‘Over the past year, the COVID-19 pandemic has completely dominated developments in the Norwegian economy. It will continue to restrict activity in the months ahead, but the economy now seems to have reached a turning point,’ says Statistics Norway researcher Thomas von Brasch.
After the first lockdown in March last year, mainland Norway’s GDP fell by more than 10 per cent between February and April. Although activity picked up markedly in the third quarter, the latest waves of COVID-19 infection, both nationally and internationally, reduced activity development in the winter through to the spring. Economic activity in Norway was around 3 per cent lower in March this year than in February 2020.
At the end of May, the government moved to the second phase of the reopening plan, and according to the Norwegian Institute of Public Health, the entire adult population will have been offered their first vaccine dose by early August.
‘The infection trend is now falling, more and more people are being vaccinated and society is gradually being reopened. The stage is therefore set for the economy to pick up sharply in the time ahead. The recovery will be particularly strong in the labour-intensive industries, which have been hit hard by the infection control measures,’ says Thomas von Brasch.
In the forecasts, it is estimated that mainland Norway’s GDP will increase by 3.1 per cent this year. This upswing is somewhat weaker than previously estimated and is related to a weak development in activity at the start of the year, coupled with the shutdown or curtailment of large parts of the Norwegian economy so far in 2021.
‘By the end of 2021, we expect the economy to be back at the same level as before the outbreak of COVID-19 in February 2020. The aftermath of the international economic downturn and national infection control measures will nevertheless continue to impact on the economy for a long time to come. Not until 2023 do we estimate that unemployment will be back to what we consider a more normal level,’ says Thomas von Brasch.
The service industries that have been hardest hit by the infection control measures, such as the hospitality sector and tourism, employ about 20 per cent of the labour force in Norway. Once society has fully reopened and activity has picked up in these industries, unemployment will initially see a relatively quick fall. According to the estimates, unemployment will be 4.6 per cent in 2021, falling to 3.7 per cent in 2024.
‘As the economy accelerates at a rapid pace going forward, the abnormally low zero interest rate will quickly become untenable. We believe that the key policy interest rate will most likely be raised from the current 0 per cent to 0.25 per cent in September. It will then be increased gradually up to 1.75 per cent in 2024,’ says Thomas von Brasch.
Over the past year, there has been a sharp rise in house prices. This may indicate that the low mortgage rates have largely dominated other factors, such as moderate income growth and weak population growth. In addition, there has been a record high savings rate in the same period. According to forecasts, house prices will level off in the coming months, which means annual average growth of between 9 and 10 per cent in 2021.
‘There are now prospects of being able to start spending money on lots of other things apart from housing again. Coupled with higher interest rates and an increase in the supply of housing, this will help to curb inflation. However, there is still great uncertainty about house price developments,’ says Thomas von Brasch.
International upswing
‘Death, infection and hospitalisation rates are now seeing a sharp fall in countries where large parts of the population have been vaccinated. This has led to great optimism with regard to possibilities for kick-starting economies and the future international economic cycle,’ says researcher Roger Hammersland.
Consequently, Norway's trading partners are assumed to be set for a very strong economic upswing.
Below you will find a summary of the main components in the forecasts for the Norwegian and international economy. Note that there is still considerable uncertainty associated with the future development of the economy. The forecasts are based on the vaccination programme being able to keep infection rates at bay, including mutations of the virus. If this assumption is not realised, the economic downturn will last longer than reflected in current estimates.
In 2021, NOK 94 billion has been allocated or proposed for COVID-19-related measures. According to the Revised National Budget (RNB), these measures and the after-effects of the measures from last year will boost mainland Norway’s GDP this year by 1.4 per cent. According to the fiscal rule, petroleum revenue spending over time should amount to 3 per cent of the oil fund, but a large emphasis must also be placed on smoothing out fluctuations in the economy to ensure good capacity utilisation and low unemployment, as was seen in 2020 and is planned for 2021. The structural non-oil public deficit for 2021 is estimated at NOK 402.6 billion in the RNB. This corresponds to around 3.7 per cent of the petroleum fund’s market value at the start of the year. During 2022 and 2023, we expect the budget balance to be reduced to about 3 per cent of the fund.
Total consumption for households fell as much as 6.9 per cent as an annual average last year. This is the greatest fall in consumption in the time series, which dates back to 1970. New, strict regional and national infection control measures meant that consumption of both goods and services fell in the first quarter of this year. It was mainly the consumption of leisure services, hotel and restaurant services as well as passenger transport that pushed down service consumption. We assume that total consumption, as a result of the vaccination of the population, reopening of the economy and pent-up demand in households, will rise to the pre-pandemic level towards the end of 2021. With prospects for growth in real disposable income, but weak development in real house prices and thus also in real wealth, consumption is expected to grow by just over 3 per cent as an annual average in 2023 and 2024.
