The economy is improving, but the crisis is not over

Throughout the spring and summer, lower infection rates, increased vaccination rates and the easing of national restrictions have led to an increase in economic activity. The Delta variant of COVID-19 has however pushed up infection rates both in Norway and abroad recently, but the growing vaccinated population means that far fewer of those infected are hospitalised. Continued economic growth is therefore expected.

‘We assume that the reopening of society will continue going forward. In line with this, we expect economic growth to pick up considerably in 2022, particularly in many of the industries that have been hardest hit by the infection control measures,’ says Statistics Norway researcher Thomas von Brasch.

In June, mainland GDP was back at about the same level as in February 2020, i.e. before the pandemic hit Norway. Nevertheless, activity is around 2.5 per cent lower than what Statistics Norway considers to be a trend level for the economy.

‘It has to be said – that is a lot. We have to go all the way back to the crisis following the dot-com bubble in the early 2000s and the banking crisis of the 1990s to find something similar. The COVID-19 pandemic is not over yet,’ says Thomas von Brasch.

The ramifications of the international recession and national infection control measures will impact on the Norwegian economy for some time to come. Not until 2023 will unemployment return to what is considered a more normal level, according to Statistics Norway’s forecasts.

Greater probability of a negative development than a positive one

The Delta variant is on the rise, both in Norway and abroad, and data from Israel suggest that immunity following the Pfizer vaccine will decline somewhat faster than originally thought. New mutations of the virus may also occur.

‘The pandemic situation is still precarious. It is more likely to go worse than go better than forecasts show,’ says Thomas von Brasch.

At the end of August, the Norwegian Directorate of Health declared that Norway is experiencing its fourth wave of infections, but hospital admissions are lower than previous waves due to the high vaccination rate. The Norwegian Institute of Public Health therefore considers it unlikely that intensive care capacity will be saturated in the immediate future. At the start of September, the Government postponed stage 4 of the reopening in order to limit the spread of infection and keep the disease burden low until 90 per cent of the adult population has been fully vaccinated. The authorities’ ambition is now to achieve this vaccination rate within 4–6 weeks.

‘Our forecasts are based on this scenario. If these conditions do not come to fruition, further economic recovery will take longer than forecast in our estimates,’ says Thomas von Brasch.

High growth in house prices over the past year

Over the past year, the record low mortgage rates and enforced savings appear to have dominated other factors, such as moderate income growth and weak population growth. In the second quarter of 2021, house prices were more than 12 per cent higher than in the corresponding quarter last year. In recent months, however, there have been signs that house price growth is slowing.

‘We therefore estimate that house prices will maintain the current high level in the coming months, which indicates annual average growth of up to 10 per cent in 2021. A moderate increase in mortgage rates in the short term is likely to curb house price growth in the long term,’ says Thomas von Brasch.

The high house prices have made house-building more profitable. Housing investment has therefore increased and calculations show that it will continue to rise next year. This will help curb house price growth in the years ahead. Adjusted for the growth in the consumer price index (CPI), it is likely that real house prices will remain largely unchanged up to 2024.

More job seekers in the labour market

‘The Labour Force Survey (LFS) showed a surprisingly marked increase in both employment and the labour force in the second quarter of 2021. It is younger people in particular who are entering the labour market now,’ says Thomas von Brasch.

The combination of restrictions on travelling to Norway, which dampen competition from foreign workers, and a higher demand for labour in a number of service industries, such as hospitality, may therefore lead to even more young people finding work in the autumn, according to the Statistics Norway researcher.

Nevertheless, unemployment is still high compared to what is considered normal. Before the economy was hit by the pandemic, unemployment was around 3.7 per cent. According to monthly seasonally and break-adjusted figures from the LFS, unemployment was 4.9 per cent on average for April, May and June this year. The calculations show that annual average unemployment will be 4.7 per cent in 2021, falling to around 4.2 per cent in 2023. These estimates are not break-adjusted. Adjusting for the assumed breaks, unemployment in 2023 will be in line with the average so far in the 2000s.

Prospects of higher underlying inflation

Underlying inflation, measured by the 12-month growth in the CPI, adjusted for tax changes and excluding energy products (CPI-ATE), rose by 1.1 per cent in July.

‘Higher import prices and labour costs will pull up underlying inflation going forward, and underlying price growth is likely to remain at around 2.0 per cent until 2024. For the current year, overall growth in the consumer price index is expected to be 3.3 per cent,’ says Thomas von Brasch.

Rising energy prices will pull growth in the CPI up by 1.9 percentage points this year, while reduced taxes will pull growth down by 0.5 percentage points.

Towards normalisation of interest rates

Norges Bank responded to the COVID-19 pandemic with interest rate cuts, and the key policy rate has been 0 per cent for just over a year.

‘The zero interest rate reflects an economy in crisis. As economic activity increases and society continues to reopen, interest rates are likely to be raised from the current abnormally low level,’ says Thomas von Brasch.

As in the previous forecast, the first interest rate jump is expected to be in September. Next year, there may be a further three interest rate increases, and rates are likely to continue increasing in 2023 and 2024. With this interest rate scenario, it will nevertheless take two years before the key policy rate returns to the pre-lockdown level of 1.5 per cent in March 2020.

International upswing continues

Researcher Roger Hammersland is closely monitoring developments in the global economy. The spread of the Delta variant of COVID-19 is currently having a major impact on the world economy.

‘We envisage a continued recovery in the economic activity of our trading partners in the years ahead, but it is expected to be somewhat weaker than shown in our earlier forecasts. This is mainly due to complications related to the spread of the Delta variant. As our most important trading partners gain control over the virus and an increasing proportion of the population develops immunity, we envisage a normalisation of economic trends internationally in 2023,’ says Roger Hammersland.