Kjetil Olsen

06-09-2024 14:16

Norwegian economy in an upswing

Thanks to high wage growth, lower inflation and a stable interest rate environment, household purchasing power is now increasing quite significantly in Norway. Together with increased petroleum investments, high profitability in the export sector and, not least, a strong increase in public spending, economic growth in Norway will likely pick up and unemployment remain fairly stable going forward.
Women on a swing in Norway overlooking water and mountains

A sharp drop in residential investment and slowing consumer spending have led to modest growth since early last year. Other factors have contributed to an overall positive Norwegian economy, however.

First, petroleum investments have been lifted a lot after the tax package adopted during the pandemic. Second, competitiveness in the export sector including tourism has improved significantly due to the weak NOK. And third, strong stimulus has come from higher public budget spending of oil revenues. Calculations suggest budgetary policy will positively impact mainland GDP growth by around 1-1.5 percentage points this year.

Investment activity on the Norwegian Continental Shelf will remain high for several years. Also, profitability in the export sector looks set to be very strong even if the NOK strengthens somewhat. This should  ensure good activity here for a long time ahead. Additionally, the value of the petroleum fund has surged this year, giving the government significant room for accelerating oil revenues spending even more. We can thus also expect support from these three factors in the future. Consequently, economic growth will pick up if consumer spending increases and the fall in residential construction slows down. We believe this is what is happening right now. Norges Bank’s regional network supports a more optimistic growth picture going forward.

Improved household purchasing power

There are good reasons to believe household consumption will increase going forward. For the second year running, average annual wage growth is above 5%. During the summer, 12-month total consumer price growth dropped below 3%. After several years of declining real wages, most consumers now have stronger purchasing power even without rate cuts. When interest rates are on hold, indebted households will have more money to spend as loan costs, which for highly indebted households account for a large part of total costs, do not change. At unchanged spending, total costs for a family with debt will thus typically increase less than consumer prices. Indebted households should then see their purchasing power – what they can spend after tax and loan costs – rise even more than indicated by real wage growth alone. 

We expect Norges Bank to cut the policy rate cautiously next year. We also believe that future wage growth will come in above inflation, which will gradually decline. Norwegian household purchasing power will continue to rise, and consumer spending will become an important growth driver for the Norwegian economy in the time to come.

Norway: Macroeconomic indicators

 20232024E20252026
Real GDP (mainland), % y/y0.70.71.62.0
Household consumption-0.81.12.62.6
Core consumer prices, % y/y6.23.93.12.5
Annual wage growth5.35.24.33.8
Unemployment rate (registered), %1.82.02.22.1
Monetary policy rate (end of period)4.504.504.003.75
EUR/NOK (end of period)11.2011.7511.0010.75

A / Upswing in the Norwegian economy going forward

Mainland GDP , NOKbn (fixed 2021 NOK)

B / Registered unemployment to stay at a low level

% of work force

Slightly higher, but still low unemployment 

Registered unemployment has risen somewhat from the low of 1.6% in the summer of 2022 to 2.1% this Au-gust. The rise constitutes about 14,000 persons, of which about a third can likely be attributed to the steep decline in residential construction. The construction industry will likely continue to be weak for a while, but with increasing prices of existing homes and increasing sale of new homes, the industry could also have a less negative view on the future. At the same time, there are still many vacancies in the construction sector overall. Those who have been made unemployed in the industry therefore have a chance to get a new job in the same sector. To sum up, this suggests the increase in unemployment in the construction sector will slow and gradually come to a halt. It will likely help if prices of existing homes continue up. We expect price growth in the housing market around the nominal wage growth level this year, and likely stronger price growth than wage growth next year, when the policy rate will probably be lowered slightly.

Ukrainian refugees who register as unemployed to be able to continue receiving welfare benefits account for another third of the uptick in unemployment. Currently, 4,700 unemployed Ukrainians are registered. If they were excluded, unemployment would still have been at 1.8%-1.9%. It is difficult to predict how many Ukrainians will register as unemployed going forward. There are still many vacancies, but even though many Ukrainians have the skills required for the jobs, language barriers and Norwegian competence requirements make it difficult for them to quickly find employment. Registered unemployment may thus increase more than our cur-rent estimate. However, any further increase in unemployment due to this has little to do with the demand for labour or the trend in the Norwegian economy.

With the prospect of the Norwegian economy quickly increasing towards trend growth, we only expect a very modest rise in unemployment and that it will stay at a low level going forward.

Lower inflation

Core inflation adjusted for energy and fees has declined sharply from the peak about a year ago. In July, 12-month growth was 3.3% against 7% in June last year due to an especially sharp drop in price growth for imported consumer goods, but also a decline in price growth for Norwegian-produced goods and services, although it is still above 4%. Most of the “easy” part of lowering inflation is likely behind us. International goods and commodity prices have fallen from their peak, with a significantly negative impulse as a result. With more stable commodity prices, the negative impulse will gradually disappear, and then domestic factors such as wage growth and the NOK exchange rate will be key. With high wage growth, it will take some time before inflation approximates Norges Bank’s 2% inflation target unless the NOK strengthens significantly.

