The downturn in the the Norwegian economy has lasted for more than a year, with the driver being the material drop in oil sector investment levels. Low interest rates have contributed to a very weak exchange rate for the Norwegian krone, which in isolation has contributed to a markedly strengthened competitiveness. A weak exchange rate and better access to required competent labour access (with less demand from the petroleum sector) could over time increase exports. When the exporting industries take the view that the weaker krone is a lasting feature, their investments will increase. Both the fiscal- and monetary policy now have a significant stimulating effect on the Norwegian economy. The downturn in the Norwegian economy is still isolated to parts of western Norway where the oil related activity has been at the highest level. Other parts of the country could be affected over time due to increased uncertainty, which could result in higher unemployment and reduced tax yield. This could result in a weaker housing market, and the expectation is therefore that only a moderate increase in real estate prices nationally will result for this current year. If the Norwegian economy weakens further, the central bank can decrease its monetary policy rate further and the government budget can become more expansive. Norwegian banks have stocked up their equity capital over several years, and if the credit growth falls significantly the authorities have the possibility to reduce the countercyclical buffer (core capital countercyclical buffer in effect at 1.5 per cent from July 1, 2016), which means the banks would then enjoy an increased capacity to lend. The government has announced more structural reforms (including tax reform) in order to increase the growth rate in the Norwegian economy, which will contribute positively as well.
The price of oil has dropped from a high point of $115 per barrel in the summer of 2014 to around $34. Oil related investments are expected to decline by all of 15 per cent this year, and almost as much again in 2017. The oil companies and the services- and component subcontractor segment have cut significantly their staffing and costs. The second round effects on the rest of the local businesses is materially painful. The unemployment rate for Norway is expected to breach the 5 per cent mark during the year. Other industries have however experienced a boost after the depreciation of the krone. Especially the fisheries sector (Norwegian salmon farming), but also other traditional goods and services including tourism and a series of other exports industries are experiencing stronger demand. Increased exports will lead to demand for more staff and investments, but not enough will take place to compensate for the downturn in the oil sector, which has been and is Norway’s largest single industrial sector.
Norway still attracts a high net immigration rate as well as a continued urbanization trend to the large cities around the country. The consequence of this is a continued housing deficit in the cities, and especially in eastern Norway (Oslo). The tax system still stimulates residential real estate investments, while a walth tax is levied on invested capital such as machinery and production equipement in businesses. The residential real estate building will expand this year, but there are material levels of commercial property empty in the large cities, and the rents are declining. It is therefore to be expected that some commercial property will be converted to residential real estate over time. A price increase of 3 per cent may be expected for residential real estate nationally, with the Oslo market probably at 7 per cent growth.
Norway’s central bank will lower its monetary policy rate, which will decrease the downturn, and stimulate the residential real estate market. A weak krone will contribute positively for the exporting sectors. Another effect of a weaker krone is that domestic consumption will re-orientate more towards domestic production of goods and services. The natural splendors of Norway will become more accessible to foreigners through its reduced cost. There is also ample room to increase the investments in the government’s budget, if growth turns out to be weaker than expected. The banks are robust and can handle a more adverse environment. Mainland GDP is probably growing, all things considered, by around 1 per cent this year and 1.5 per cent in 2017.
Norway: Private investments, outside of oil sector
Annual change. Percent. 2008 - 2018 2
1 Housing and business investment.
2 Projections for 2015 - 2018.
Sources: Statistics Norway and Norges Bank
Norway: Business sentiment survey
Source: SpareBank1, Macrobonds
The oil sector belongs to that part of the labour market which negotiates pay settlements first, and which therefore sets a framework for wage increases in the rest of the economy. With the cooling off in the oil sector, wages will increase more moderately in the future. This year the wage growth will probably be around 2.7 per cent, only marginally above the rate of inflation. Next year we may experience negative real wage growth due to that higher import prices are expected to contribute to CPI growth up to 3 per cent, while wage increases remain around 2.7 per cent.
Weaker growth will contain inflationary pressures in the Norwegian economy, and contribute to a weaker korne exchange rate. The weak currency results in higher price growth in Norway because around one third of consumption comes from abroad. Thereby the growth in real wages is more moderate in the upcoming period than what has been the development over the last several years. This will contribute to a further cooling of the economic activity.
A weaker exchange rate is the mechanism which helps Norwegian business to reinvent itself for a period of lesser oil related activity. The exchange rate makes all export companies more competitive. Lower activity in the oil sector enables other sectors of Norwegian industry to hire qualified personnel. The Norwegian central bank has warned that with the lower activity in the oil sector, the monitary policy rate will be further reduced from today’s 0.75 per cent. A rate cut is on the cards already for March, and the interest rate may be reduced to 0.25 per cent by the end of the year.
Norway, Unemployment, Rate, Males & Females, Total 15-74 Years
Source: SpareBank1, Macrobonds
Relative wage costs
Labour costs1 relative to trading partners.
Index. 1995 = 100. 1995 - 2015 2
1 Hourly labour costs in manufacturing.
2 Projections for 2015 (broken lines).
Sources: TBU, Statistics Norway and Norges Bank
Norway: Forecasts (Estimates for 31.12, average for the year for GDP, unemployment and wages)
|Oil price (USD)||57,5||38||40|
|House prices (annual growth in December)||8,1||5,1||3|
|Norges Banks key rent||1,5||0,75||0,25|
|Unemployment rate (AKU)||3,5||4,6||5,2|
|Oil investments||212 mrd||-15 %||-10 %|
Sources: SpareBank1, Statistics Norway
Elisabeth Holvik is the Chief Economist at SpareBank 1.