Upturn to start in 2015

Increased demand on the mainland and internationally is behind an expected turnabout to a modest upturn from 2015. Mortgage rates in private banks are not expected to increase until 2016.

Weak growth in 2013, but with conflicting impulses

Household consumption and house prices in the secondary market in the last six months saw a weak development. This has more than offset the expansionary impulses resulting from the weaker krone exchange rate over the last six months and a marked increase in petroleum investments. Mainland Norway’s GDP has thus shown a weaker development so far in 2013 than previously projected. On an annual basis, growth is expected to be 1.8 per cent; well below the trend growth that is now estimated at around 2.5 per cent.

Weak growth, but international recovery in sight…

Economic growth among Norway's trading partners is still very low, but there are large disparities between countries. In the USA and UK, growth has picked up markedly in recent months. The beginnings of a recovery have been seen in the economy in the Euro area over the last two quarters, after six consecutive quarters of decline. The key policy interest rates in the OECD area have been close to zero for some time. In some peripheral Euro countries, however, the combination of weak public finances and problems in the banks means that businesses and households are nevertheless facing high market interest rates.

The US economy is healthier than the economy in Europe, and there are also signs of a quicker recovery. A turnaround to a moderate upturn is expected in 2015 among Norway's trading partners as a whole. Nevertheless, the continued high unemployment means that low interest rates are likely to continue in the OECD countries throughout the projection period, despite the anticipated increase in interest levels from 2015.

...contributing to turnaround in household demand

The increased growth among our trading partners will gradually stimulate the export activity, particularly in 2015 and 2016. In addition, the improvement internationally will gradually help to reduce some of the uncertainty associated with the development in the Norwegian economy and thus curb household demand and business investment to a lesser extent. The fall in house prices, as seen this autumn, is likely to continue, after adjusting for seasonal variations, but is expected to end next year. In 2015 and 2016, an increase is expected in the real price of housing. Growth in household income will fall slightly in 2013 compared to 2012, but will increase slightly going forward, and particularly in 2015 and 2016. This will contribute to marked growth in consumption.

Mortgage rates at a standstill

Norwegian money market rates fell markedly during 2012 and have fallen slightly further this year. Despite this, the lending rates have risen somewhat, partly as a result of stricter capital adequacy requirements by financial institutions. Money market rates are expected to remain more or less unchanged over the next 18 months, before starting to rise again in summer 2015. At the end of 2016, the three-month money market rate is expected to increase by just over one percentage point from the level in autumn 2013. High revenues in banks are enabling the banks to meet the requirements for equity by a good margin. Thus, we believe the premium on money market interest rates will be reduced. Mortgage rates in private financial institutions may therefore remain virtually unchanged in 2015, before starting to increase. Typical mortgage rates at the end of 2016 are projected to be 4.3 per cent, which is only a modest increase from the current level.

Moderate expansionary fiscal policy

It is assumed that the fiscal policy will be slightly expansionary going forward. The approved national budget has been used as a basis for 2014. The structural non-oil budget deficit, which next year is estimated at 2.9 per cent of the pension fund, is assumed to be less than three per cent throughout the projection period. Public consumption is expected to increase roughly on a par with mainland Norway’s GDP in the next two years, and slightly less in 2016. Social benefits to households, however, will see marked real growth, while growth in public investment is expected to be high. Tax concessions of around NOK 8 billion have been approved for 2014, and further concessions are expected in personal tax, equivalent to around NOK 6 billion each year for the next few years.

Fundamental factors indicate higher house prices

High income growth and a growing population, combined with low interest rates and a recovery following the downturn due to the financial crisis, have contributed to large hikes in house prices over the past four years. Apart from the fact that the adjustment after the financial crisis has now been made, the development in these fundamental factors in housing demand has not changed much in recent times. Nevertheless, house prices throughout this autumn have shown a clear decline. Stricter requirements for equity are likely to have led to a more restrictive lending practice by banks and, combined with the prospect of a marked increase in interest rates in some state banks, contributed to the development. Households’ growing pessimism, however, also plays a key role. This is expected to be further strengthened before the more fundamental factors once again dominate. Increased income growth and low interest rates will help housing prices start to rise again from year-end 2014/2015. Towards the end of the projection period, house price increases will also help stimulate housebuilding and underpin the upturn in the economy.

Higher consumption growth from 2015

Despite low interest rates and strong growth in household wealth, household saving has increased in recent years. Now that confidence about the future has been reduced, house prices are falling and income growth has slowed, moderate growth is expected in demand. Notwithstanding, the relatively good development in households’ economy is gradually expected to continue. Saving behaviour will gradually normalise, despite the savings rate also increasing next year, followed by a very moderate fall. Projections show that growth in household consumption in 2014 on an annualised basis will be about the same as this year, gradually picking up to a significantly higher level in 2015 and 2016.

Investments in petroleum sector nearing a peak

Demand from the petroleum sector has given strong growth impulses over the last three years. Going forward, a much more modest development is expected. Investments in mainland industries are, however, expected to pick up somewhat.

Growing labour market from 2015

Despite the weak output growth, employment continued to show a significant increase. Growth is expected to fall somewhat going forward, however, and is not expected to keep pace with the increase in the labour force. The trend of higher unemployment during the last 18 months is therefore set to continue. Following the increase in output growth in 2015, employment will pick up slightly, leading to a slight fall in unemployment towards the end of the projection period.

Reduced real wage growth and moderate inflation

Going forward, the development in inflation will be marked by the recent sharp weakening of the krone, and will push prices up. How far it pushes will depend on the ongoing progress of the krone. In the short term, the krone is expected to be markedly strengthened, thereby limiting the increase in inflation. Growth in the Consumer Price Index (CPI) excluding energy goods and adjusted for tax changes (CPI-ATE) is expected to increase by 0.5 percentage points from 2013 to 2.1 per cent in 2014. Energy prices are expected to pull the CPI down slightly more than higher taxes pull it up, leading to CPI growth in 2014 of 2.0 per cent. On an annual basis, inflation is expected thereafter to remain at approximately this level for the next few years.

Labour market conditions indicate slightly lower wage growth going forward. Projections show an estimated real wage growth below 2.0 per cent this year. In the years ahead, real wage growth will fall slightly further, to around 1.5 per cent.