NORWEGIAN ECONOMY IN TROUBLED WATERS

He is a senior adviser in the analysis department at Virke, and at the member meeting of the Elektronikkbransjen Foundation on 26 May he will present a macroeconomic overview. Lasse André Paulsen paints a picture of a Norwegian economy that has been through a series of successive disruptions since the pandemic, and is now facing fresh global turmoil.

Norway has experienced the highest price growth in 40 years, as measured by the consumer price index. Price data from Statistics Norway show that price growth for Norwegian goods and services has for a long time developed more strongly than price growth for imported goods.

– This means that foreign price impulses are not the primary driver. Nevertheless, strong profitability in the export industry has helped keep wage growth up, also in sheltered sectors that do not have corresponding profitability, which helps to put pressure on margins and prices in domestic sectors, says Paulsen.

He points out that during the pandemic, consumption shifted from services to goods, which created pressure in international goods markets. Disruptions in supply chains reinforced price growth, and then came the war in Ukraine with a sharp rise in energy and commodity prices.

– During the pandemic, people were afraid of what would happen when society reopened. Therefore, interest rates were cut to zero, and large support schemes were introduced for businesses. This provided a great deal of stimulus, so when society reopened and things normalised quite quickly, it created strong pressure in the labour market and wage growth picked up. In a way, this has helped keep inflation elevated, even though it has come down from the highest levels we saw, says Paulsen.

Interest rates and the krone exchange rate

To bring price growth down towards the two per cent target, Norges Bank has increased the policy rate markedly. Paulsen points out that peak interest rates had, as a trend, become lower in each cycle up until the pandemic, but that this has now changed. Higher defence spending in Europe and large budget deficits in the United States are highlighted as structural reasons why long-term interest rates have risen globally.

– Long-term interest rates, that is, ten-year government bond yields, say something about what the market perceives as a normal interest rate level. And it is the market’s view that it is no longer normal to have low interest rates. It is not the case that the market is pricing in rates to come down quickly again, says Paulsen.

He points out that the krone has strengthened from weak levels, also against the euro, up by about eight per cent trade-weighted since the turn of the year.

– The krone has strengthened particularly against the dollar, which is partly explained by the fact that the dollar has generally weakened after Trump returned to the White House, says Paulsen.

He continues:

– With a stronger krone, it becomes cheaper to import. A stronger krone does part of the job for Norges Bank. Wage growth through the pattern bargaining settlement will also moderate with the kind of exchange rate we have now, relative to what we have had in recent years.

Global trade policy

Uncertainty in the global economy has reached historic heights. During Trump’s second term, uncertainty, as measured by mentions in the media, has reached its highest level since the 1960s. Paulsen believes Trump’s tariff policy as an approach to trade deficits is based on a fallacy.

– Trade balance deficits largely reflect a savings deficit. Imposing tariffs on goods without doing anything about the underlying savings deficits has no other effect. Normally, the dollar would strengthen and offset the effect of higher tariffs. If the currency weakens instead, prices rise, and the effects are counteracted in that way, says Paulsen.

A third source of uncertainty is the pressure on independent central banks. Paulsen describes this as a break with conventional thinking.

– Interest rates are raised when the economy runs up against capacity constraints, and lowered when stimulus is needed. Trump’s attacks on the central bank have probably intensified the unrest, with long-term interest rates rising, the stock market performing weakly in the US compared with other countries, and the dollar weakening, says Paulsen.

Consumption and the housing market

Consumer confidence among Norwegian consumers fell markedly during what Paulsen describes as the cost-of-living crisis, to a greater extent than during the financial crisis. Nevertheless, private consumption has increased in step with improving purchasing power, and private consumption is now the most important driver of growth in the Norwegian economy. The savings rate of Norwegian households has normalised and is close to the average for the period before the pandemic.

Housing investment has fallen by nearly 30 per cent since its peak, driven by rising interest rates and weakened purchasing power. Construction costs have increased sharply over time, and prices for new homes have risen more than prices for existing homes, which has shifted demand towards the existing homes market.

– Rising interest rates make it expensive to finance projects. When you are uncertain about your own finances, you are probably more inclined to buy an existing home than to buy a new one and sit and wait to take possession. Uncertainty and weakened purchasing power have helped to dampen activity in the new-build housing market, says Paulsen.

Retail

In retail, measured excluding fuel and cars, volume growth has returned after a period of negative development when purchasing power fell. Paulsen points out that Statistics Norway’s e-commerce statistics only include players with e-commerce as their primary industry code, but that from this year the agency will incorporate e-commerce into the industry statistics.

– This will provide a substantially more complete picture, Paulsen believes.

He continues:

– The distinction between physical shops and online is becoming less important. Those who combine physical shops and online are winning at the expense of pure online players.

For groceries, lower value growth is expected, primarily as a result of lower price growth for food and drink. The private segment for building materials has declined sharply when adjusted for prices in the years after the pandemic. This market is now believed to have turned around.

For the electronics industry, there is still some statistical uncertainty linked to last year’s figure. Paulsen nevertheless expects good value growth, justified by improved purchasing power, although a weak new housing market pulls somewhat in the opposite direction. Furniture is also a consumer durables sector where improvement is expected from low volumes in line with increased purchasing power.

– Overall, slightly lower value growth is expected in retail this year than last year, but still quite good development. Stronger volumes and weaker price growth than we have seen in recent years is the main scenario, but there is a possibility of somewhat stronger price growth, says Virke’s man.