According to the Norwegian Statistical Office, the Norwegian economy is booming. At the same time, inflation is at a record high. This points to a rapid increase in interest rates in the coming time. Combined with the weak outlook in the international arena, this will slow down growth in Norway.
The Norwegian economy has recovered from the pandemic. In March, mainland Norway's GDP was just below trend. Currently, unemployment is at its lowest level since the financial crisis in 2008. Activity is expected to increase further in the future. Statistics Norway (SSB) estimates this year growth of the continental economy at 3,7 percent.
Inflation is currently estimated at 4,7 percent
- We're going into a boom. At the same time, we have record high inflation. This suggests that the key interest rate will be raised relatively quickly in the future, says Thomas von Brasch.
In May, the 5,7-month increase in the Consumer Price Index (CPI) was as high as 1988 percent. This is the highest figure measured by the Norwegian statistical office since 4,7. Inflation is now estimated at 1,4 percent for the full year, an upward revision of XNUMX percentage points from the forecast published by the SSB in March.
– Inflation is high and price increases have a broader basis than a few months ago. Therefore we estimate that Norges Bank will increase its main interest rate by 0,5 percentage points in June and by a further 0,25 percentage points in both September and December, says Thomas von Brasch.
Also internationally, there are prospects that the strong growth achieved so far will slow down as a result of high inflation and higher interest rates. Affects the Norwegian economy.
- The combination of interest rate increases and lower international growth prospects will limit activity in the Norwegian economy in the future. Consequently, the boom we are approaching will not be particularly strong and we estimate moderate growth in the coming years, says Thomas von Brasch.
Growth in the continental economy is expected to slow to just under 2 percent in 2025.
Without the imminent interest rate hikes, inflation would likely remain above the inflation target and the Norwegian economy would have entered much higher growth than forecasted.
After more than a year with a record low key interest rate of "0" percent, Norges Bank tripled its interest rate from last September to the current 0,75 percent. This level is still well below what the central bank describes as the normal level of interest rates. Normal interest rate for the money market is estimated to be around 2 percent.
With another three interest rate hikes this year, by a total of one percentage point, the main interest rate will rise to 1,75 percent before being raised next year.
- We estimate that the key policy rate will amount to 2,5 percent. in 2023 and will remain the same thereafter. In this picture, the normal mortgage rate will increase from around 2 percent in 2021 to around 4 percent in 2025, says Thomas von Brasch.
Inflation drivers have changed
Last year, the increase in the Consumer Price Index (CPI) was as high as 3,5 percent. as a result of higher energy prices. So far this year, twelve-month CPI growth has increased every month.
- Further increases in energy prices following the war in Ukraine give strong inflationary impulses also this year. The bottlenecks in the production of goods and services that characterize the international economy go in the same direction, says Thomas von Brasch.
- The fact that the inflation estimate for 2022 has been revised upwards by 1,4 percentage points to 4,7 percent is mainly due to the weakening of the koruna. Meanwhile, future electricity and oil markets are showing higher prices than previously assumed. In addition, the rise in non-energy commodity prices internationally has also increased more than expected, says Thomas von Brasch.
Inflation is expected to decline in the coming years. Slightly higher productivity gains and slightly lower electricity and oil prices are driving the CPI growth down to around 2,5%. in 2023 and getting closer to the inflation target of 2%. in 2024 and 2025
Real wage drop this year despite high pressure on the labor market
Unemployment as measured by the Labor Force Survey fell by about two percentage points in one year, averaging 2,9 percent from February to April. We have to go back to the pre-financial crisis in 2008 to find a fairly low level.
Parties to negotiations wage authorities have set a salary cap this year from 3,7 to 3,8 percent However, high labor market pressures are likely to lead to larger wage increases than this framework.
- We estimate the annual salary increase by 4%. in 2022. Correction of the inflation estimate to 4,7%. still marks a decline in real wages this year, says Thomas von Brasch.
Real wages are projected to increase in the coming years. Annual wage growth is expected to remain around 4 percent between 2023 and 2024.
5,8% house prices increase this year
There is likely to be a moderate increase in house prices in the coming years. In 2021, house prices rose by as much as 10,5% annually, but the growth rate slowed throughout the year.
Statistics by Eiendom Norge show that house prices have increased by almost 5%. in the first five months of 2022. The price increase so far this year should be considered in connection with the stricter requirements for reporting stocks in the Disposal Act, which have been tightened since the turn of the year, and the resulting low supply of apartments.
In May, the number of flats for sale increased and a further increase in the supply of flats is expected in a slightly longer perspective as a result of higher investments.
- Increased supply of housing combined with higher interest rates contributes to limiting the increase in housing prices. As a result, real prices are likely to decline slightly in the coming years, says Thomas von Brasch.
- In total, the increase in apartment prices this year is estimated at 5,8 percent. These estimates mean house prices will increase by 1 percent for the rest of the year, says Thomas von Brasch.
Due to the expected path of higher interest rates, the forecasts of changes in home prices have been revised downwards from next year. It is assumed that the annual dynamics of housing prices will decline from 2,6%. in 2023 to about 1 percent in 2024 and 2025. With such a picture, real house prices will fall in each of the years in the period 2023-2025.
The international economy. Inflation and higher interest rates
“The international economy is characterized by the war in Ukraine, problems in the global supply chain. In addition, weak demand and closed ports in China, as well as the global cost of living crisis, says researcher Roger Hammersland.
The forecasts for the international economy are based on higher inflation in the euro area than in the March forecast. Following a period of strong recovery in our trading partners' economies, several countries are now facing rapid growth. With an increase of 5,9 percent. in 2021, falling to 3% and 1,8 percent In 2022 and 2023 respectively, economic growth among our trading partners is expected to be weaker than forecast in March.
Source: SSB
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