3% interest peak in the New Year

After the end of lockdown in late January/early February this year, activity in the Norwegian economy picked up sharply in March. Since then, the upswing has continued at a more moderate pace, and in September, mainland GDP was 4.4 per cent higher than in February 2020.

Statistics Norway’s latest forecasts estimate significantly lower growth in the period ahead compared to developments so far this year.

‘Activity in the economy is at a level we consider normal, but the Norwegian economy is not in a normal situation’, says Statistics Norway researcher Thomas von Brasch.

‘The State is generating record high revenues from oil and gas, inflation is well above the target inflation rate and there is a tight labour market . The latter tends to coincide with upswings in the economy, but that is not the case now’, says von Brasch.

He notes that despite record low unemployment, productivity is also low. They are each following their own trajectory. In addition, high inflation and rising interest rates are dampening the effect on the economy.

‘The picture is complex. We expect a moderate downturn in the economy in the short term. The level of activity is nevertheless cyclically neutral, and will remain so’, says Thomas von Brasch.

According to forecasts, the key policy rate will peak at 3 per cent at the start of 2023. This equates to an overall rise of 0.50 percentage points from the current level of 2.5 per cent. The calculations show that interest rates will be lowered again towards the end of 2023.

‘As we approach 2024, we estimate that unemployment will have increased somewhat, inflation will have declined and productivity will have picked up. In such a scenario, Norges Bank will most likely reduce the interest rate, probably down to 2 per cent in 2024.’

‘The level of activity will still be cyclically neutral in 2024-2025, but various economic factors will return to normal’, says Thomas von Brasch.

According to the forecasts, growth in mainland GDP will be 3.8 per cent in 2022. As a result of the poor growth outlook for international trade, the calculated trend has been adjusted downwards slightly since the previous report. Growth in 2023 and 2024 is estimated at 1.2 and 1.6 per cent, respectively.

Fall in real wages this year and next

Inflation, as measured in the Consumer Price Index (CPI), is expected to be 5.8 per cent in 2022. Next year, price growth is expected to be 4.9 per cent, but the calculations show a sharp fall towards the end of the year.

‘The primary uncertainty factor associated with next year’s consumer price trends is which direction energy prices will go’, says Thomas von Brasch.

Wage growth looks set to be 3.9 per cent this year. With inflation at 5.8 per cent, this means employees are facing an overall real wage decrease of 1.9 per cent. A small real wage decrease of 0.2 per cent is also estimated for next year.

‘Many will probably want to be compensated for the decline in purchasing power, but it is the profitability in the wage-leading tradable sector that determines the framework for the size of next year’s wage settlement. Although part of the tradable sector is struggling with high input costs, high producer prices, particularly within the consumer goods industry, will help ensure good overall profitability nonetheless’, says Thomas von Brasch.

As inflation gradually falls, real wage growth is expected to pick up, to around 2 per cent annually in 2024 and 2025.

Unemployment just over 4 per cent in 2025

Unemployment, as measured by the Labour Force Survey (LFS), was close to 3.4 per cent in August, September and October. Unemployment has thus remained low since April this year, after falling from a peak in August 2020 of 5.5 per cent.

‘Unemployment has not been this low since the boom before the financial crisis in 2008. Many have also returned to the labour market’, says Thomas von Brasch.

Labour force participation was 72.6 per cent in the period August–October, which is more than 1 percentage point higher than in 2019. In addition, the number of layoffs has fallen to a low level, and commuters from other countries have largely returned since the pandemic.

‘With weaker growth prospects internationally, and lower demand in many industries, the pressure in the labour market will eventually ease. We estimate that unemployment will rise to 3.7 per cent in 2023, and then gradually increase in the years ahead to just over 4 per cent in 2025’, says Thomas von Brasch.

8% fall in house prices

Following the strong house price growth in 2021 and the first half of 2022, a clear change of direction in the housing market was seen in the autumn.

‘House prices have started to fall due to the higher cost of living and higher interest rates’, says Thomas von Brasch.

According to seasonally adjusted figures from Real Estate Norway (Eiendom Norge), house prices were almost 3 per cent lower in November than in August. This is the largest drop since 2008.

According to our calculations, house prices will continue to fall throughout the rest of the year and much of next year. Nominally, a drop of 8 per cent is expected from the third quarter of 2022 to the third quarter of 2023.

‘Since the start of the pandemic, house prices have risen by around 20 per cent. Although they are expected to see a relatively strong fall in the period ahead, house price levels will remain much higher than pre-pandemic levels’, says Thomas von Brasch.

The weak development in house prices and the high cost of building materials, such as metals, make housing construction less profitable. New home sales have also fallen since the summer. Consequently, housing investment is expected to decline by around 6 per cent from 2021 to 2023.

Global cyclical downturn

For much of this year, the economies of Western industrialised countries have been characterised by steadily stronger price growth. The combined effect of rising prices and declining demand, production and investment has had a negative impact on economic growth among Norway’s trading partners.

‘We have assumed a higher and more enduring course of inflation in the eurozone than in our previous forecast. An energy crisis in addition could also now take Europe into a recession’, says Statistics Norway researcher Roger Hammersland.

Combined with the prospect of a protracted war in Ukraine, continued pressure on commodity prices and supply chains, as well as high inflation, the economic activity of Norway’s trading partners looks set to be weak until 2024. It is assumed that they will enter an economic downturn at the turn of the year.