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Norway’s economy is at an inflection point

Norway’s economy is at an inflection point

As vaccines are rolled out, Norwegian society will gradually reopen. After summer, most things will be back to normal and the economy will recover fast. Clear signs of normalisation will pave the way for the first rate hike from Norges Bank in September. Housing prices are near the peak and will flatten out ahead. The NOK could strengthen further.

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For the time being, the measures to contain the coronavirus affect the Norwegian economy. The recovery since the summer and autumn of last year has paused, and mainland activity fell by 1.3% in the first two months of 2021. But the new lockdowns have only had a limited effect on unemployment, which has remained fairly stable around 4% over the past months. In comparison, unemployment rose from 2.2% to over 10% as a result of the lockdowns in March 2020.

The economy is now at an inflection point. COVID-19 infection cases are declining, and parts of the economy are gradually reopening. Although some vaccine types will likely be removed from the vaccination programme, Norway will receive many more doses from Pfizer than originally assumed. Moreover, the interval between the first and second shot has been extended so that more people can get their first vaccine sooner. Hence, all adults will still be offered a first shot by July at the latest. The vaccines from Moderna and Pfizer offer good protection after just one dose, and the summer will have a dampening effect on the spread of the virus. We are therefore convinced that the summer will mark a turning point for both the pandemic and the economy.

Find out more about the Nordea Economic Outlook: Unrestricted Growth.

Strong recovery driven by households

The recovery looks set to be strong. Once the restrictions are eased and gradually lifted, spending and demand will rise sharply. Households have been “forced” to save up more due to the limited consumption opportunities. Compared with a normal consumption pattern, above 10% of their annual disposable income has gone into savings since March 2020. The consumption of services has been much lower than usual, and travel restrictions have reduced consumers’ spending outside Norway to almost zero. When the services sector reopens, households’ large savings buffer and people’s strong desire to return to normal should trigger a sharp increase in the consumption of services.  We will therefore see the economy rapidly returning to a more normal situation when activity is allowed to resume again.

Norway: Macroeconomic indicators

2018 2019 2020E 2021E 2022E
Real GDP (mainland), % y/y 2.2 2.3 -2.5 3.5 4.0
Household consumption 1.6 1.4 -7.6 4.9 9.0
Core consumer prices, % y/y 1.5 2.2 3.0 1.8 1.7
Annual wage growth 2.8 3.5 3.1 2.6 3.1
Unemployment rate (registered), % 2.5 2.3 5.0 3.4 2.3
Monetary policy rate, deposit (end of period) 0.75 1.50 0.00 0.50 1.25
EUR/NOK (end of period) 9.90 9.87 10.47 9.75 9.50

Lower unemployment and higher wage growth

In our view, economic activity could be back at pre-crisis levels before the end of summer. In tandem with the recovery, unemployment will decline fairly rapidly. We think registered unemployment will be near normal levels in early 2022.

Collective bargaining has resulted in a general wage increase of 2.6% this year. Given the Technical Calculation Committee for Income Settlements’ estimate of 2.8% consumer price growth, real wages look set to remain largely unchanged. But we would not be surprised if local wage settlements bring overall wage growth above the norm. Activity is high in many parts of the economy not affected by the lockdowns, and there are signs of a growing shortage of qualified labour. On the other hand, low-income wage-earners have been hit disproportionately hard by the pandemic. When they return to work, the composition of the labour force could drag down the calculated rate of annual wage growth, much in the same way as it boosted annual wage growth last year.

We expect wage pressures to increase as the labour market situation improves and unemployment declines. After a couple of years of low-to-no real wage growth, a stronger labour market will boost the bargaining power of the trade unions. Hence, real wage growth will pick up in the coming years.

The Norwegian economy is at an inflection point.

Dane Cekov, Nordea Analyst, Norway

Charts showing: A) NorwegianGDP back at February level during the summer and B) Unemployment will decline

Inflation ~2%; inflation abroad is the wild card

The strong NOK depreciation in March last year and much higher electricity prices at the start of this year than last year have contributed to the rather high level of inflation YTD. Now the NOK is roughly back at pre-pandemic levels and imported inflation looks set to decline markedly in coming months.