According to Real Estate Norway’s house price statistics, house prices for Norway as a whole rose by 12 per cent between April 2020 and April 2021. This high growth may indicate that the low mortgage rates have largely dominated other factors, such as moderate income growth and weak population growth. A record high savings rate and the associated liquidity has probably also pushed up house price growth during the pandemic. We estimate that house prices will level off in the coming months, which implies growth of between 9 and 10 per cent as an annual average in 2021. There is great uncertainty about house price growth going forward. A moderate increase in mortgage rates in the near future is likely to dampen house price growth, but house prices will nevertheless continue to rise throughout the forecast period. The high house prices have made house-building more profitable, and our calculations show that housing investment will rise markedly next year. Adjusted for the growth in the consumer price index, we estimate slightly positive real growth in house prices going forward.
In 2020, petroleum investments fell by a total of 4.1 per cent. Based on the oil companies’ investment plans, it appears that the total investment activity will fall slightly this year and somewhat more next year. In line with market expectations, we assume that the oil price will gradually fall from the current level of around USD 70 to around USD 60 a barrel towards the end of 2024. The tax measures package approved by the Storting in June last year and the prospect of a relatively high oil price are likely to lead to increased activity in 2023 and 2024. Petroleum investments are expected to rise by 10 and 4 per cent in these years respectively. In 2024, the investment level will be roughly in line with the pre-pandemic level, but still more than 20 per cent below the investment peak in 2013. Calculated as a share of mainland Norway’s GDP, petroleum investments are estimated to be just under 6 per cent in 2024 compared with 9 per cent in 2013.
Although the development has been weak over the past year, there are signs that investment will gradually recover after the marked fall a year ago. Both manufacturing and retail are reporting higher investment next year. The other service industries and power supply companies are reporting reduced or unchanged investments. The willingness of businesses to invest has been marked by the major uncertainty about the economic outlook, but there is now less uncertainty than a year ago. Overall, we estimate that business investment will increase modestly this year and that growth will then pick up to around 2 per cent annually until 2024.
After a sharp depreciation in March 2020, the krone has strengthened over the past year. Measured by the import-weighted krone exchange rate, the value of the krone at the start of June 2021 is about the same as at the start of 2020. At the end of May, one Euro cost NOK 10.22, while the price for one USD was NOK 8.38. The forecasts use these same exchange rates, which are about the same level as in our previous forecasts from March. On an annual basis, this means a 5.5 per cent appreciation of the krone from 2020 to this year, which follows a depreciation of almost 7 per cent the year before.
In 2020, underlying inflation (CPI-ATE) was 3.0 per cent, but the strengthening of the krone has reduced the 12-month growth in the CPI-ATE to 2.0 per cent in April. As an annual average, we expect the CPI-ATE to grow by 2.1 per cent in 2021. However, growth in the CPI, which includes energy products and taxes, is expected to be 3.1 per cent this year. While tax changes look set to reduce CPI growth by around 0.5 percentage points, rising energy prices are likely to push up inflation by around 1.5 percentage points. For the years 2022-2024, growth in the CPI-ATE is estimated to be close to Norges Bank’s inflation target of 2 per cent. Based on our assumptions for energy prices and taxes, the CPI growth will roughly follow the growth in the CPI-ATE in the coming years.
In the face of the COVID-19 crisis, Norges Bank cut its key policy interest rate last year from 1.5 to 0 per cent over the course of two months. The zero interest rate reflects an economy in crisis. With the reopening of Norway and the expected normalisation of economic activity, it is likely that interest rates will approach more normal levels in the years ahead. The first interest rate hike will probably come in the second half of this year. Thereafter, interest rates will be increased gradually, and by the end of 2024, the key policy interest rate is expected to be 1.75 per cent, close to what Norges Bank considers to be a normal interest rate level.
The negotiations on this year’s wage settlement were concluded on 11 April after going to extra time in mediation. In these negotiations, the Confederation of Norwegian Enterprise (NHO) and the Norwegian Confederation of Trade Unions (LO) agreed an annual wage growth for industries represented by NHO of 2.7 per cent in 2021. Figures for average agreed monthly wages for the first quarter of 2021 show a growth of 2.9 per cent compared with the same quarter last year. Wage growth in the private sector and public enterprises was 3.8 per cent. Although the figures for central and local government do not show clear signs of a higher wage growth, we believe that developments in the private sector indicate that wage growth will pick up somewhat this year. Our estimate for annual wage growth in 2021 is therefore adjusted to 3.1 per cent, up from 2.6 per cent in the previous economic report. With about the same level of inflation, real wages will remain unchanged.
In April this year, registered unemployment was 4.0 per cent. Since 1948, only in the period 1990–1996 and in 2020 has the annual registered unemployment rate been above 4 per cent. We expect the situation in the labour market to improve when economic activity picks up after the summer this year, particularly in the labour-intensive service industries, which experienced a sharp decline last year. According to our calculations, unemployment as measured in the Labour Force Survey will be 4.6 per cent in 2021, and will then fall to just under 4 per cent in 2024. In comparison, average unemployment in the 2000s has so far been 3.7 per cent. The employment rate among the economically active population (aged 15–74) is expected to increase from the current level of around 67.2 per cent to just over 68.5 per cent in 2024.
