Upturn in economy on hold

After a year and a half of relatively weak growth, mainland Norway’s GDP increased in the second quarter by almost 5 per cent annualised. A particularly large rise in production in the power supply industry and some other industries that are largely affected by natural conditions contributed markedly to the increase, but growth was also relatively high and above trend growth in other sectors. Notwithstanding, this does not constitute a reversal to a longer period of above-trend growth, and no clear upturn in the economy will take place until the end of 2015.

Oil investment crucial to economy

Investment in the petroleum industry has long made a substantial contribution to growth in the Norwegian economy, but growth has stalled and a clear fall is expected next year. The start-up of several major field developments is likely to mean a corresponding increase in 2016. However, no further growth is expected in oil investment in 2017. Business investment on the mainland as a whole has remained virtually unchanged over the past year. This trend is expected to continue, turning to a very moderate upturn in 2016 and 2017.

International upturn in economy towards end of 2015

The international activity growth has slowed from 2013 to the first half of this year. This trend has been particularly weak in the euro area, Japan and many emerging economies outside of India and China. Reduced trade with Russia because of the Ukraine conflict has impaired the economic development in the EU and is curbing global growth prospects. For Norway's trading partners, growth in activity is expected to increase considerably towards the end of next year and beyond. Despite a lack of expectation of a strong international upturn, this will nevertheless help to increase Norwegian exports and activity growth in the mainland economy. Weakened cost competitiveness will continue to contribute to the loss of market shares, meaning that Norwegian exports will generally show slightly less growth than imports among Norway’s trading partners.

Stable low interest rates

Low international interest rates, moderate growth and available capacity in the Norwegian economy, coupled with rising house prices, are some of the reasons behind the expectation that the key policy interest rate will remain at the current level through 2015. The money market rate may thus remain at the current low level for some time to come. Through 2016 and 2017, money market rates are expected to pick up very slowly, along with a global improvement in the economic situation. As banks build up their capital, thereby satisfying announced and anticipated regulatory requirements, this can contribute to interest rates faced by households falling slightly in the short term and then remaining unchanged throughout the projection period.

Fiscal policy has expansionary effect

Growth in public consumption is expected to increase to almost trend growth in the Norwegian economy in the years ahead. Real benefits are likely to increase somewhat more and general government investment considerably more. With tax concessions estimated at NOK 6 billion per year going forward, fiscal policy will have a clearly expansionary effect. With continued significant, albeit reduced, state oil revenues, the structural non-oil public deficit measured as a share of the Government Pension Fund Global will nevertheless continue to remain below 3 per cent.

Consumption and savings up

Household income has seen a marked and steady increase in recent years. Slightly higher real wage growth and slightly lower debt interest rates are expected to contribute to the disposable income picking up somewhat over the next few years. After almost a year of weak growth in household consumption, clear growth was seen in the first half of this year. Somewhat weaker consumption growth is expected through the next six months, which will be followed by somewhat higher growth. Low interest rates, high income growth and increased housing wealth will all pave the way for a clear consumption growth in the years ahead. The tendency for increased savings that has been seen since the financial crisis is likely to continue for several more years.

Moderate increase in house prices

House prices fell through the autumn last year, but since February have grown rather steadily. With a stable income development and prospects of continued low interest rates, moderate house price growth is expected, somewhat above inflation going forward. The fall in housing investment through the winter turned to a modest growth in the second quarter. House price growth through the second half-year and the prospect of continued growth are helping to accelerate housebuilding going forward.

Slightly higher unemployment

Employment has been increasing moderately for the past while, and growth is expected to be reduced towards 2016. The economic upturn will also gradually lead to employment picking up. The effects of changes in employment growth on unemployment will be curbed by the fact that the labour supply is also affected. More people seek work during times of prosperity than in hard times. The trend for a fall in unemployment in the first half-year this year is likely to turn into a moderate increase for some time to come. However, it may fall again slightly in 2016 and 2017 to about 3.5 per cent.

Stable wage growth and slightly lower inflation

Growth in annual pay, which has hovered at around 4 per cent since the financial crisis, is expected to fall to around 3.5 per cent this year and beyond. The petroleum industry will no longer drive up wage growth and business leaders acknowledge that the marked deterioration in cost competitiveness cannot continue. The labour market will be less restrictive and the lag effects will curb wage growth, even when the improvement in the international economic situation contributes to improved profitability in manufacturing towards the end of the projection period. The Norwegian krone has substantially strengthened so far this year, after the preceding sharp depreciation. Norwegian inflation will therefore be somewhat lower going forward. Thus, real wage growth will be slightly higher in the coming years than this year.