Brighter days ahead

The Government’s conference on the 2022 budget is premised on the assumption that vaccination of adults and lifted containment measures will spur high growth in the Norwegian economy. How fast growth will pick up largely depends on the speed of vaccination and how soon virus containment measures can be phased out.

The Norwegian economy fares well compared to last spring, partly because containment measures are less stringent, and partly because firms now are drawing on experience when adjusting costs and activity to the actual situation. Norwegian businesses are also benefitting from higher oil prices and a rise in demand from abroad.

Activity in the Norwegian economy is still lower than the pre-pandemic level, although effects of the crisis are unevenly distributed across industries. Service industries that have been hit hard by the pandemic, including culture and entertainment and hospitality, comprise about 10 percent of mainland GDP and one-sixth of total employment, and are experiencing a fall by about 28 percent compared to pre-pandemic activity. The remaining 90 percent of the economy has rebounded, and activity in January this year was about 1 percent higher than in February last year.

Unemployment has come considerably down since last spring. Still, it is significantly higher than before the pandemic. As of 9 March, almost 206 000 persons were registered as job seekers at Nav, including furloughed and partially unemployed. Last year’s rise in unemployment is mainly due to an increase in furloughed employees. Compared to February last year, there is an increase in full-time ordinary unemployed by just below 17 000 persons. There is reason to believe that many of those furloughed will quickly resume work when containment measures are lifted.

Uncertainty about economic developments is unusually high. A major factor is the speed of vaccination and how early strict containment measures can be phased-out.

To the Government’s conference on the 2022 budget, material is prepared that presents three different scenarios for the development in mainland GDP, see figure 1. As containment measures are phased-out, activity will pick up and furloughed can go back to work. In all three scenarios, the economy will close in on the pre-pandemic trend towards the end of 2022.

Figure GDP for Mainland Norway
Figure 1: Different scenarios for GDP for Mainland Norway. Index. February 2020 = 100

The figure including data (pptx)

The most optimistic scenario suggests a rebound as early as mid-2021. That implies growth of 3½ in 2022. In such a scenario, growth will be close to the long-term trend by the end of 2022.

In the most pessimistic scenario, a rebound will come later. Although as soon as it takes hold, growth will be fast and reach 5¼ percent in 2022. In this scenario, a later lifting of containment measures implies lager accumulated household saving to trigger fast consumption-led growth. Still, economic activity will be lower than in the other two scenarios. Lower activity must be seen in light of a deeper and more prolonged setback during 2021. More businesses will go bankrupt.

Projected mainland GDP-growth in the three scenarios are presented in table 1.

Table 1: Different scenarios for GDP for Mainland Norway. Per cent volume change from previous year

  2021 2022
Optimistic 4.5 3.4
Middle 3.7 3.6
Pessimistic 0.5 5.3

National account figures released after concluding the material to the Government’s budget conference, reveal that the fall in activity in January was less than projected. In figure 1 this is illustrated by the difference between the blue and the red line for January this year.

We expect unemployment to continue to fall in line with containment measures being phased out. Still, it may remain higher than the pre-pandemic level also in 2022. Expectations are based on the assumption that most furloughed workers will be back at work. The need for restructuring in parts of the economy may lead to unemployment remaining high for longer in certain occupations.