Unemployment to peak at 4.3 per cent in 2016

A clear fall in oil investments has been a strong contributor to the slowing activity growth in the Norwegian economy since last summer. Demand from the mainland, excluding general government, has also consistently seen a weak development, and export growth has been modest. From early 2016, we expect, however, increased momentum in exports, slightly higher growth in household demand and somewhat higher growth in business investments on the mainland. This, together with strong growth in public demand, will have a clear positive impact on economic growth despite the fact that investment in the petroleum industry is expected to continue falling somewhat throughout 2016. The growth in mainland Norway’s GDP is expected to pick up further in 2017, reaching 3.2 per cent.

International growth to pick up again towards end of the year

Economic growth has slowed down among Norway's trading partners as a whole, after an upswing last autumn. Lower oil prices have had a positive impact for most of Norway's trading partners, but growth is weakened by high debt in the public sector as well as in households. Many OECD countries are still experiencing a major slump with high unemployment. This means the low interest rates internationally are set to continue, although we expect the interest rates to increase slightly towards the end of the projection period. We assume that the growth in Norway’s export markets will pick up slowly from the end of 2015.

Higher structural non-oil public deficit, lower interest rates and weak krone

Expansionary fiscal and monetary policy are dampening the economic downturn in Norway, and will contribute to a turnaround to an upswing next year. Measured by the increase in the structural non-oil budget deficit, fiscal policy was highly expansionary in 2014, and equally as expansive this year. We assume a similar fiscal orientation in 2016 and 2017. The key policy interest rate is at a record low and we expect that it will be reduced by 0.25 percentage points at the upcoming policy meeting. We believe it will then remain unchanged until the end of 2017. The fall in oil prices and the prospect of lower interest rates have contributed to a markedly weaker krone. Measured by the import-weighted exchange rate, the krone has depreciated by as much as 20 per cent from January 2013 to the beginning of June this year. We assume that the krone will be somewhat stronger than this up to the end of 2018. As an annual average, this means that the krone will weaken by almost 6 per cent in 2015 after a weakening of 5 per cent in 2014. This will contribute to a marked improvement in the cost competitiveness, which together with increased international growth, will contribute to pushing traditional exports up.

Fall in investments in petroleum industry until end of 2016

High cost and relatively low profitability in the petroleum industry have led to a fall in investment in the industry since the peak in the third quarter of 2013. The marked decline in crude oil prices during autumn 2014 and into 2015 will reinforce the reduction in demand from the petroleum industry going forward. We now assume a fall in investment of 14.5 per cent this year and 8 per cent in 2016. This will be followed by just minor changes in the investment level.

Higher investment in mainland industries in 2016

Investment in the mainland industries saw a very modest increase last year and fell somewhat in the first quarter this year. Going forward, we expect investment to flatten out, while the weak krone, higher global growth, low interest rates and improved Norwegian economic prospects will contribute to higher growth from next year. Large amounts of available capacity in some industries, however, will curb the development whereby growth is likely to be very modest compared with previous economic upturns.

Low real wage growth

Growth in average salaries fell to 3.1 per cent in 2014. The increase in unemployment will contribute to wage growth this year falling further, estimated at 2.8 per cent. Growth in the consumer price index (CPI) is expected this year to remain at the level of last year, at 2.0 per cent. Low energy prices will pull the index down, while the weakening krone will pull it up. The weakening krone we have seen so far, however, is having a steadily declining impact on price growth, which will help to reduce inflation further going forward. Somewhat higher energy prices will, nevertheless, lead to CPI inflation increasing slightly next year. Thereafter, we expect inflation to fall to around 1.5 per cent. With slightly higher wage growth over the next few years, real wage growth will pick up gradually, from just 0.8 per cent this year to 1.9 per cent in 2018.

Moderate growth in household consumption

Interest rates for households fell throughout last year and are expected to fall further throughout this year. As an annual average, we assume that typical mortgage rates will fall from 3.9 per cent in 2014 to 3.0 per cent in 2016. This will curb the slowdown in growth in the households’ real income as a result of weak growth in employment and real wages this year and next year. Consumption is expected to rise in line with income this year, and somewhat less in the years ahead. The total saving in the households will therefore continue to increase somewhat.

Turnaround in house prices

House prices have increased considerably over the past year, driven by low interest rates and prospects of steadily lower rates. Weaker income growth and slightly tighter lending practices are expected to lead to a levelling off or a modest nominal price fall throughout the rest of the year. As an annual average, we estimate that house prices will, nevertheless, rise by 4.6 per cent, and slightly above inflation over the next few years. Housing investment has fallen somewhat throughout last year and into 2015. The current high level of house prices will contribute to house building increasing slightly going forward.

Unemployment to rise

The weak production development has contributed to weak growth in employment and to unemployment rising from 3.2 per cent in spring 2014 to 4.1 per cent in the last four months. We expect further increases, peaking at 4.3 per cent in 2016.