The Norwegian economy in 2016
The negative impulses from the petroleum industry continue to be significant, but there are numerous indications that Norway has come through the biggest challenges it was facing. The fact that Norway’s economy coped so well through a period with a sharp fall in the price of oil demonstrates that it is more robust than many thought, and that it has a flexible and adaptable labour market.
Investment in the oil sector fell markedly once again in 2016, and the challenging times facing the supply industry continued. Towards the end of 2016, however, there were signs of improvement in petroleum-sensitive regions as well, and by this point the price of oil had increased to nearly double the level seen at the start of the year. At the same time, the costs associated with many large projects on the Norwegian continental shelf virtually halved. This is reason for hope that brighter times lie ahead.
The unemployment rate was somewhat higher in 2016 than in 2015, but with an annual unemployment rate for 2016 of 3%, unemployment remains moderate. There are many indications that unemployment peaked in 2016, and unemployment was lower at the end of the year than at the beginning. The regional differences are, however, sizeable. The counties of Rogaland, Aust Agder and Vest Agder have struggled, with unemployment heading towards 5% as a result of the strong presence of petroleum-related industry. Although investment in the petroleum sector continues to fall, the unemployment rate in these counties fell in 2016. This indicates that the labour market is flexible, and that other industries are managing to use workers from the petroleum sector, who often have a lot of expertise.
Inflation was markedly higher in 2016 than in previous years. The 3.6% increase in the consumer price index can in part be explained as a delayed effect of the krone having weakened over the last three years, with imported goods consequently becoming more expensive. The strong increase in electricity prices is another important reason. Lower growth in electricity prices and the krone strengthening will probably cause inflation to be significantly lower in 2017.
Up until 2016, the economic downturn had not had much of an effect on household income and consumption. 2016, however, saw higher inflation and low wage growth, and this actually caused a fall in real wages. This impacted consumption growth, which in 2016 was at its weakest level since the financial crisis. Low interest rates, the gradual improvement in the labour market and the stronger krone leading to cheaper imports are, however, giving grounds to think that consumption growth will pick up again in the time ahead. The growth in the housing market will also help increase consumption, because households will experience an increase in net worth.
Despite the low consumption growth, there was a high level of demand for residential property in 2016. This caused house prices to grow strongly, with the annual rate of growth standing at an impressive 12.8% on a country-wide basis. Oslo saw the biggest increases, with house price growth in the city reaching a record high of 23.3%. Other locations in Norway also saw strong growth, including Trondheim, where prices were up 10.3%, and Tromsø, where they were up 7.5%. In contrast, prices in Stavanger fell by 2.6%, but towards the end of the year the situation there seemed to be improving. The strong house price growth on a country-wide basis is leading to strong growth in residential construction. This will probably lessen the excess demand somewhat, and there is consequently reason to expect house prices to grow less strongly in the years ahead.
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Unlike the petroleum industry, the mainland economy saw higher investment in 2016. This was particularly due to investment in the energy supply and service industries. The level of willingness to invest in the manufacturing industry remains relatively weak.
Exports of traditional goods and services benefited from the weak krone. The seafood index was up 23% in 2016 following a record year in 2015, partly due to higher salmon prices. A fall in the level of international demand for oil-related products, however, caused exports to fall significantly, and overall traditional exports were down in 2016. The stronger krone and limited salmon production as a consequence of the need for disease prevention mean there are grounds to expect exports to be low going forward. If the salmon industry satisfies the authorities’ environmental targets, production will potentially increase by 6% every second year.
Norway’s low key policy rate is helping to limit the economic downturn. The key policy rate currently stands at 0.5%, and has led to residential mortgage rates falling to around 2%. Norway’s expansive fiscal policy is also further limiting the downturn. Tax reductions are stimulating private consumption growth, while public sector consumption and investment are increasingly strongly. Norway’s National Budget for 2017 indicates that public sector consumption growth will continue to be high. A lot of the underlying growth is connected with social security benefits, transfer payments made by the National Government, and the healthcare sector. There are few indications that this growth will slow. 2017 is also an election year, which may provide additional impetus for consumption by the state and the local government sector in 2018.
It is reasonable to expect growth in the Norwegian economy to pick up in the time ahead. Lower unemployment, expectations that the fall in demand from the petroleum industry will slow sharply, and the prospect of higher international growth are important drivers for this. Increased investment in the residential property sector, and fiscal policy that remains expansive, are also important reasons for the expectation that there will be a gradual return to more normal growth over time.
This article was published in KBN's Annual Report 2016. You can find the whole Report here