The turnaround in the economy was driven by a highly expansive fiscal and monetary policy, a weak krone, low wage growth and strong growth in house building. Going forward, house building is expected to curb the economic upturn. Interest rates will remain low for some time ahead.
Higher international growth
International growth prospects are constantly improving. Norway’s trading partners have passed the cyclical bottom and we now estimate that the economic upturn in the OECD area will be somewhat stronger than previously assumed. As before, we expect that improved international economic conditions will also lead to higher growth in emerging economies. The risk now seems to be somewhat more balanced than the last time, although recent turmoil in connection with the German Government has increased the political risk.
Moderate upturn in the economy
Many of the driving forces that have had an expansive effect in the economic downturn will have a more neutral or contractionary development in the years ahead. This particularly applies to monetary and fiscal policy, the cost-competitiveness of businesses, as well as house building. However, the absence of these positive driving forces will not halt the looming upturn. International growth is expected to pick up, and investments in the petroleum industry will once again make a positive contribution to the development inactivity. In our scenario, the Norwegian economy will be in a roughly cyclically neutral situation in the second half of 2019.
Towards a more neutral fiscal policy
From 2013 to 2017, the structural non-oil public deficit (SNPD) increased by an average of NOK 20 billion annually. The latitude in fiscal policy seems to be considerably smaller going forward, both as a result of an adjusted fiscal rule and higher expenditures in connection with the aging of the population. We assume a roughly neutral fiscal policy during the projection period, with the SNPD as a share of trend GDP for mainland Norway being expected to remain more or less constant.
Interest rates set to increase in 2019
From an already low level in 2014, the key policy interest rate was reduced further, reaching 0.5 percent in March 2016. Since then, the rate has remained unchanged. We expect the rate to be kept at this low level until well into 2019, then gradually increasing towards the end of the projection period. If our assumptions are accurate, the money market rate will rise to 1.2 percent in 2020 as an annual average.
A stronger krone
The krone has weakened in recent months, which was somewhat surprising given that oil prices have risen in the same period. However, the krone measured as an annual average appears to be somewhat stronger in 2017 than in 2016, measured by the import-weighted exchange rate. We expect to see a moderately stronger krone in the years ahead.
House prices will continue to fall throughout next year
The falling house prices are primarily due to a large housing supply, high prices, and moderate wage growth. In addition, the mortgage regulations may have contributed to the shift, but it is the aforementioned more fundamental conditions that will continue to push down house prices throughout next year. By the end of 2018, prices will then be almost 10 percent lower than the level in the first quarter of 2017. As the housing supply diminishes and the economic conditions improve further, developments in the housing market will turn to a moderate upturn in 2019 in our
Petroleum investments pushing up growth
Oil prices have risen in fits and starts since the turn of the year 2015/2016, when they were initially below USD 30, rising to the current level of over USD 60. Combined with improved international economic conditions and lower investment prices, this will drive investments in the petroleum industry. The petroleum companies’ investment plans confirm this picture. Higher investments are planned in particular for the Johan Sverdrup field. In addition, it is expected that several plans for development and operation will be submitted to the authorities in the near future. The weak development in oil investments since 2013 now seems to be shifting to a new upswing.
Mainland business investments increasing
Power supply companies are planning further investments in the production, transmission and distribution of electricity. Manufacturing companies report strong growth in oil refining, chemical and pharmaceutical manufacturing and in the food industry. Service companies also report an increase in investments according to Norges Bank’s regional networks. Overall, this will mean a growth rate in the years ahead of around 5 ppercent Compared with previous upswings in the economy, however, this development is moderate.
Higher consumption growth
Consumption has given positive growth impulses to the economy for five consecutive quarters. Although the consumption of goods in the third quarter was somewhat weaker than earlier this year, we expect higher consumption growth to continue going forward. Continued low-interest ates and increasing real income growth will contribute to this. Although the weak development in house prices is slowing, we expect consumption growth to increase to about 3 percent by 2020.
Real wages increasing
This year we expect the nominal wage growth to be 2.4 percent. In line with the improved economic situation, wage growth will reach 4 percent by the end of the projection path. With relatively stable inflation of just under 2 percent, this corresponds to an average annual real wage growth from 2018 to 2020 of almost 1.5 percent.
Unemployment rate continues to fall
After a peak of almost 5 percent in mid-2016, the unemployment rate has now fallen to 4.0 percent according to Statistics Norway’s Labour Force Survey (LFS). Unlike previously, when unemployment has fallen as a result of a shrinking labor force, we are now in a situation where unemployment is falling because employment growth is stronger than the growth in the labor force. As an annual average, we expect unemployment to be 4.2 percent in 2017 and then gradually decrease to 3.7 per cent at the end of the projection period.
Delayed price effects from the current weak krone are likely to pull up growth in prices of imported goods for some time to come. For 2017 as a whole, the CPI-ATE is set to increase by 1.5 percent, while the growth in the CPI is estimated to be 1.8 percent Wage growth will increase somewhat during the upturn in the economy and, in isolation, will push up price rises. In the opposite direction, growth in productivity will increase during the first few years, which is normal in the early stages of an economic upturn. According to our calculations, growth in the CPI-ATE will be 1.8 percent as an annual average during the projection period. We estimate CPI growth of almost 2 percent in 2019 and 2020.