Business Cycle Barometer for Northern Norway 2018

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International Economy

The world economy has been growing at a reasonable rate in recent years, with most regions performing well. This growth is forecast to continue, but there is a great deal of uncertainty – both political and financial – in many parts of the world. The situation may calm down, but the uncertainties appear to be weighted to the downside. Prospects remain bright for the economy of Northern Norway, but it is still likely to be affected by any weakness in the global economy.

Exporters of commodities, seafood and tourism products are particularly exposed. Trade wars, higher interest rates, a strong dollar and higher oil prices are the main factors that may act as brakes on the world economy. Climate-related disasters may also reduce world growth.

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Expected growth IMF for 2018

IMF

Prognosis - international ecnomy (IMF)

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The United States

The United States has experienced a long period of strong growth, and the unemployment rate is now under four percent. Many economists have pointed out that these periods of growth rarely last for more than ten years. The start of 2018 saw a temporary slowdown, but growth has since picked up again. The Fed, the US central bank, has attempted to rein in growth by raising interest rates eight times since the end of 2015. That has led to a strengthening of the US dollar, combined with what appears to be a cooling housing market. The aim is to avoid inflation or an economic bubble.

On the other hand, the Trump administration is running a very expansionary fiscal policy, with rising public expenditure and generous tax cuts. That is stimulating higher consumption and investment. US industrial production is also increasing, having risen 5.1 percent over the past year.

Nevertheless, the IMF is highlighting the risk of further negative news and expects the US growth rate to slow down gradually. Trade policy in relation to China and a number of other countries will put downward pressure on GDP growth, but it may take a while to have an impact. If the trade war with China escalates – which is a real possibility – US stock markets are likely to suffer, with knock-on effects for the real economy. In that case, we can expect a sharper slowdown in the rest of the world as well.

If the trade war with China escalates [...] we can expect a sharper slowdown in the rest of the world as well.

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Europe

In 2017 the Eurozone grew at its fastest pace in a decade. Now a gradual slowdown is expected due to higher interest rates, rising oil prices, economic weakness in Italy, fears of a trade war and slow productivity growth. That is bad news for exporters in Northern Norway, who sell a lot to those countries. On the other hand, the EU’s unemployment rate is falling, and wage growth is picking up.

German GDP growth is expected to decline, from 2.5 percent last year to 1.9 percent in 2018. In France and Italy an even sharper slowdown is expected, with growth not much above one percent this year and in 2019. In Spain, on the other hand, growth will remain high after several years of wide-ranging economic reforms.

In the United Kingdom, growth has fallen significantly. The Brexit negotiations have reached a critical phase, and it is far from clear that any agreement will be reached. Many people now fear a so-called “no-deal Brexit”, where neither the UK nor the EU are willing to give way at the negotiating table, resulting in the UK withdrawing from the union without any agreement in place. The Bank of England raised interest rates in August, but has indicated that it will hold off with any further interest rate rises.

Growth remains high in Eastern Europe, but there are many reasons to believe that it will begin to decline. Russia’s economy continues to experience slow growth, being held back by sanctions. If oil prices rise, growth is likely to pick up slightly in 2019 and 2020.

In 2017 the Eurozone grew at its fastest pace in a decade.

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Asia

China’s GDP growth remains high but is expected to fall in the coming years. Lower export growth, the trade war and volatile financial markets are some of the factors behind the slowdown. Domestically, there remains a risk of debt bombs in the private sector and particularly in residential housing, but that has been true for a long time, and the state has plenty of capital and tools at its disposal to combat financial imbalances. With the help of fiscal and monetary stimulus, growth has been sustained.

India’s economy continues to grow at a very quick pace. Supported by rapidly rising private consumption, this will continue. Growth is primarily being driven by a stronger domestic economy, with economic reforms, rising education levels and greater stability boosting productivity in both the industrial and agricultural sectors. A growing number of states are participating in the economic upturn. However, even India is at risk of a slowdown. Rising interest rates, higher oil prices and a strong dollar are making it much more expensive for the public and private sectors to service their foreign debt.

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Africa

In Sub-Saharan Africa, growth has picked up recently, and even faster growth is expected in 2019. This is the result of higher commodity prices and better access to international capital markets. However, countries with high levels of dollar-denominated debt are being hit by the strong dollar and higher interest rates. One such country is South Africa, where modest growth is forecast, and the South African rand has weakened significantly.

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Latin America

In Brazil, much faster growth is expected in 2019, but the forecasts are associated with a great deal of uncertainty. The new president, Bolsonaro, has traditionally been a centrist, in spite of his occasionally extremist rhetoric. There is no guarantee that Bolsonaro has the ability or desire to implement the necessary economic reforms.

