Vaccines offer the prospect that life in Norway may return to a kind of normal by the summer. The economy will then be able to recover quickly. Households’ large savings buffer and their strong desire to get back to normal will pave the way for strong growth in service consumption this year. The economic rebound could be powerful, and the first rate hike from Norges Bank could come before the end of this year. We expect the housing market to remain buoyant in H1 2021 and then gradually slow. Higher oil prices and signals from Norges Bank of more rate hikes will contribute to a stronger NOK ahead.
The Norwegian economy has regained much of the ground lost during the sharp downturn last spring. Mainland activity was 2.4% lower in November than in February, after a drop of no less than 14% in March last year. The recovery is also visible in the unemployment figures. Unemployment was just under 4% at year-end, after having risen from 2% to over 10% when Norway locked down some ten months ago. However, activity is now on its way down again as a more contagious coronavirus variant has led to new strict restrictions in parts of the country. In the next few weeks, many will likely be furloughed again, and unemployment may rise a good deal again.
The restrictions dampen activity, and the recovery will not continue until they are eased. However, when the restrictions are eased and gradually lifted, spending and demand will increase. We will therefore see the economy rapidly returning to a more normal situation when activity is allowed to start rising again.
The roll-out of vaccines gives ground for optimism about the Norwegian economy. If all goes according to plan, there will be four different vaccines available from Easter and it will be possible to vaccinate the entire adult population by the end of summer. And as warmer weather seems to dampen infection rates, we believe that the summer will mark a definite turning point for the pandemic and hence the economy.
More vaccines will facilitate a faster normalisation
At present, two COVID-19 vaccines have been approved in Norway, those from Pfizer and Moderna. Based on recent announcements from vaccine producers and the health authorities, we expect two additional vaccines to be approved during Q1 2021. The vaccine from AstraZeneca and Oxford University will likely be approved at the end of January, and the first doses should arrive in Norway in February. Moreover, the vaccine from Johnson & Johnson might be approved in February, with the first doses arriving in April. In that case, most of the 1.6 million Norwegians in the risk groups could be vaccinated until the beginning of May.
Subsequently, vaccines for the rest of the population should become more readily available over the course of Q2 2021. Against this backdrop, it is reasonable to believe that many of the restrictions dampening economic activity can be lifted gradually from May onwards. Hence, life could return to some kind of normal during the summer.
Households will drive the rebound ahead
We expect a sharp increase in the consumption of services, which will boost total household consumption during the summer. Household consumption will be the key driver behind the economic rebound ahead, which could be powerful. Many Norwegians probably want to make up for lost time. And as a saying goes: “Money is not an issue.” Norwegian households have saved about 10% of one year’s disposable income, partly due to much lower spending on services than usual and partly due to the travel restrictions, which since March last year have reduced spending abroad to almost zero. Historically low interest rates and ample public spending will also contribute to the economic recovery.
Norway: Macroeconomic Indicators
|Real GDP (mainland), % y/y||2.2||2.3||-3.4||2.7||4.3|
|Core consumer prices, % y/y||1.5||2.2||3.0||1.8||2.1|
|Annual wage growth||2.8||3.5||2.2||2.7||3.2|
|Unemployment rate (registered), %||2.5||2.3||5.0||3.8||2.5|
|Monetary policy rate, deposit (end of period)||0.75||1.50||0.00||0.25||1.00|
|EUR/NOK (end of period)||9.90||9.87||10.47||9.90||9.60|
Lower unemployment and higher wage growth
Based on our assessment of the outlook, economic activity could be back at pre-crisis levels by the end of summer. In tandem with the recovery, unemployment will decline fairly rapidly. Registered unemployment will likely be at normal levels in one year’s time.
The prospect of a rapid labour market improvement once the restrictions are lifted will put upward pressure on real wage growth as early as this year. At the same time, due to higher electricity prices, the consumer price index looks set to rise far more this year than last year. This will raise the starting point for the wage negotiations. Based on our estimate of CPI growth this year by 2.4%, we would not be surprised if the wage negotiations result in a general wage rise of close to 3%. The trade unions will probably not accept any lower real wage growth than last year. However, the calculated annual wage growth could end up being slightly lower than 3%. The coronavirus pandemic has hit low-educated, low-income wage-earners disproportionately. When they return to work, the composition of the labour force could drag down the calculated rate of wage growth, much in the same way as it boosted annual wage growth last year. Wage growth is expected to rise further next year, in step with the continued improvement of the labour market and declining unemployment.
