some extent are stimulated by the low oil prices. Many countries in the OECD area are still experiencing a deep and prolonged downturn, with high unemployment and low inflation. Interest rates will therefore remain at very low levels internationally throughout the projection period.

Investment decline in the petroleum industry slows

Oil investments fell by 6 per cent in the first quarter of 2016, making the level of oil investments 32 per cent lower than the peak in 2013. Demand from the petroleum industry is affected by political decisions, but the main decider is expectations of future prices of oil and gas and the cost of potential expansions. The expectations of oil price developments are strongly linked to “today’s price”, and oil prices have now clearly been lifted from the bottom level in January 2016. We assume that oil prices will increase gradually from around USD 50 per barrel at the start of June this year to USD 60 per barrel at the end of 2019. The expansion costs in Norway appear to have fallen considerably due to smarter solutions and reduced margins in the supplier industry. We therefore expect that the decline in petroleum investments will be curbed going forward, but the decline in the annual average may still surpass 16 per cent in 2016. After stabilising through 2017, investments may increase slightly in 2018 and 2019.

Weak krone

Measured by the import-weighted exchange rate, the krone was almost 30 per cent weaker in early January than three years earlier. Since then, the krone has strengthened by about 4 per cent as per the end of May. We assume that the krone will be strengthened moderately going forward. By the end of 2019, the krone will still be almost 20 per cent weaker than in January 2013.

Further fall in interest rates

The key policy interest rate is at a record low, and we expect Norges Bank to reduce it by a further 0.25 percentage points in autumn 2016. Typical mortgage rates may then come down from 3.2 per cent as an annual average in 2015 to 2.5 per cent in 2017 and 2018. A small increase in the key policy interest rate is expected in 2019, increasing mortgage rates to almost 3.0 per cent by the end of 2019.

Expansionary fiscal policy

Measured by the Ministry of Finance's estimate of the increase in the structural non-oil budget deficit, fiscal policy was clearly expansionary in 2014 and 2015, after being roughly neutral from 2009 to 2013 as a whole. For 2016, it is estimated that the budget deficit will increase substantially more than in the previous two years. With a relatively smaller element of tax cuts, the expansionary effect on the economy is also likely to be greater. Fiscal policy is expected to be less expansionary in 2017, and almost cyclically neutral in 2018 and 2019.

High price growth in 2016 to fall

The sharp depreciation of the krone has pushed up underlying inflation over a long period of time. Growth in the consumer price index (CPI), measured from the same month the year before, therefore peaked in March, with 3.3 per cent. The impact of depreciation will gradually diminish, and will be offset by the recent appreciation of the krone, which is expected to continue. Underlying inflation will therefore fall, while higher energy prices and indirect taxes may push up the growth rate in the CPI. Overall, we expect the CPI to rise by 2.9 per cent in 2016, while inflation will fall again to around 2.0 per cent over the next three years.

Low real wage growth

The economic downturn and rise in unemployment sparked by the decline in the oil industry characterized the wage settlement. The manufacturing industry’s ceiling of 2.4 per cent seems to be serving as a norm for other wage settlements. Structural changes may, however, push up the average annual wage rise to 2.6 per cent. Average real wages may thus fall by 0.3 per cent. A gradual improvement in economic conditions and lower CPI inflation are expected to have a positive effect on real wage growth, gradually rising to 1.5 per cent in 2019.

Low consumption growth in 2016

Low growth in employment and a fall in real wages are expected to pull down households’ real income growth from 2015 to 2016 despite reduced interest rates and tax cuts. This can result in growth in households’ consumption of just 1.3 per cent in 2016, compared to 2.0 per cent in 2015. The improvement in the economy is expected to improve developments in income and consumption in the years ahead.

Slight drop followed by new growth in house prices

House prices rose sharply through 2015 up to April this year. We expect the effects of weak economic conditions with relatively high unemployment and weak real wage increases in the period ahead to dominate over the interest rate reduction. This is likely to lead to a slight fall in house prices. Gradually increasing income growth and perhaps even slightly lower mortgage rates, as well as the expectation they will remain low for a long period of time, may see the return of the marked increase in house prices in 2017 and the following two years. The high price growth we have had has contributed to continued clear growth in housing investments in 2016. Growth in house building is expected to be muted in 2017, but will accelerate thereafter.

Moderate increase in investment in mainland industries

Investment in mainland industries has, overall, fallen slightly in 2015, but we expect that an increase of 2.2 per cent in the first quarter will show a shift to moderate growth in the period ahead. This year, it is particularly investments in manufacturing and power generation that will pull investment up. Growth in the service industries will then pick up.

Exports to increase gradually

Low growth in international markets for goods related to petroleum production has, along with some temporary factors, probably contributed to the marked fall in traditional exports of goods in the first quarter of 2016. Lag effects of the improvement in cost competitiveness, which will gradually be strengthened by slightly higher growth in the world economy, will pull exports up going forward.

Slow growth in activity

From early 2017, mainland Norway’s GDP will surpass trend growth, which is estimated at about 2 per cent. Employment will also pick up, and unemployment will gradually fall 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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