The economic situation in Norway

October 2011

Activity in the mainland economy is expanding, but will be curbed by weak foreign growth. Private consumption has picked up somewhat, but household optimism has weakened lately. At the same time, house prices are still rising and housing investments has shown a substantial increase. The unemploy-ment rate has remained unchanged at just above 3 per cent the last months, which is very low both by historical standards and compared to other countries.

GDP Growth, Mainland Norway

Labour market

Activity in Norwegian companies is increasingNorway is a small and very open economy with a significant proportion of exports and imports. Many Norwegian companies were hit by the global recession in the wake of the financial crisis. Investments by mainland companies fell by 20 per cent from late 2008 to early 2010. The negative develop-ment turned around in the middle of 2010, and investments have grown moderately over the last year. The development is particularly strong in building and construction services, while the development in manufacturing is rather weak. Investments are expected to increase moderately going forward.

Capital Formation

Gross capital formation, Mainland Norway excl. Government, change last 12 months (LTM)

Private consumption is picking upAfter a slow start of 2011, due to high electricity bills, house-hold consumption picked up in the second quarter. Households‘ disposable real income has shown a clear increase and higher house prices lead to rising housing wealth, which both stimu-late consumption. Optimism amongst households has however decreased lately, and could dampen household demand going forward. Private consumption accounts for over 50 per cent of the activity in the Norwegian mainland economy.

Private consumption

Household consumption, change last 12 months (LTM)

Still large current account surplusNorway has experienced a large surplus on the current account for many years, thanks to the large export of petroleum products. The surplus on the current account was 13 per cent of GDP in 2010 and is expected to continue to stay at high levels in the coming years, mainly due to high exports and high prices of petroleum products.

6,00

5,00

4,00

3,00

2,00

1,00

0,00

-1,00

-2,002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Perc

ent

3,0

2,9

2,8

2,7

2,6

2,5

2,4

2,3

2,2

2,1

2,0

5,00

4,75

4,25

4,00

3,75

3,50

3,25

3,00

2,75

2,50

2,002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Pers

on (m

illio

ns)

Percent

Unemployment rate (right scale)

Total employment (left scale)

Source: Reuters EcoWin

20,00

15,00

10,00

5,00

0,00

-5,00

-10,00

-15,00

-20,002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Reuters EcoWin

7,00

6,00

5,00

4,00

3,00

2,00

1,00

0,00

-1,00

-2,00

-3,002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Perc

ent

Source: Reuters EcoWin

Source: Statistics Norway

Perc

ent

Current account, balance in % of GDP

Expansionary fiscal policy to be reversed in 2011Large petroleum revenues give the Norwegian goverment substantial economic freedom, and the financial crisis was met by strong fiscal and monetary stimulus. The fiscal policy, as measured as the change in the structural non-oil budget deficit as a share of trend GDP for mainland Norway, was very expansionary in the wake of the financial crisis. In light of the improvement in the economy, the Government is now moving towards a more neutral fiscal policy. Lower spending of petroleum revenues will lead to a reduction in the structural non-oil deficit from 2010 to 2011, which corresponds to a fiscal tightening of approximately 0.3 per cent of mainland trend-GDP.

Fiscal policy – budget impuls

House prices are increasing sharplyHouse prices rose sharply towards the end of 2010 and increased by more than 8 per cent from 2009 to 2010. The strong development has continued this year, fuelled by low interest rates, increasing optimism, high population growth and employment growth. Home building has picked up sharply over the last year, after falling markedly in the wake of the financial crisis. The adjustment of housing supply is nevertheless slow and housing supply is still insufficient to meet the increased demand, especially in central areas.

Real house prices are high by historical standards. However, income levels have also increased considerably over the last decades, and deflated by income levels house prices are more moderate. In addition, spending on necessary consumption, i.e. food and clothing, has decreased as a share of total consumption over the last decades. House prices deflated by disposable income net of such necessary expenses are somewhat lower, but still about 10 per cent higher than the average over the last quarter of a decade.

Potential slide in house prices could have significant adverse distribution effects. Historically, however, only a very small proportion of households have defaulted on their mortgages. Instead, they have cut back on other outgoings, such as expenditure on consumer durables and travel.

