After a good year for the Norwegian economy, next year will see slower growth. The economy has remained strong thanks to expansive government budgets and low interest rates. Next year there will less of a boost from those factors. Low residential investment and the trade war may act as significant dampers on the Norwegian economy. But this will most likely be offset by far higher investment in the oil sector, helping to keep the country growing at a decent rate of just under two percent for the coming two years.
Solid growth in private consumption
Norwegian households are optimistic about the future, as can be seen from indicators like Finans Norge’s Expectation Barometer. With higher wage growth, low unemployment and moderate inflation, consumption will increase at an annual rate of 2.5 percent until 2020. Slightly higher interest rates and rising electricity prices will restrict purchasing power, but not much. Retail sales in Norway are also showing signs of improvement, but the competition from online retailers keeps growing. Consequently, retail sales at physical shops are no longer such an important indicator.
… but what about the housing sector?
This year, residential investment has contracted sharply, as developers have responded to a reduction in the demand for housing. We must therefore expect the level of residential housing construction to be much lower in the coming years than it has been recently. The situation remains highly dependent on house prices, and they are hard to predict. Many people expect house prices to fall as a result of rising interest rates, an ample supply of new homes, strict rules on granting residential mortgages and the high number of unsold existing homes. However, interest rates remain low, unemployment is low and employees can look forward to higher wages. This reduces the risk of falling prices.
We expect house prices to continue falling slightly through 2019 – between two and five percent from current levels. In 2020 we expect prices to stabilise. The fact that residential investment has fallen slightly is a promising sign in terms of reducing the risk of a house price crash. It shows that the market is capable of adjusting gradually.
The Oil Sector
We are currently experiencing strong investment growth in the oil sector. After a period of very low levels of investment, oil companies have resumed extensive exploration and development activities. This upturn has been on the cards for a long time, but it has been slow to materialise.
As always, investment levels will be sensitive to the oil price. Predicting what will happen to oil prices is almost impossible. With the global economy only growing at a moderate pace, you might expect low prices. The rapid integration of increasingly affordable renewable energy sources is also exerting downward pressure on prices. Conversely, sanctions against Iran, plummeting production in Venezuela and political unrest in the Arabian Peninsula are pushing prices upwards. US oil demand is also increasing as a result of strong economic growth. Overall, these factors suggest that oil prices will continue rising over the coming years.
Falling export growth for traditional goods
After a significant improvement in Norway’s exports of non-oil goods and services over the past two years, these exports are expected to grow more slowly in 2019 and 2020. The reasons for this include slower growth in important export markets, growing trade barriers and a loss of competitiveness due to a stronger Norwegian krone.
Slightly slower growth will also hamper employment growth. It will be just over one percent per year – roughly in line with population growth – while the unemployment rate will stabilise at the current low level.