The Norwegian economy is experiencing strong activity levels and low unemployment. However, purchasing power has been reduced for many as a result of continuously rising prices. The period with high inflation is now coming to an end.

‘The factors that were pushing up inflation have now been reversed. Electricity prices have fallen, the depreciation of the Norwegian krone seems to have halted, and international inflation is on the way down. This suggests that interest rates are set to peak soon’, says Statistics Norway researcher Thomas von Brasch.

The Norwegian krone has strengthened since June when Statistics Norway presented the previous forecast.

‘We see no signs that the exchange rate will weaken further in the near future. This suggests that interest rates will peak this year and will remain high for most of 2024’, says Thomas von Brasch.

The unusually high inflation is linked to international factors: the exchange rate of the krone, together with electricity prices, are two of the key drivers behind the unusual price increases.

Over the hump

The forecasts show that inflation is on the way down. The annual growth in underlying inflation is expected to fall to around 3 per cent by the end of 2024.

‘Once the factors that have contributed to rising inflation normalise, inflation will gradually ease. Falling energy prices in particular are now helping to pull down inflation. Without further weakening of the krone, and with relatively rapidly falling international price growth and lower energy prices also for businesses, the underlying inflation will gradually come down’, says Thomas von Brasch.

Statistics Norway’s new forecasts estimate that the growth in CPI and CPI-ATE will be 5.8 per cent and 6.3 percent, respectively, this year.

Record high interest rate burden

So far this year, the key policy rate has been raised by 1.25 percentage points. The current key policy rate is 4.0 per cent. In less than two years, the rate has been raised from 0 to 4 per cent.

Statistics Norway assumes that the interest rate will be increased further to 4.25 per cent in September. The interest burden on households, measured as interest expenses after tax as a percentage of disposable income, is estimated to be 8–9.5 per cent in the forecast period, which is up to the end of 2026. By comparison, the average annual interest burden was 5.5 per cent in the ten-year period 2010-2019.

‘Even though the forecasts indicate that interest rates are set to peak soon, we are not completely over the hump. The household interest burden is expected to increase. Not since the early 1990s has the level been as high as that expected next year’, says Thomas von Brasch.

Towards a more normal development

Last year was marked by high inflation, interest rate hikes and the post-pandemic recovery of economic activity. Mainland GDP has remained close to what we consider a trend level for just over a year, but growth has been slowing down recently. Meanwhile, the labour market has been relatively tight. Statistics Norway expects that the growth in mainland GDP next year will be close to trend growth at around 1.7 per cent.

‘Activity is high in the Norwegian economy and unemployment is low. But, in recent years, many people’s wages have been eaten up by continuously rising prices’, says Thomas von Brasch.

The weak krone has prolonged high inflation, but the forecasts indicate that inflation is on the way down. While EUR 1 cost NOK 10.50 at the end of 2022, the price had risen to NOK 12.00 by the end of May this year. Since then, the deprecation of the krone has been partly reversed, but it is expected to decline 8 per cent on an annual basis in 2023.

The increasingly weak krone is part of the reason why it will take some time for inflation to come down to the target rate. Inflation measured by the Consumer Price Index (CPI) has declined since its peak in October last year, but the annual growth in the CPI adjusted for tax changes and excluding energy products (CPI-ATE), often referred to as the underlying inflation rate, is still high.

Slight decrease in real wages this year

The overall annual wage growth will be 5.5 per cent this year. With an expected inflation rate of around 5.8 per cent, this entails a slight decrease in real wages.

‘If this estimate holds true, there will have been no real wage growth in Norway since 2015. Looking ahead to 2026, we expect inflation to decrease and real wage growth to climb to just under 2 per cent by 2026’, says Thomas von Brasch.

High and rising interest rates, combined with weak international growth prospects and lower demand in many industries will dampen the pressure in the labour market, especially in the construction sector.

Falling consumption and higher unemployment

According to Statistics Norway’s forecasts, both consumption and house prices will fall slightly in 2023.

‘The Norwegian economy is currently facing several disruptions. The strong depreciation of the krone has helped keep unemployment low, and households’ have lost their purchasing power due to high prices and higher interest rates’, says Thomas von Brasch.

Unemployment will increase slightly in the years ahead, reaching around 4 per cent in 2025.

Fall in house prices

House prices are likely to continue falling throughout the autumn. According to the monthly house price index from Real Estate Norway (Eiendom Norge), house prices fell 1.2 per cent from April to August.

‘Lower real disposable income due to high inflation and increased interest rates will also pull house prices down slightly during the rest of the year’, says Thomas von Brasch.

Statistics Norway’s forecast indicates that consumption will decline by just under 1 per cent in 2023.

‘The high interest burden will have a clear negative impact on household consumption both this year and next year’, says Thomas von Brasch.

Weaker international development

Statistics Norway expects a weaker international economic outlook compared to the last forecast.

‘The developments in the property sector in China are worrying, but the severity of the repercussions depends on the countermeasures that are implemented’, says Statistics Norway researcher Roger Hammersland.

The weak development in China has led to weak domestic demand in several Asian countries. As a result, imports have fallen significantly, not only in China, but also in countries such as Japan, India and South Korea.

‘A weakened Chinese economy, coupled with the war in Ukraine, high inflation and rising interest rates, could lead much of Europe into a recession’, says Roger Hammersland.