There is reason to question whether the Norwegian economy needs a lot of rate cuts.

Kjetil Olsen, Chief Economist, Norway

After two years of wage growth just above 5% – a 15-year high – wage growth is expected to gradually decline, but remain at a high level. Wage earners’ bargaining is based on the outlook for headline inflation in the coming year to secure real wage growth. With lower inflation, a smaller nominal supplement is required to obtain the same real wage development. But wage earners also look to the trend in the profitability of the export-oriented industries and in employment. Thanks to the weak NOK, profitability in the industrial sector has been very good. Demands for more reasonable profit distribution may lead to higher real wage growth compared to recent years. Continued low unemployment is also a good bargaining lever for wage earners. With inflation around 3% next year, we expect wage growth above 4%. In 2026, wage growth and inflation may fall further. With modest productivity growth, it will, however, take some time before wage growth reaches levels consistent with an inflation rate of 2%.

C / Real wage growth will boost purchasing power

CPI and annual wage growth, y/y %

D / Few rate cuts ahead

Policy rate, Nordea estimates and Norges Bank’s forecasts, %

Lower interest rates may support the NOK 

The NOK weakened again during the summer. Global volatile market conditions are the main culprit. Previously, the NOK would usually strengthen when interest rate expectations fell globally, but this time it weakened. This illustrates that the reason why global interest rate expectations fall is important. If it is mainly due to lower inflation and continued good economic development, the NOK will typically strengthen, whereas fears of a downturn with associated stock declines will typically weaken the NOK. Trends in and expectations for the US economy and interest rate setting are especially important.

When we believe the NOK will strengthen slightly going forward, it is because we think the US recession fears are exaggerated, among other things. We also believe the Federal Reserve (Fed) will gradually start to cut rates from September as inflation seems to have fallen to a level acceptable for the Fed. Lower interest rates in such a scenario will support the NOK if, at the same time, Norges Bank waits to cut its rates. 

We also need to acknowledge that the NOK exchange rate trend will be uncertain as usual going forward. Renewed turmoil in global financial markets can quickly weaken the NOK briefly. However, we still believe the NOK will strengthen in the long term.

Norges Bank to trail other central banks

In June, Norges Bank signalled that the policy rate would most likely stay at 4.5% for the remainder of 2024 and that it will first start to gradually cut rates in March next year.  The last interest rate forecast from the central bank showed a policy rate down towards 3.75% by end-2025 and 3% by end-2026. 

Although inflation has been slightly lower than Norges Bank had forecast, we still believe Norges Bank will wait until next year to cut rates. The NOK weakening will contribute to keep inflation around the previously expected levels on a 6-9 month horizon. 

We still believe that the NOK will strengthen in the long term.

Kjetil Olsen, Chief Economist, Norway

The trend in the NOK exchange rate will probably play a key role for how much room Norges Bank will have to set interest rates. Also, the interest rate signals from Norges Bank will affect the NOK exchange rate. We thus believe Norges Bank will rather wait with its first rate cut than rush it, because signals about early rate cuts in Norway might also result in a weaker NOK. 

If Norges Bank keeps the interest rate on hold for a while after rate cuts from central banks abroad, we will see a stronger NOK, which in turn can lead to lower inflation and wage growth. And this may give Norges Bank the manoeuvring room required to cut rates slightly. We believe Norges Bank will cut the policy rate twice next year, to 4% and further down to 3.75% in 2026. It is a great deal higher than Norges Bank’s forecast and market expectations. It is important to remember that Norges Bank has signalled rate cuts going forward not because it believes inflation will become too low, rather the contrary, but because it believes that an interest rate around the current level will gradually contribute to too high unemployment. In other words, it believes the current interest rate level is very restrictive and significantly higher than a natural/neutral level. 

If our forecast that economic growth in Norway is going up is correct, it is a good indication that the current interest rate level is perhaps not so much higher than the level that is neither stimulating nor restricting. With inflation well above 2% for a long time, continued low unemployment, expanding economic growth in Norway, rising home prices, high wage growth and a weak NOK, there are good reasons to ask whether the Norwegian economy needs a lot of rate cuts.

Find out more about the latest Nordea Economic Outlook

Author

Name:
Kjetil Olsen
Title:
Chief Economist, Norway, Nordea
Economic Outlook
Insights
After reading this article, is your perception of Nordea?
Two people kayaking together at sunset

Economic Outlook

Denmark's economic outlook: Calm waters

After some hectic years, the Danish economy is moving into a calmer period. Inflation is under control in both Denmark and the Euro area, boosting household purchasing power.

Read more
Stockholm, Sweden in sunset

Economic Outlook

Sweden enters new fiscal policy phase

Sweden's public finances are stable, which is and has been a strength – especially during the recent turbulent years with the pandemic, war and high inflation. Ahead of the next framework period, low government debt and an increased investment requirement open the door for a more expansionary fiscal policy.

Read more
Business people walking through a city at dawn

Economic Outlook

Danish labour market approaches balance

Over the past ten years, the Danish labour market has undergone a remarkable development. The latest figures indicate that a soft landing has been achieved, with continued low unemployment at the same time as the balance between supply and demand for labour has improved.

Read more