Economic growth has remained moderate since mid-2022. Repeated interest rate hikes, high inflation and weak demand from abroad have curbed economic activity. Meanwhile, unemployment has risen from a low level and is currently 4 per cent.
‘The Norwegian economy is now on the rise. Household consumption, which accounts for about half of mainland GDP, has started to pick up after a weak 2023’, says Statistics Norway’s head of research, Thomas von Brasch.
After a period of high inflation, higher interest rates and a decline in real income, households have already seen increased purchasing power this year. This growth in real income is expected to continue in the years ahead.
‘Strong profitability in the wage-leading tradable sector is keeping wage growth steady. In addition, lower price growth and interest rate cuts will improve households’ financial situation’, says Thomas von Brasch.
Price growth nears target inflation
Since peaking at 7.5 per cent in October 2022, inflation has more than halved, with the 12-month growth at 2.4 per cent in November. In recent months, price developments in imported goods have been a major factor in pulling down overall price growth.
‘The contribution of clear nominal wage growth means that inflation will likely remain just above the 2 per cent target in the coming years’, says Thomas von Brasch.
According to forecasts, price growth, as measured by the consumer price index (CPI), will fall from 5.5 per cent in 2023 to 3.2 per cent in 2024, and further to 2.4 per cent in 2027.
Five interest rate cuts next year
Since December 2023, the key policy rate has remained at 4.5 per cent, the highest since December 2008. At the latest monetary policy meetings, Norges Bank indicated that this level is likely to be maintained for the remainder of the year, with the first interest rate cut not expected until next year.
‘The drop in inflation and weaker growth outlook suggest slightly lower interest rates. We expect the first cut in the key policy rate early next year, followed by five cuts of 0.25 percentage points throughout 2025’, says Thomas von Brasch.
According to forecasts, the money market interest rate will fall from its current level of 4.7 per cent to around 3.5 per cent in 2026 and 2027.
Mainland economy to pick up in 2025
New lending regulations will be introduced at the start of the year, with one of the changes being a reduction in the required mortgage deposit from 15 to 10 per cent. Following a decline in housing construction, similar to the housing crisis of the 1990s, lower interest rates and increased purchasing power are expected to eventually increase housing construction in the future.
‘A clear boost in household consumption, coupled with an increase in housing construction, will take the mainland economy in 2025 to a more normal level compared to the past few years’, says Thomas von Brasch.
The value of the sovereign wealth fund surpassed NOK 20 billion in December, providing fiscal space that will drive substantial growth in public consumption and investments in the years ahead. However, a weaker growth outlook internationally will curb activity in the Norwegian economy.
Weaker growth internationally
The economic development remains strong in both the United States and China, but growth in China has been weaker than expected. Growth in the euro area is very low, despite the recent modest increase.
‘The economic development among most of our trading partners is expected to be slightly below trend growth in the coming years’, says Statistics Norway researcher Roger Hammersland.
GDP growth among our trading partners, which has remained just below 2 per cent annually since 2005, is expected to be around 1.5 per cent in the next few years, before rising to roughly 2 per cent in 2027.
The uncertainty in the forecasts is particularly related to geopolitical tensions and trade policy. Box 2.1 in the report illustrates various scenarios for US tariff policy and how they could impact on the Norwegian and international economies.
