The vaccination of the population is progressing well, and the reopening of society will give a significant boost to economic activity in Norway.
Article continues below
The first interest rate hike will most likely be in September.
‘Over the past year, the COVID-19 pandemic has completely dominated developments in the Norwegian economy. It will continue to restrict activity in the months ahead, but the economy now seems to have reached a turning point,’ says Statistics Norway researcher Thomas von Brasch.
After the first lockdown in March last year, mainland Norway’s GDP fell by more than 10 per cent between February and April. Although activity picked up markedly in the third quarter, the latest waves of COVID-19 infection, both nationally and internationally, reduced activity development in the winter through to the spring. Economic activity in Norway was around 3 per cent lower in March this year than in February 2020.
At the end of May, the government moved to the second phase of the reopening plan, and according to the Norwegian Institute of Public Health, the entire adult population will have been offered their first vaccine dose by early August.
‘The infection trend is now falling, more and more people are being vaccinated and society is gradually being reopened. The stage is therefore set for the economy to pick up sharply in the time ahead. The recovery will be particularly strong in the labour-intensive industries, which have been hit hard by the infection control measures,’ says Thomas von Brasch.
In the forecasts, it is estimated that mainland Norway’s GDP will increase by 3.1 per cent this year. This upswing is somewhat weaker than previously estimated and is related to a weak development in activity at the start of the year, coupled with the shutdown or curtailment of large parts of the Norwegian economy so far in 2021.
‘By the end of 2021, we expect the economy to be back at the same level as before the outbreak of COVID-19 in February 2020. The aftermath of the international economic downturn and national infection control measures will nevertheless continue to impact on the economy for a long time to come. Not until 2023 do we estimate that unemployment will be back to what we consider a more normal level,’ says Thomas von Brasch.
The service industries that have been hardest hit by the infection control measures, such as the hospitality sector and tourism, employ about 20 per cent of the labour force in Norway. Once society has fully reopened and activity has picked up in these industries, unemployment will initially see a relatively quick fall. According to the estimates, unemployment will be 4.6 per cent in 2021, falling to 3.7 per cent in 2024.
‘As the economy accelerates at a rapid pace going forward, the abnormally low zero interest rate will quickly become untenable. We believe that the key policy interest rate will most likely be raised from the current 0 per cent to 0.25 per cent in September. It will then be increased gradually up to 1.75 per cent in 2024,’ says Thomas von Brasch.
Over the past year, there has been a sharp rise in house prices. This may indicate that the low mortgage rates have largely dominated other factors, such as moderate income growth and weak population growth. In addition, there has been a record high savings rate in the same period. According to forecasts, house prices will level off in the coming months, which means annual average growth of between 9 and 10 per cent in 2021.
‘There are now prospects of being able to start spending money on lots of other things apart from housing again. Coupled with higher interest rates and an increase in the supply of housing, this will help to curb inflation. However, there is still great uncertainty about house price developments,’ says Thomas von Brasch.
‘Death, infection and hospitalisation rates are now seeing a sharp fall in countries where large parts of the population have been vaccinated. This has led to great optimism with regard to possibilities for kick-starting economies and the future international economic cycle,’ says researcher Roger Hammersland.
Consequently, Norway's trading partners are assumed to be set for a very strong economic upswing. ■