Norway’s trading partners have passed the cyclical bottom and we now estimate that the economic upturn in the OECD area will be stronger than previously envisaged. The improved global economy is also expected to push up growth in emerging economies. The downside risk associated with the international economic outlook still remains, however, but seems to be somewhat reduced, at least in the short term.
Weak upturn on the horizon
We are facing a moderate economic upturn. Some of the factors that helped reverse the economic development, such as the krone exchange rate, fiscal policy and developments in housing investment, will not continue to yield such positive impulses in the years ahead. Interest rates will, however, remain low for some time, thereby contributing to the upswing. The petroleum investment will also gradually make a positive contribution. In addition, global growth has increased. This signals growth that is above trend growth, but we expect the upturn to be one of the weakest economic upturns since the 1970s.
Petroleum investment to level off before new upturn
The cyclical downturn was driven by the fall in oil prices in the second half of 2014. By the start of 2016, oil prices had dropped to 30 USD per barrel, but rose again to around 50 USD per barrel during the course of the year. In addition, the futures market indicated that oil prices would continue to rise. In line with this increase in oil prices, the fall in petroleum investment has slowed, and in the last two quarters a slight increase has been observed. Going forward, we expect oil prices to rise to just over 60 USD per barrel in 2020, and this will help push up petroleum investment towards the end of 2018. Until then, we expect investment to remain relatively stable.
Slightly stronger krone going forward
The value of the krone fell sharply in line with the fall in oil prices. This represented a major improvement in competitiveness for the parts of the business sector that compete directly or indirectly with foreign companies. Lower costs also made it easier to switch to new markets for companies that previously delivered goods and services to the petroleum industry. However, between the start of 2016 and the start of September this year, the krone strengthened somewhat against the euro, and we expect the exchange rate to appreciate by a moderate degree to about NOK 9.0 at the end of the projection period.
Higher wage growth
Developments in competitiveness have also been improved through moderate wage settlements since 2014. In 2016, annual wage growth was 1.7 per cent, which was lower than both inflation in that year and the wage growth of trading partners. Going forward, improved profitability and a general economic upturn will lead to somewhat higher wage growth. Annual wage growth is expected to rise to 2.4 per cent in 2017, increasing to 4.0 per cent by 2020.
Set for neutral fiscal policy
Over the last few years, fiscal policy has been highly expansive. The budgetary rule limit of three per cent of the value of the oil fund does not leave much scope for an expansive fiscal policy going forward. However, the economic profile we envisage does not demand such an expansive fiscal policy. We therefore project a neutral fiscal policy in 2018. This will be followed by a slightly more restrictive policy, and the structural non-oil public deficit as a share of trend GDP for mainland Norway is expected to remain more or less constant until 2020.
Protracted low interest rate
The monetary policy has also curbed the economic downturn. The key policy interest rate was gradually reduced until the spring of 2016, reaching 0.5 per cent. It has subsequently remained unchanged. We expect the credit interest rate to fall slightly, reaching 2.4 per cent at the start of next year. We expect this low rate to continue for some time, increasing by about half a percentage point at the end of the projection period.
Fall in house prices set to continue
Low interest rates have contributed to a rise of 20 per cent in house prices over the past three years. Over the first eight months of the year, this growth has been reversed, and prices in August were lower than at the start of the year, according to statistics from Real Estate Norway. The shift must be viewed in conjunction with the record-high level of house building in recent years, changes in mortgage regulations and, not least, the high level that prices had reached. Going forward, we expect the weak development in house prices observed so far this year to continue throughout the year and through 2018, and subsequently level off. In 2020, house prices are expected to be around the same level as in 2016. The low interest rates and an expected fall in housing investment will help to curb the fall in house prices.
Consumption increase gaining momentum
Consumption growth has been increasing in recent months. In the second quarter of 2017, consumption grew by 4.2 per cent, measured as an annual rate, after clear growth in the three previous quarters. Despite currently being in a cyclical upturn, we only expect moderately high consumer growth going forward. The weak development in house prices is curbing consumption, but with continued low interest rates and somewhat rising income growth, consumer growth is expected to reach 3 per cent at the end of the projection period.
Investment in mainland industries set to increase
Low interest rates and more optimistic prospects are expected to contribute to a moderate upturn in investment in mainland industries. The high growth in the supply of power is expected to continue, and manufacturing investment will probably rise after a sharp decline in the first half of the year. However, business investment as a whole, which has often been characterised by two-digit growth rates during cyclical upturns, will have a considerably weaker development in the current upswing. Investment growth is expected to rise to about 5 per cent in 2018 and then to remain at around 4 per cent annually throughout the remainder of the projection period.
Lower unemployment
The unemployment rate increased by about one-and-a-half percentage points in line with the economic downturn from 2014. By mid-2016, unemployment was up to 5 per cent according to the Labour Force Survey (LFS). Since then, unemployment has fallen and is now 4.3 per cent. A large part of the decline is due to the fact that people have withdrawn from the labour market as a result of both cyclical conditions and the ageing population. Going forward, we expect economic growth to push up employment, but the labour force will also probably rise, thereby hampering the decline in unemployment. Our calculations project unemployment of 3.9 per cent in 2020.
Low inflation
Following a 3.6 per cent rise in the consumer price index (CPI) in 2016, with inflation peaking in July, inflation has been steadily falling. Going forward, increased productivity growth could neutralise the price effects of higher wages. We assume moderate international price growth in finished goods. Coupled with a slightly stronger krone, small negative price impulses are expected from imported consumer goods. Our calculations show that underlying inflation will remain low, and with reduced impulses from energy prices CPI growth will reach 2.1 per cent in 2017, subsequently falling to just under 2 per cent for the remainder of the projection period.