Upturn in the Norwegian economy soon over

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

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Global economy experiencing slow decline

The outlook for the global economy has improved in recent months. The likelihood of the UK leaving the EU without a deal is now significantly less, and the deadline for the Trump administration imposing import tariffs on European cars has now passed. Our forecasts for the international economy have therefore been revised up since the last time, but the international economic downturn is still expected to continue in the years ahead.

Fiscal policy still almost cyclically neutral

Fiscal policy has been approximately cyclically neutral in recent years. Although growth in public investment and consumption is expected to be somewhat below the trend growth, the ageing population will push up spending on retirement pensions and other benefits. The combination of cyclically neutral expenditure growth and small changes in the tax level means that the budgetary impulse is expected to remain almost constant throughout the projection period. The structural non-oil public deficit will be well below 3 per cent of the value of the oil fund by 2022.

Change in pace in petroleum industry investment

The growth in petroleum investments over the past year has boosted the Norwegian economy in 2019. While investments were almost halved from the third quarter of 2013 to the first quarter of 2018, a moderate increase was seen in 2018 followed by a marked rise so far in 2019. The growth in 2019 is mainly driven by the fields Johan Sverdrup (phase 2) and Johan Castberg. Delays and a greater scope of work on some development projects have generated higher investments than previously anticipated, and most of this additional investment is expected to take place in 2020. We expect the completion and phasing out of development projects to reduce investments in 2021. For 2022, we expect new developments will once again lead to moderate investment growth.

Shift in business investment

So far this year, business investment has been characterised by strong growth. Although growth has slowed compared with the development from 2015 to 2018, growth throughout 2019 has nevertheless been significantly higher than the trend growth in the economy. However, as from 2020, the slowdown in the international economy will dampen investment growth. According to our calculations, the overall business investment from 2020 to 2022 will remain roughly unchanged from the 2019 level.

Balanced housing market

Housing investment began to rise in mid-2018 after falling in the fourth quarter of 2017 and the first half of 2018. Growth has been moderate over the past five quarters. House prices have also seen moderate growth, and the fourth-quarter growth has been around 2.5 per cent during this period. The moderate increase in house prices is set to continue in the years ahead. The mortgage regulations remained in force without any new austerity measures, but moderate income growth and higher real interest rates after tax are curbing the development in house prices. The weak development in real house prices means that housing investment is expected to virtually stagnate in the period 2020-2022 after a growth of just over 1 per cent this year. Nonetheless, the level of housing investment will be high, and the new house provision will see a marked increase throughout the projection period.

Higher consumption growth

Consumption growth has remained at around the trend growth in the Norwegian economy over the past year. In the period 2020-2022, wage income growth is expected to slow as a result of declining employment growth. Consequently, growth in real disposable income is also expected to slow since wage income constitutes a large share of this. Welfare benefits will make a positive contribution to the growth in real disposable income throughout the projection period, following the weak growth in 2018. With roughly unchanged real house prices, it seems that consumption growth will be in excess of the trend growth in mainland Norway in the years ahead.

Moderate wage growth

Wage growth has gradually picked up during the upswing in the economy. We expect wage growth to rise further in 2019, to 3.5 per cent. The krone depreciated in the third quarter of this year and energy prices are falling. This, in isolation, is improving the profitability of export-oriented businesses, both through higher revenues and lower costs. In the next few years, profitability will also be characterised by the decline in the international economy. We therefore assume that wage growth will remain at around 3.5 per cent in 2020 and 2021, and fall slightly in 2022 as a result of weaker international growth and somewhat lower inflation in Norway.

Fall in unemployment stagnates

Unemployment fell almost continuously from just over 5 per cent at the start of 2016 to approximately 3.5 per cent in mid-2019. This autumn, unemployment has remained at around 3.7 per cent, which we also expect to be the annual average for 2019. In the years ahead, lower international demand and the effects of interest rate increases over the past year will dampen the demand for labour. Lower immigration, a falling population growth and a smaller increase in the number of workers with short-term residence permits mean that the unemployment rate will nevertheless remain at approximately 3.7 per cent until 2022. From a historical perspective, this level of unemployment is on a par with what we consider to be normal capacity utilisation.

Weakest krone on record

The krone has been weak since 2016, and has weakened further in the summer and autumn of this year. Compared to when the upturn in the economy began in early 2017, the import-weighted krone exchange rate at the start of December is approximately 7 per cent weaker. We have assumed unchanged exchange rates from the current level to the end of the projection period, but there is considerable uncertainty in relation to developments in the exchange rate going forward. Our assumptions indicate that the annual import-weighted exchange rate will weaken by approximately 3.0 per cent in 2019 and 2020, and that one euro will cost in excess of NOK 10 by 2022.

Approaching target inflation

Underlying inflation measured by the 12-month CPI-ATE growth has remained stable over the past six months, and rose by 2.2 per cent in October. The effects of the krone depreciation this autumn will push up imported inflation next year, but the effects of the krone depreciation will be phased out at some point in the future. We estimate CPI-ATE growth of 2.3 per cent next year. With roughly unchanged wage growth, slightly higher productivity growth and lower energy prices, inflation measured by the CPI is set to be close to the target inflation rate in the years ahead.

Unchanged interest rates

The Norwegian economy is facing a change of pace. Over the next 12 months, the cyclical upturn that began in early 2017 is likely to come to an end. The slowdown in the international economy and the markedly lower growth in petroleum investments are contributing to the change of pace. In the years ahead, growth in the Norwegian economy is expected to be close to the trend growth, unemployment is in line with what we consider to be normal capacity utilisation and the housing market will be balanced. Nevertheless, interest rates will remain at a historically low level. This is due to the likelihood of the very low international interest rates continuing. Overall, production development in Norway is expected to be consistent with normal capacity utilisation throughout the period up to 2022.