Housing market to remain strong
Despite the coronavirus pandemic, 2020 was a good year for the Norwegian housing market. Nationwide, prices were up almost 9% in December 2020 compared with prices a year earlier. We believe that housing market sentiment will remain buoyant in 2021, but the pace of growth will gradually slow, and hence housing prices could begin to flatten towards the end of the year. Read more about the Norwegian housing market in the theme article from the Nordea Economic Outlook.
Norges Bank will hike rates before year-end 2021, as the first central bank in the world.
Kjetil Olsen, Nordea Chief Economist, Norway
Higher oil prices will boost oil investments
Oil prices have increased considerably since April 2020 as a result of the production cuts from OPEC+ and gradually rising demand. The recent good news on the vaccine front and Saudi Arabia’s production cuts have sent oil prices up to around USD 55/barrel for the first time in almost a year.
We see solid arguments for a further pick-up in oil prices once the global economy starts to normalise. This will substantially boost demand for oil and reduce inventories further, paving the way for even higher oil prices. Saudi Arabia requires an oil price around USD 80/barrel. Consequently, it will probably do what it can to maintain discipline among the OPEC+ countries. The wild card for oil prices will likely be US shale oil production. The question is how quickly US shale oil producers will increase volumes. Many investors in the US have burned their fingers on shale oil and put pressure on shale oil producers to get cash flows rather than allowing the money to be reinvested. However, oil prices are currently high enough to prompt an increase in the number of rigs and hence oil production. But this time it may take longer before the US producers can increase their output. In order to boost profitability, shale oil producers have changed their strategy. Previously, the normal practice for a rig was to drill a well and shortly after start oil extraction from that well. Now it has become more normal for a rig to drill several wells in a specific area and to start production only when all the wells have been drilled. This means that it takes longer before new production is started. The longer it takes before US oil production increases, the more oil prices could rise in tandem with the pick-up in demand.
An oil price around or above the current level would be good news for the Norwegian oil sector and the oil-related industries. The sector has also received support from the tax package the Norwegian parliament passed last year. This means that projects shelved in the spring of 2020 are back on the table again, leading to renewed investment activity on the Norwegian shelf. All in all, this suggests that oil investment will decline less than previously assumed.
2021 will be a good year for the NOK
The NOK strengthened markedly towards the end of last year and into 2021, driven by the higher oil prices and the positive sentiment in global stock markets caused by the uplifting vaccine news.
As usual, we cannot rule out brief periods of NOK weakness as the NOK is vulnerable to shifts in global risk sentiment. But we see good arguments for a stronger NOK going forward. Oil prices are a key driver of the NOK and higher oil prices will trigger NOK appreciation. The NOK will also get support from Norges Bank’s rate hikes ahead. Hence, the NOK should strengthen over the next few years both against the EUR and the USD.
First rate hike before year-end 2021
In December, Norges Bank brought forward its first rate hike by more than six months and now expects to start hiking rates in early 2022. Its rate path is based on the assumption that the vaccines will make it possible to phase out restrictions during this year so that no or only few restrictions remain when we enter 2022. The central bank has made it clear that it might hike rates faster if the economic upturn materialises sooner than expected. In light of the recent vaccine news, we are quite confident that the normalisation of the economy will take place earlier than assumed by Norges Bank. Hence, the first rate hike could come before the end of this year. If so, Norges Bank will surely be the first central bank in the world to hike rates after the pandemic. Based on Norges Bank’s wish to return to a normal interest rate level as soon as the economy permits this, we look for three rate hikes in 2022, bringing the policy rate to 1% by end-2022. 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 following the pandemic will allow Norges Bank to proceed more quickly than is usually the case.
This article first appeared in the Nordea Economic Outlook: The Growth Booster, published on 27 January 2021.
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