Activity in the mainland economy is expanding, but will be Capital Formationcurbed by weak foreign growth. Private consumption haspicked up somewhat, but household optimism has weakened Gross capital formation, Mainland Norway excl. Government,lately. At the same time, house prices are still rising and housing change last 12 months (LTM)investments has shown a substantial increase. The unemploy-ment rate has remained unchanged at just above 3 per cent the 20,00last months, which is very low both by historical standards and 15,00compared to other countries. 10,00 GDP Growth, Mainland Norway 5,00 Percent 6,00 0,00 5,00 -5,00 4,00 -10,00 3,00 -15,00Percent 2,00 -20,00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1,00 Source: Reuters EcoWin 0,00 -1,00 Private consumption is picking up -2,00 After a slow start of 2011, due to high electricity bills, house- 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 hold consumption picked up in the second quarter. Households‘ disposable real income has shown a clear increase and higher Source: Statistics Norway 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 Labour market forward. Private consumption accounts for over 50 per cent of the activity in the Norwegian mainland economy. 3,0 5,00 Unemployment rate (right scale) 2,9 4,75 Private consumption 2,8 4,25 2,7 4,00 Household consumption, change last 12 months (LTM)Person (millions) 2,6 3,75 7,00 Percent 2,5 3,50 6,00 2,4 3,25 5,00 2,3 3,00 4,00 2,2 2,75 Total employment (left scale) 3,00 2,1 2,50 Percent 2,00 2,0 2,00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1,00 0,00 Source: Reuters EcoWin -1,00Activity in Norwegian companies is increasing -2,00Norway is a small and very open economy with a significant -3,00proportion of exports and imports. Many Norwegian 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011companies were hit by the global recession in the wake of thefinancial crisis. Investments by mainland companies fell by 20 Source: Reuters EcoWinper cent from late 2008 to early 2010. The negative develop- Still large current account surplusment turned around in the middle of 2010, and investments Norway has experienced a large surplus on the current accounthave grown moderately over the last year. The development is for many years, thanks to the large export of petroleumparticularly strong in building and construction services, while products. The surplus on the current account was 13 per cent ofthe development in manufacturing is rather weak. Investments GDP in 2010 and is expected to continue to stay at high levelsare expected to increase moderately going forward. in the coming years, mainly due to high exports and high prices of petroleum products.
House prices are increasing sharply Current account, balance in % of GDP House prices rose sharply towards the end of 2010 and increased by more than 8 per cent from 2009 to 2010. The 20,00 strong development has continued this year, fuelled by low 18,00 interest rates, increasing optimism, high population growth and 16,00 employment growth. Home building has picked up sharply over the last year, after falling markedly in the wake of the financial 14,00 crisis. The adjustment of housing supply is nevertheless slow 12,00 and housing supply is still insufficient to meet the increased Percent 10,00 demand, especially in central areas. 8,00 Real house prices are high by historical standards. However, 6,00 income levels have also increased considerably over the last decades, and deflated by income levels house prices are more 4,00 moderate. In addition, spending on necessary consumption, 2,00 i.e. food and clothing, has decreased as a share of total 0,00 consumption over the last decades. House prices deflated by 2004 2005 2006 2007 2008 2009 2010 disposable income net of such necessary expenses are somewhat lower, but still about 10 per cent higher than the average over Source: Statistics Norway the last quarter of a decade.Expansionary fiscal policy to be reversed in 2011 Potential slide in house prices could have significant adverseLarge petroleum revenues give the Norwegian goverment distribution effects. Historically, however, only a very smallsubstantial economic freedom, and the financial crisis was proportion of households have defaulted on their mortgages.met by strong fiscal and monetary stimulus. The fiscal policy, Instead, they have cut back on other outgoings, such asas measured as the change in the structural non-oil budget expenditure on consumer durables and travel.deficit as a share of trend GDP for mainland Norway, wasvery expansionary in the wake of the financial crisis. In lightof the improvement in the economy, the Government is now Housing Marketmoving towards a more neutral fiscal policy. Lower spending Real house prices. Indices.of petroleum revenues will lead to a reduction in the structural 1985 =100. Annual figures. 1985 – 2010non-oil deficit from 2010 to 2011, which corresponds to a fiscaltightening of approximately 0.3 per cent of mainland trend-GDP. 300,00 250,00 Fiscal policy – budget impuls 200,00 Positive numbers indicate that the budget is expansionary 150,00 2,5 100,00 2 50,00 percent of mainland GDP 1,5 0,00 1 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2010 Deflated by CPI Deflated by disposable income 0,5 Deflated by disposable income minus expenses for food non-alcoholic beverages, clothing and footwear 0 Source: Norges Bank -0,5 Norges Bank rate increases brought to a halt 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Norges Bank, the Norwegian central bank, cut its key policy rate markedly in 2008 and 2009 to cushion the impact of the Source: Ministry of Finance 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.
to disposable income in the Norwegian household sector is Monetary policy rates historically high at around 200 per cent. However, this debt level should be seen in the light of the fact that around 80 per 7,00 cent of Norwegian households own their own homes. Total household gross wealth (including dwellings) is around three 6,00 UK times the outstanding debt of the sector, and, on average, US 5,00 Norwegian households have both adequate reserves and incomes to cover foreseeable interest increases and repayments 4,00 on their mortgage debt. Percent The Norwegian Financial Supervisory Authority has recently 3,00 Sweden announced that it considers tightening the guidelines for 2,00 Norway prudent residential mortgage lending practice; including lowering the level of what is considered a prudent loan-to-value Euro area 1,00 ratio from 90 to 85 per cent of the property’s market value. 0,00 2006 2007 2008 2009 2010 2011 Domestic credit, change y/y Source: Reuters EcoWin 22,50The operational target of monetary policy is low and 20,00stable inflation, with annual consumer price inflation ofapproximately 2.5 per cent over time. Since substantial changes 17,50in the aggregate CPI (Consumer Price Index) may occur as a 15,00result of extraordinary fluctuations in product prices or changes 12,50in taxes, Norges Bank will pay most attention to the underlying Percent 10,00inflation. One indicator of the underlying inflation, the CPI-ATE, adjusts for tax changes and excludes energy products. 7,50Underlying inflation is still at very low levels, at 0.8 per cent 5,00in August 2011. In isolation, this low inflation is serving to 2,50postpone further interest rate hikes. 0,00 -2,50 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Consumer prices, per cent change y/y Non-financial enterprises Households 6,00 Total credit indicator Source: Reuters EcoWin 5,00 The Norwegian krone 4,00 The Norwegian krone fell during the financial crisis, but has since regained its strength. The strong krone reflects both Percent 3,00 high oil prices, Norway’s solid fiscal situation and the relative favorable prospects for the Norwegian economy. 2,00 NOK – Exchange rate change 1,00 TWI – Trade weighted index (inverted) 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 90,0 CPI CPI ATE Inflation target 2,5 % 95,0 Source: Statistics NorwayCredit market 100,0Investment growth in the mainland economy has led to Indexincreased credit demand from non-financial companies. Credit 105,0growth plummeted in the wake of the financial crises buthas picked up again over the last year. The credit growth innon-financial companies has however been quite moderate 110,0compared to previous upturns. In July 2011 the twelve-monthgrowth in corporate credit growth was 3.6 per cent. 115,0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Household credit growth has picked up over the last year, dueto the strong demand in the housing market. The ratio of debt Source: Reuters EcoWin