Unemployment peaks in 2016

Reduced demand from the petroleum industry is contributing to the weak activity growth that the Norwegian economy is now facing, but this is offset by the strong depreciation of the krone and the expansionary fiscal policy.

Continued fall in investments in petroleum industry until end of 2018

Oil prices fell sharply after summer 2014, and at the end of August 2015 were more than halved. We expect oil prices to remain low going forward, but gradually increasing to around 60 USD per barrel in 2018. High cost growth meant that petroleum investments started to decline before the fall in oil prices, falling by 15 per cent from the peak in the third quarter of 2013 to the second quarter of 2015. The low oil prices mean that few potential new development projects are profitable, while investment projects related to existing fields can help to curb the fall in investment. As an annual average, we now assume that the investments will fall by almost 12 per cent this year, and that the decline will gradually decrease in the years ahead to 5.5 per cent in 2018. This implies a drop of almost 33 per cent from 2013 to 2018.

International growth to pick up next year

International economic growth remains low and the growth profile in recent quarters is mixed. However, we anticipate that the cyclical bottom is near, and that Norway’s trading partners as a whole are heading into a new upturn next year - first the USA and the UK, followed by the euro area. However, the recovery is not set to be strong, and we expect a very moderate growth increase in Norwegian export markets going forward. Many OECD countries are still experiencing a major slump with high unemployment. The low interest rates internationally are therefore set to continue, although we expect the interest rates to increase slightly towards the end of the projection period.

More expansionary fiscal policy

The orientation of the fiscal and monetary policy has long stimulated the Norwegian economy and helped to curb the downturn we are currently facing. Measured by the increase in the structural non-oil budget deficit, fiscal policy was highly expansionary in 2014, and equally as expansive in 2015. The economic outlook for Norway is now somewhat weaker than it has been for a long time. We therefore assume that the orientation of fiscal policy in 2016 will be somewhat more expansionary than in the two preceding years.

Lower interest rates and weak krone

The key policy interest rate is at a record low and we expect that it will be reduced by 0.25 percentage points during the current half-year, and then remain unchanged to the end of 2017. As a result of this and lag effects of previous interest rate cuts, the average mortgage rate could drop to 2.8 per cent in 2016 compared with 3.9 per cent in 2014. The fall in oil prices and interest rate outlook have contributed to a marked weakening of the krone during the summer months. Measured by the import-weighted exchange rate, the krone was 20 per cent weaker in late August than the average in 2013. We assume that the krone will gradually strengthen going forward, but in 2018 the krone will still be at least 14 per cent weaker than in 2013. As an annual average, this means that the krone will depreciate by 10 per cent in 2015 after a decline of 5 per cent in 2014. This will contribute to a marked improvement in the cost competitiveness, which will stimulate exports and reduce imports, and thereby increase activity in Norway.

Higher investment in mainland industries going forward

Investment in the mainland industries saw a very modest increase last year and has fallen in the first half of this year. However, we expect this to turnaround to a moderate growth during the year, partly due to the weak krone, higher global growth and low interest rates. Improved prospects in the Norwegian economy will eventually stimulate further growth in mainland industry investment. Large amounts of available capacity in some industries, however, will curb growth.

Low real wage growth

Higher unemployment will contribute to wage growth this year and the next three years of just below last year’s 3.1 per cent. Growth in the consumer price index (CPI) is being pulled up this year by the weak krone, while reduced energy prices are pulling the index down. The index is thus expected to end at 2.1 per cent. Real wages will then rise by 0.7 per cent this year. Next year, lag effects from the weak krone will continue to push inflation up, and a substantial increase in electricity prices must be assumed. Growth in the CPI is assumed to reach 2.9 per cent, which may prevent growth in real wages in 2016. In the following two years, we expect inflation to fall to around 2 per cent, with real wage growth of around 1 per cent.

Moderate growth in household consumption

Weak growth in employment and low real wage growth will pull the growth in household income down this year and next year. Lower interest rates and tax relief, however, will pull in the opposition direct, such that income growth this year could be similar to last year, but somewhat lower in 2016. Consumption in households has seen a clear increase in the last winter months, but rather less in the second quarter. We expect moderate growth in consumption up to the end of next year, thereafter picking up slightly. As an annual average, we expect consumption to follow income growth, such that household saving will remain approximately unchanged going forward.

Lower growth in house prices

House prices have increased considerably over the past year, driven by low interest rates and prospects of steadily lower rates. Prices have also seen a marked rise so far this year, although the growth has declined. Weaker income growth and more pessimistic expectations of future growth are expected to lead to falling prices throughout the rest of the year. As an annual average, we estimate that house prices will, nevertheless, rise by almost 6 per cent in 2015, and more or less in line with the CPI next year. Improved prospects in the economy and low interest rates will contribute to growth in real house prices in 2017 and 2018. Housing investment fell somewhat last year, but increased somewhat in the first half of 2015. We assume that the growth in house building will increase further to around 5 per cent per year in 2017 and 2018. 

Weak activity growth for a further year

Growth in mainland Norway’s GDP has only increased by 0.9 per cent over the past year, and in the second quarter annualised growth was just 0.7 per cent. Our calculations indicate that the low growth will continue for another year. A weak exchange rate, expansionary fiscal policy, lower interest rates and slightly higher growth in Norwegian export markets will stimulate a cautious turnaround in the economy in the second half of next year, despite a continued marked fall in demand from the petroleum industry. As an annual average, mainland Norway’s GDP is expected to increase by 1.3 per cent in 2015 and 1.8 per cent in 2016, while the trend growth is estimated at 2 ¼ per cent. Unemployment measured by the Labour Force Survey (LFS) has increased from 3.2 per cent in the second quarter of 2014 to 4.5 per cent in the period from May to July 2015. The weak activity growth will mean slightly higher unemployment, peaking in 2016, and with an annual average of 4.6 per cent. Growth in mainland Norway’s GDP is expected to reach 3 per cent in 2017 and 2.5 per cent in 2018. The calculations show that unemployment will then decrease somewhat, but will remain above 4 per cent in 2018.