Gradually, the effect of last year’s NOK depreciation on inflation will fade. But global commodity and input prices have risen sharply due to a combination of production bottlenecks, lack of transportation capacity and increased demand. Companies globally say they plan to increase prices as their input costs have risen but also because the economic recovery allows them to raise their margins. Higher prices abroad will have a positive effect on consumer prices in Norway. This, coupled with higher wage growth, suggests that headline inflation could hover around 2% in coming years.

First rate hike in September

In March, Norges Bank brought forward its first planned rate hike to H2 2021, with a 50/50% probability for September and December. Norges Bank is therefore set to become the first central bank in the world to hike rates after the pandemic. Norges Bank has said that it wants to see clear signs of economic conditions normalising before it hikes rates. We think this will become very clear in late summer this year and therefore expect the first rate hike in September.

The high indebtedness of households usually puts a limit on how fast the central bank can hike rates without dampening consumption too much. But households’ very strong financial position after the pandemic will allow Norges Bank to proceed more swiftly than usual. As the economy normalises, Norges Bank will feel more secure hiking rates. And based on its wish to return to a normal interest rate level as soon as economic fundamentals permit, we think Norges Bank will revise up its projected interest rate path throughout the year. Hence, we may see more and faster rate hikes than the central bank has previously signalled.

Housing prices will level off

The increase in housing prices over the past year has been exceptionally sharp. Norges Bank’s policy rate cuts to zero significantly boosted households’ purchasing power and have been a key factor behind the surge in housing prices. We now believe that housing prices are near the peak. The effect of the rate cuts is already well reflected in the prices and interest rates will gradually rise later this year. This will have a dampening effect on price growth, and we expect housing prices to move largely sideways ahead. Over the past months, demand for new housing has risen to record highs, and sales of holiday cottages have also been buoyant. We expect new housing starts and residential investment to continue to increase going forward.

Norges Bank will hike its key rate in September.

Kjetil Olsen, Nordea Chief Economist, Norway

Charts showing: C) Gradually lower EUR/NOK ahead, USD/NOK largely stable and D)Norges Bank will hike rates after the summer

Slightly higher oil prices ahead

Since the turn of the year, oil prices have increased further. We think oil prices could rise a bit more, in tandem with the normalisation of the global economy. This will boost demand for oil and reduce inventories further, paving the way for even higher oil prices. Any production increases by OPEC+ will likely be well planned and controlled. The wild card for oil prices is US shale oil production. The question is if and how fast US shale oil production will increase. However, the appetite for investing in new shale oil projects is very low, and this suggests a more moderate pick-up in production. The longer it takes before US oil production increases, the more oil prices could rise in tandem with the growing demand.

An oil price around or above the current level is good news for the Norwegian oil sector and the oil-related industries. The sector has also benefited from the tax package the Norwegian parliament passed last year. Hence, projects that were shelved in the spring last year are back on the table again, leading to renewed investment activity on the Norwegian shelf.

Gradually stronger NOK, but not against USD

The NOK is to a large extent driven by oil prices, interest rate differentials and market sentiment. Hence, it is not surprising that the Norwegian exchange rate has strengthened after the pick-up in oil prices and Norges Bank’s (as one of a few central banks) signals of rate hikes soon.

Norges Bank’s rate hikes and the prospect of higher oil prices ahead point to a stronger NOK in trade-weighted terms. However, as usual, we cannot rule out short periods of NOK weakness as the NOK is vulnerable to shifts in global risk sentiment.

We believe EUR/NOK will come down to NOK 9.75 later this year. But further downside is probably limited. EUR/NOK mostly traded in the NOK 9.50-10.00 range in 2018-19, and we do not expect it to move much lower than NOK 9.50.

Turning to USD/NOK, we expect the cross to move fairly sideways in the coming period. The US economy is also at an inflection point. Thanks to a rapid vaccination programme, unprecedented fiscal stimulus and a very accommodative monetary policy, the US economy looks set to rebound sharply. This will pave the way for the Federal Reserve to gradually hike rates faster than indicated so far. The combination of higher rates and a better growth outlook than for most countries point in the direction of a stronger USD. With both the NOK and the USD appreciating at the same time, USD/NOK should trade fairly sideways in the period ahead.


This article first appeared in the Nordea Economic Outlook: Unrestricted Growth, published on 11 May 2021.


Kjetil Olsen, Nordea Chief Economist, Noway
Kjetil Olsen, Nordea Chief Economist, Norway

Dane Cekov, Nordea Analyst
Dane Cekov, Nordea Analyst


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