Since the summer, increased vaccination uptake and the reopening of society have given a boost to the Norwegian economy. In September, the activity level was around 2 per cent higher than before the pandemic.

‘There has been enormous growth in the economy recently. The recovery is now almost complete, and we are approaching a normal level of activity,’ says Statistics Norway researcher Thomas von Brasch.

The economic growth is expected to continue going forward, but at a significantly slower pace than in recent months. The forecast for the next few years is that the economy will be cyclically neutral.

‘We are facing a change of pace now. Unemployment is at the pre-pandemic level, and many businesses are once again operating at almost full capacity,’ says von Brasch.

However, the latest wave of infections and the outbreak of the Omicron variant have led to a new round of measures and restrictions.

‘In the forecasts, we assume that the negative effect of the new measures on the economy will be limited and temporary. This is of course very uncertain right now, as we don’t know how the situation will develop,’ says von Brasch.

‘Omicron is also a reminder that new mutations can suddenly emerge and plunge us back into a more serious situation. It is still more likely that things will get worse instead of better than what is shown in our forecasts,’ says von Brasch.

In the full report in Box 2.1, SSB has illustrated how the Norwegian economy could potentially develop if the authorities decide to impose another lockdown.

Major pressure in the labour market

In mid-2020, the Labour Force Survey (LFS) showed a rise in unemployment to 5.2 per cent, while a marked fall has been seen in the summer and autumn of 2021. On average for the period August to October, unemployment was 3.6 per cent, which is lower than the average from 2000 to 2019.

The combination of a sharp increase in demand from the service industries – which have been hit hard by the infection control measures – and the scarcity of immigrant workers in Norway has created job opportunities for residents. A record number of vacancies have been advertised, and the labour market has seen an influx of newcomers.

‘Going forward, we expect the improvement in the labour market to continue, but at a significantly slower pace than in recent months. In 2022, we estimate unemployment to be 3.7 per cent,’ says von Brasch.

‘Labour immigration is also expected to increase gradually, which will ease the pressure in the labour market,’ he adds.

Unemployment in 2023 and 2024 is forecast to be around 3.9 per cent.

Large fluctuations in inflation

The 12-month growth in the consumer price index (CPI) was 3.5 per cent in October, and the annual growth this year is estimated to be 3.4 per cent. Rising energy prices will push up CPI growth by just over 2 percentage points this year, while lower taxes will reduce growth by half a percentage point.

‘We expect the high energy prices to be temporary. Our forecasts assume that inflation will gradually decrease, from 3.4 per cent in 2021 to 1.5 per cent in 2023,’ says von Brasch.

Underlying inflation, which has been low this past year as a result of the stronger krone, is expected to rise to around 2.5 per cent next year, falling to around 2 per cent in 2023 and 2024, at roughly the target inflation rate.

Decline in house price growth

House price growth has been declining over the past year, but remains high. Prices in the 3rd quarter of this year were a good 10 per cent higher than in the 3rd quarter last year, but price growth from the 2nd to the 3rd quarter of this year was a more modest 4.6 per cent, calculated as an annual rate.

Housing investment has increased since bottoming out in the 3rd quarter of 2020, but fell slightly in the 3rd quarter of this year. The high house prices have made house-building more profitable, but the increase in construction costs has reduced this profitability.

‘We expect housing investments to pick up going forward. However, the higher construction costs have led to a downward adjustment in growth from our previous report,’ says von Brasch.

‘Higher interest rates and low population growth will mitigate rising house prices. According to our calculations, house price growth will slow to around 1.5 per cent by 2024,’ says von Brasch.

Two factors threatening international recovery

The international recovery is currently strong, but is threatened by two factors. First, new waves of infection may make it necessary to implement wide-ranging infection control measures. Second, high and rising inflation in important industrialised nations may push up interest rates. With booster vaccinations and the prospect of a rapid roll-out of new and improved vaccine programmes, the expectation is that the global economy will be able to cope with both old and new waves of infection without any major ramifications for the economy.

The forecasts assume that the latest wave of infections and any new waves as a result of the Omicron variant will have a limited impact on Norway’s trading partners.

‘We also estimate that the rising inflation will turn out to be relatively temporary,’ says researcher Roger Hammersland.

‘It will not therefore be necessary for the central banks to tighten monetary policy significantly. We expect the recovery to continue going forward, albeit at a somewhat more moderate pace than has been the case in the last six months,’ says Hammersland.