Upturn in Norwegian economy continues, but with clouds on the horizon

Main economic indicators 2009-2022. Accounts and forecasts. Percentage change from previous year unless otherwise noted

To table

Weaker growth trajectory internationally

The international economic upturn is expected to continue for the seventh consecutive year in 2019. With the prospect of a weaker international business cycle, continued uncertainty in global trading conditions and internal turmoil, particularly in Europe, we envisage that the growth trajectory will be weaker than was forecast in our last projection. Furthermore, the downside risk is still high, especially with regard to the course of the real economy. The further escalation of ongoing trade conflicts is still a possibility. 

Balanced development in the Norwegian economy

Much of the upturn that is behind us in the Norwegian economy was characterised by expansionary fiscal policy, low interest rates and wage moderation. During the course of last year, fiscal policy became more neutral, wage growth picked up slightly and Norges Bank increased interest rates for the first time in more than two years. In the years ahead, it is assumed that these driving forces will yield a neutral or contractive impetus. The picture is reversed for investments in the petroleum industry, where marked growth is expected in 2019. Overall, it appears that the Norwegian economy will be almost cyclically neutral throughout the period up to 2022. 

Neutral fiscal policy

Fiscal policy has gradually become more cyclically neutral following the highly expansive fiscal policy that was implemented in the period 2014–2016 in order to mitigate the negative impetus from the fall in oil prices in 2014. We assume that the fiscal policy will remain almost cyclically neutral and the petroleum revenue spending will be just over 2 per cent of the value of the oil fund in 2022. This moderate petroleum revenue spending is reasonable based on the economic situation up to 2022, the desire to secure a buffer to meet any major changes in the value of the oil fund and the need to finance the higher expenditure as a result of the ageing population. 

Housing market also experiencing a rather neutral development

After falling throughout the second half of 2017 and the first half of 2018, housing investment was almost unchanged in the second half of last year. According to our calculations, housing investment will pick up somewhat during the first half of 2019. Higher house prices make house-building more profitable and the growth stems from the increase in house prices throughout 2018, which followed a marked fall throughout 2017. In the years ahead, house price growth will be driven by higher incomes, but dampened by higher interest rates and lower population growth. As a result, house price growth is expected to be sufficiently moderate that house prices in real terms will remain virtually unchanged up to 2022. Compared with the last five years, which were characterised by large fluctuations in both house prices and housing investments, the housing market is now more balanced. 

Petroleum investment has reached a turning point

Starting in 2013, petroleum investment fell for four consecutive years. At the start of 2018, the trend shifted to a slight upturn, and we expect the investments to grow markedly in 2019. The development projects Johan Sverdrup phase 2 and Johan Castberg are the main drivers of this development. Lower costs and an assumed oil price of just over USD 60 per barrel also make many other projects profitable. In the period 2020–2022, the investment level is expected to remain close to the level in 2019, which is around 19 per cent lower than the record level of 2013. 

Moderate growth expected in business investment

Higher interest rates, moderate growth in the Norwegian economy and considerable uncertainty about international developments are set to dampen investment growth going forward. We estimate that growth in business investment will fall from just over 3 per cent this year to between 1 and 2 per cent towards 2022. 

Moderate consumption growth expected

The consumption is driven by the course of household income, wealth and interest rates. Wage earnings, which are the main source of income for households, are expected to increase in the years ahead, both as a result of higher annual wage growth and employment growth. The ageing of the population will also push up welfare benefits. Conversely, the weak development in real house prices and higher interest rates are expected to curb consumption growth. Overall, this means that growth in consumption in the years ahead will be just over the trend growth in mainland Norway, but nevertheless considerably lower than in earlier upturns. 

Wage growth continues to increase

After a peak of just over 5 per cent at the start of 2016, unemployment was 3.7 per cent on average from November 2018 to January 2019, according to Statistics Norway’s Labour Force Survey (LFS). As a yearly average, we expect unemployment to fall to 3.6 per cent towards the end of the projection period. Going forward, an improved economic situation, lower unemployment and lower energy prices will provide the basis for higher wage growth, both nominally and in real terms. In 2022, the nominal annual wage growth is expected to rise to around 3.5 per cent. Consequently, the labour cost share in manufacturing in the years ahead will be approaching the average for the past 30 years. 

Considerable uncertainty concerning exchange rate developments

Interest rates are now higher in Norway than in the euro area, which, based on the theory of uncovered interest parity, suggests that the krone is set to weaken. At the same time, the krone is at a weak level in relation to the historical relative price development between the euro area and Norway. This signifies a stronger krone. The considerable uncertainty surrounding the exchange rate developments going forward coupled with the unclear direction of the sum of the economic driving forces has led us to assume an unchanged exchange rate throughout the projection period. This means that one euro will cost around NOK 9.7. Compared with our projection in December 2018, this indicates a weaker krone. 

Inflation

The CPI and CPI-ATE growth rates are both estimated at 2.3 per cent for 2019. Higher power prices and a weaker krone have pushed up the projections for price growth since our last projection. With a somewhat more tightened labour market, it appears that wage growth, and thereby domestic cost growth, will increase. Underlying inflation is expected to increase from around 1.5 per cent in the past two years to just over 2 per cent in the years ahead.

About one percentage point higher interest rates up to the end of 2022

Norges Bank’s operational goal is for the annual growth in consumer prices to reach almost 2 per cent over time. In addition, monetary policy shall help stabilise production and employment at around the highest possible level that is consistent with price stability over time. The upturn in the Norwegian economy seems set to continue at a moderate pace and it is expected that Norges Bank will increase the key policy rate further. We have assumed four interest rate hikes of 0.25 percentage points by the end of 2022. The interest rate on credit lines is therefore expected to reach around 4 per cent in 2022.