The upswing in the Norwegian economy turns into a downturn in 2021

DNB Markets believes the upturn will continue in the Norwegian economy both this year and next, but in 2021 a setback in the US and globally will also bring Norway down.

This writes the brokerage house in this year’s first edition of the report Economic Outlook, which deals with the period 2019-2022.

Over the past couple of years, the Norwegian mainland economy has performed well, and DNB Markets estimates economic growth of 2.0 per cent this year and 2.1 next year. But the two consecutive years become leaner.

– In 2021, we have assumed that the Norwegian economy is hit by a downturn in the US. This results in lower growth and decline in key rates, writes senior economist Kyrre Aamdal in the report.

Good, even so long

But for the current and next year the speeches are clear: The positive trend in the Norwegian economy will continue. The reason is, among other things, a marked increase in oil investments, estimated at 10 per cent this year and 4 per cent next year, and a more moderate decline in housing investment than last year.

The fact that the speed is likely to be slightly lower this year than last year is primarily due to the high electricity prices “which weigh on the consumption at the beginning of the year”.

The ups and downs are reflected in several ways. The annual wage growth will rise to 3.1 per cent this year and 3.2 per cent next year, it is estimated.

– Although electricity prices may remain high this winter, there is hardly any reason to expect the same rise in prices as last year. Thus, it is assumed that real wage growth will pick up, and with the growth in consumption, Aamdal writes.

At the same time, unemployment will continue somewhat further down, measured by Statistics Norway’s labor force survey (LFS).

Turns in 2021

Although the brokerage house envisages that the picture turns in 2021, both globally and for Norway, the forecasts show a moderate downturn.

– As in our two previous half-year reports, we estimate that the next economic downturn will come in 2021, writes DNB Markets’ senior economist Knut A. Magnussen.

But the bank points out that the imbalances appear to be considerably smaller now than before the financial crisis in 2008, both in the US and in Europe, especially in the household sector and the housing market. Moreover, the banks are better equipped.

But even though a decline in the US and globally may be moderate, it will affect Norway, according to DNB Markets’ forecast: LFS unemployment will rise to 4.4 per cent in 2022 and growth in the economy will fall to 1.5 per cent in 2021 and 2022.

Moreover, further tightening of US interest rate policy, escalation of the US-China trade war and an oil price that is more than expected and undermining growth in oil-importing regions can accelerate the downturn in time.

Increased interest rates

The good times in the Norwegian economy are in the process of sending the key rate in the weather. In September, interest rates were raised from record lows of 0.5 per cent to 0.75 per cent, and Norges Bank has announced a new interest rate hike in March. The interest rate path points to a further interest rate hike in 2019.

– With our estimates, it seems reasonable to expect an increase also in 2020, before the outlook removes expectations of further interest rate rises. With a setback in 2021, the key policy rate will be reduced again, writes Aamdal.

But that interest rate this year and next year is on the rise, will have an impact on house prices.

– A high level of the number of unsold homes, somewhat higher completion of new homes towards the end of last year and this year, combined with lower population growth, suggests that house prices will decline somewhat ahead, according to Aamdal.

– Interest rate increases from Norges Bank will increase lending rates and are expected to dampen house price inflation going forward.

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