Argentina is currently in recession. The country is weighed down by high levels of dollar- and euro-denominated debt, and the peso has weakened significantly. The country is also saddled with high interest rates on its foreign debt.

The Venezuelan economy is experiencing its fifth successive year of negative growth, due to political and social unrest, as well as plummeting oil production. In 2017 the economy shrank by fourteen percent, and it is expected to contract a further eighteen percent this year. So far there is little evidence that the crisis will affect growth in its neighbouring countries.

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Greater risk of a sharp slowdown in the near future

There is a lot of uncertainty in the world and many indicators are pointing in the wrong direction. The United States has warned that it will further escalate its trade war with China after New Year. If trade between the United States and China suffers, other countries in industrial supply chains will also be affected. That will spread the negative impacts around the world, including to Norway.

Northern Norway and the global trade wars

The trade war between the United States and China may continue to escalate. The question is how large the knock-on effects will be. How will this affect Northern Norway as an exporter and importer?

Why is Trump starting a trade war?

President Donald Trump’s administration has made trade policy a key part of its strategy to boost economic growth (“Make America Great Again”). The idea is that making imports more expensive will enable US companies to capture a larger share of the domestic market. The Trump administration sees the trade deficit as a measure of how much the United States is “gaining” or “losing” from international trade. Trump has withdrawn the United States from the TPP negotiations with sixteen other countries around the Pacific Ocean, renegotiated the NAFTA agreement with Mexico and Canada, and halted the TTIP negotiations with the EU.

Trump has also drawn up the report “Investigation of China’s laws, policies, practices, or actions”. The report claims that China has systems in place to steal patented American inventions, which provides grounds for introducing punitive tariffs. Trump appears to have the American political establishment behind him on this, as parties right across the political spectrum wish to prevent China from becoming a bigger technology giant than the United States.

Tariffs on you are tariffs on me

Trump often talks about American products, but products that are finished in the United States contain components and services supplied by a wide variety of countries. The Boeing 737, which is assembled in the United States, has engine parts manufactured in Italy, the United States and the UK, landing gear and batteries from Japan, wingtips from Korea, other parts of its wings from Canada and Australia, cargo doors from Sweden and passenger doors from France. And Chinese components and parts can be found almost everywhere in American manufacturing.

Putting tariffs on imported goods may reduce competition from foreign companies in the domestic market, but it also often increases production costs. This makes American companies less competitive outside the United States. Domestically, consumers and customers will have to pay more for goods, which will reduce their purchasing power and wealth. The many US businesses that supply Chinese companies will also suffer. Last, but not least, there are many US companies that manufacture goods in China. They will also face import tariffs on the goods they send to the United States.

Many studies have shown that higher input prices outweigh the advantage of being protected against competition in the domestic market. In its most recent World Economic Outlook, the IMF estimates that the global economy will be around 0.5 percent smaller in 2020 than it is today – if the trade wars continue.

Trade wars and Northern Norway

The direct impacts on Northern Norway of a trade war between the United States and China will only be small, as most of the region’s exports go to other markets – particularly the EU. Indirectly, however, an escalating trade war may have big impacts on the region. If goods across the value chain become more expensive for US and Chinese manufacturers, it will affect prices and the purchasing power of consumers in those markets. That will in turn affect exporters of seafood, metals and tourist experiences in Northern Norway, because consumers will have less money in their pockets. The prices of goods sold may also fall if there is a slowdown in growth.

Global uncertainty and strong economic growth in the United States have caused the dollar to strengthen. In addition, the Fed has put up interest rates a number of times. The combination of a strong dollar and high US interest rates makes it more expensive for other countries to service their dollar-denominated debts. Fears of potential debt and currency crises in countries such as Argentina, Turkey, Indonesia and South Africa have already had a big impact on markets. The fear felt by financial markets may easily be exacerbated and spread to other markets with high levels of foreign debt.

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In recent years there has been an acceleration in the number of extreme weather events negatively impacting the economy. The drought in Northern Europe earlier this year, increasing numbers of hurricanes in the eastern United States and China, drought in South Africa and far more frequent floods have destroyed assets and are holding back growth. The US Congress expects to pay out almost 700 billion dollars this year as a result of forest fires and hurricanes.

There is already a real risk that growth in some parts of the world will be significantly curtailed by climate-related changes to weather patterns. One example is coffee production, which is dependent on stable weather. The global coffee harvest has fallen. Climate uncertainty has become an issue much faster than many people were expecting. If the number of extreme weather events continues to rise, we must be prepared for more long-term environmental damage caused by landslides, forest fires and flooding.

There is already a real risk that growth in some parts of the world will be significantly curtailed by climate-related changes to weather patterns

Norwegian Economy

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