The recent unusually large depreciation in the krona means it will take longer for inflation to fall to the inflation target, the Norwegian Statistics Office (SSB) writes. The consequence is another year of declines in real wages and two more interest rate hikes.
The weak krona is currently having a major impact on the Norwegian economy. In 2022, one euro cost between NOK 9,40 and NOK 10,60. At the beginning of June this year, the price was NOK 11,90 for one euro. The SSB's forecasts assume unchanged exchange rates in the future, which means a record weakening of the crown this year.
While consumer price index (CPI) inflation has eased after last October's peak, the increasingly weak koruna means it will take longer than previously expected to bring inflation down to target.
– A weak crown makes inflation more relentless. Imported goods become more expensive, which helps keep inflation high for longer, says researcher Thomas von Brasch.
New forecasts from the Norwegian Statistical Office estimate that the CPI will increase by an average of 5,6 percent. in 2023, this is 0,6 percentage points higher than in the previous March forecast report. The CPI adjusted for tax changes and excluding energy products is estimated at 6,0%.
– This year, we assume an annual salary increase of 5,3 percent. With expected inflation at 5,6 percent. this means that real wages will fall somewhat this year as well, says Thomas von Braschi, recalling that there has been hardly any increase in real wages since 2015.
Measured by the national accounts deflator for household consumption, which includes increases in the prices of goods bought abroad, inflation is estimated to increase by almost 7%. in 2023. This points to a further decline in real wages.
Interest rate peak 3,75 percent. this fall
The impact of the krona devaluation on inflation means that Norges Bank is likely to raise its key rate from its current level of 3,25 per cent.
– We estimate that both in June and September the central bank will raise interest rates by 0,25 percentage points. percent, so that the peak interest rate would be 3,75 percent in the fall. says Thomas von Brasch.
Growth in the Norwegian economy has slowed somewhat so far this year, but mainland Norway's GDP is close to what Statistics Norway considers the trend level. This trend is expected to continue in the coming years, with annual growth of around 1,7%.
Ultimately, both higher interest rates and slowing price growth abroad will contribute to limiting growth prices in Norway. According to calculations, inflation will drop to 2024% in 3,0, and in 2026 it will approach the inflation target of 2%.
The gradual rise in unemployment also means that there may be room for a cut in the base interest rate as early as 2024.
– If there are no further perturbations in the economy in the future, then in 2024 we will finally see an increase in real wages – says Thomas von Brasch.
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Economic policy
– Record-breaking weak koruna exchange rate puts parts of Norway's economic policy to the test, warns Thomas von Brasch.
When the profitability of some frontline occupations becomes higher as a result of the weaker koruna, this could add to wage and price pressures if soon reflected in higher wage growth.
In addition, the room for maneuver in fiscal policy is increased by the higher value of the oil fund, measured in Norwegian crowns.
“For short-term political reasons, it may be tempting to significantly increase the use of oil money in the coming years,” says von Brasch.
However, if the koruna stays at its current level, as projected by the SSB, both fiscal policy and working parties will most likely adjust to the weakening of the koruna within a few years.
Gradually rising unemployment
A year ago unemployment was around 3,1 percent, while in recent months it was around 3,5 percent. In a cyclical perspective, this is still relatively little.
“The high pressure in the labor market seems to be easing somewhat. Our calculations show that in the coming years unemployment will gradually increase, to approx. 4 percent. in 2025, says Thomas von Brasch.
Lower decline in house prices than previously estimated
House prices in 2023 rose more than expected. The monthly Eiendom Norge House Price Index shows that second-hand house prices have continued to rise for a long time after last fall, despite frequent increases in mortgage rates in the past year.
“We expect higher interest rates and lower real disposable income to help lower house prices by the end of the year, so that average house prices fall by about one and a half percent,” says Thomas von Brasch.
Weak consumption growth this year
Household consumption, which accounts for about half of mainland Norway's GDP, rose by a whopping 6,9 percent last year, despite steep increases in the prices of many goods and services.
Growth in real disposable income is projected to pick up from 2024 on the back of higher wage growth and declining inflation, but weak growth in real house prices is dampening this growth.
Higher real disposable income contributes to an increase in consumption from around 0,5 percent. this year to approx. 3 percent. in 2026
International economy
The economic situation is currently challenging for many of Norway's trading partners.
"While the economic outlook for countries as a whole is close to neutral, there is still a high probability that some of them will fall into recession in the coming time," says researcher Roger Hammersland.
Germany is already in a technical recession and there are signs that the US may soon follow suit.
Forecasts indicate a slowdown in economic growth in the short term, however, activity will remain at a level close to the trend of Norway's trading partners combined in the coming years.
“However, downside risk is high and central banks face the difficult task of stabilizing inflation while ensuring financial stability. An overly restrictive monetary policy in this context may quickly become the seed of a new crisis, says Roger Hammersland.
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Source: Statistics Norway
