2.3 The balance of risks

The projections in this report paint a picture that the Norwegian economy is faring well. Activity is growing faster than in previous years, and unemployment remains stable. Inflation is projected to decline gradually, and real wages are expected to increase both this year and the next two years.

The backdrop for the projections is an uncertain world. Moderate growth is projected among Norway's trading partners, while inflation will decline and unemployment will remain fairly stable. Geopolitical tensions and considerable uncertainty about the evolution of conditions for international trade mean that there is a considerable risk of weaker than assumed.

An important precondition for the projections in the report is that no major new shifts in global trade policy take place. There are still considerable risks associated with developments in international trade conditions, although uncertainty about trade policy has diminished since before summer and it now seems less likely that there will be an escalated trade conflict where many countries introduce high tariffs on each other. The International Monetary Fund (IMF) maintains that continued trade uncertainty poses a downside risk to the global economy. It can also affect the Norwegian economy, either as a result of slower global growth or because the uncertainty itself can lead to postponement of consumption and investment decisions and financial market turbulence.

In addition to trade conflicts, more general unrest and military conflicts in several areas also pose a risk. Further escalation of conflicts will not only entail human costs, but may also have significant economic consequences through new cost shocks, higher inflation and lower economic growth. Conversely, if ongoing conflicts subside, household and business optimism may strengthen and lift activity more than assumed.

In the short term, a more tense geopolitical situation may also prove to boost growth in the Norwegian and European economy more than assumed. Partly as a result of new NATO objectives, European countries are planning to increase defence spending sharply. This may result in greater positive economic spillovers than assumed in the projections, also for Norway.

The projections assume that spending increases related to, for example, defence and the green transition will not create problems with sovereign debt, which is already high in many countries. If there is distrust in countries' ability to service their sovereign debt, this may lead to higher interest rates, lower economic growth and a need for fiscal tightening.

Wage growth in Norway and how it will affect consumer price inflation ahead is another important assumption for the projections. Inflation is projected to slow further towards the inflation target of 2 per cent in the coming years. This assumes that wage growth comes down. Should it prove higher than projected, this will likely push up household demand in the short term. On the other hand, higher wage growth, or a stronger pass-through from wage growth to inflation than assumed, may lead to a longer continuation of the further normalisation of inflation. If inflation picks up again or does not come down further, the interest rate may have to be held high for longer. This could then weaken growth prospects, particularly for construction, but also household consumption, and growth in both GDP and employment could be weaker than currently projected. Conversely, stronger-than-assumed productivity growth may have a lesser impact on inflation than expected. This would then pave the way for stronger real wage growth and a faster decline in interest rates than would otherwise have been the case.