Housing Market

Real house prices. Indices. 1985 =100. Annual figures. 1985 – 2010

Norges Bank rate increases brought to a halt Norges Bank, the Norwegian central bank, cut its key policy rate markedly in 2008 and 2009 to cushion the impact of the financial crisis. The key rate hit its lowest-ever level of 1.25 per cent in June 2009. It has since been raised to 2.25 per cent, but this is still well below what can be considered a normal long-term level. Monetary policy is therefore still delivering a strong stimulus to the real economy. In light of the turmoil in financial markets and weakening world growth Norges Bank recently has signaled that the previously projected rate increases will be delayed.

20,00

18,00

16,00

14,00

12,00

10,00

8,00

6,00

4,00

2,00

0,002004 2005 2006 2007 2008 2009 2010

Perc

ent

2,5

2

1,5

1

0,5

0

-0,52001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Positive numbers indicate that the budget is expansionary

300,00

250,00

200,00

150,00

100,00

50,00

0,00 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2010

Source: Norges Bank

Source: Statistics Norway

Source: Ministry of Finance

Deflated by CPI

Deflated by disposable income minus expenses for food non-alcoholic beverages, clothing and footwear

Deflated by disposable income

perc

ent o

f mai

nlan

d GD

P

Monetary policy rates

The operational target of monetary policy is low and stable inflation, with annual consumer price inflation of approximately 2.5 per cent over time. Since substantial changes in the aggregate CPI (Consumer Price Index) may occur as a result of extraordinary fluctuations in product prices or changes in taxes, Norges Bank will pay most attention to the underlying inflation. One indicator of the underlying inflation, the CPI-ATE, adjusts for tax changes and excludes energy products. Underlying inflation is still at very low levels, at 0.8 per cent in August 2011. In isolation, this low inflation is serving to postpone further interest rate hikes.

Consumer prices, per cent change y/y

Credit marketInvestment growth in the mainland economy has led to increased credit demand from non-financial companies. Credit growth plummeted in the wake of the financial crises but has picked up again over the last year. The credit growth in non- financial companies has however been quite moderate compared to previous upturns. In July 2011 the twelve-month growth in corporate credit growth was 3.6 per cent.

Household credit growth has picked up over the last year, due to the strong demand in the housing market. The ratio of debt

to disposable income in the Norwegian household sector is historically high at around 200 per cent. However, this debt level should be seen in the light of the fact that around 80 per cent of Norwegian households own their own homes. Total household gross wealth (including dwellings) is around three times the outstanding debt of the sector, and, on average, Norwegian households have both adequate reserves and incomes to cover foreseeable interest increases and repayments on their mortgage debt.

The Norwegian Financial Supervisory Authority has recently announced that it considers tightening the guidelines for prudent residential mortgage lending practice; including lowering the level of what is considered a prudent loan-to-value ratio from 90 to 85 per cent of the property’s market value.

Domestic credit, change y/y

The Norwegian kroneThe Norwegian krone fell during the financial crisis, but has since regained its strength. The strong krone reflects both high oil prices, Norway’s solid fiscal situation and the relative favorable prospects for the Norwegian economy.

NOK – Exchange rate change

TWI – Trade weighted index (inverted)

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6,00

5,00

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3,00

2,00

1,00

0,00 2006 2007 2008 2009 2010 2011

US

UK

SwedenNorway

Euro area

Perc

ent

Source: Reuters EcoWin

6,00

5,00

4,00

3,00

2,00

1,00

0,00 Jan 08 May 08 Sep 08 Jan 08 May 09 Sep 09 Jan 09 May 09 Sep 10 Jan 10 May 10 Sep 10 Jan 11 May 11 Aug 11

Perc

ent

CPI CPI ATE Inflation target 2,5 %

22,50

20,00

17,50

15,00

12,50

10,00

7,50

5,00

2,50

0,00

-2,502000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Non-financial enterprises

Total credit indicator

Households

Source: Reuters EcoWin

Perc

ent

90,0

95,0

100,0

105,0

110,0

115,02000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Reuters EcoWin

Inde

x

Source: Statistics Norway