NHO’s Chief Economist Upgrades Economic Outlook Despite Interest Rate Jumps and Inflation

Despite high inflation, interest rate jumps and a “free-falling krone exchange rate”, the economy is still doing better than NHO had feared. – But there is an underlying concern that this is going too well, says the chief economist.

NHO believes Norges Bank will raise the key interest rate both in June, August and September to a peak of 4 per cent. That probably means mortgage interest rates of well over 5 percent.

– People have long avoided interest rate increases, but there is concern that at some point they will no longer do so, says NHO’s chief economist Øystein Dørum to E24, in connection with new forecasts for the economy.

Norges Bank raised the interest rate to 3.25 per cent in May, and announced a further increase in June. Previously, the bank envisioned an interest rate peak of 3.5 per cent, but if the krone stays at the historically weak level, central bank governor Ida Wolden Bache has said that an even higher interest rate may be necessary.

– The headache for the central banks is that as long as the economy is still close to the boiling point, the central banks are not done raising interest rates, says Dørum.

Free fall and Swiss refugees

The high inflation has proved difficult to bring down towards the target of two per cent, and the weak krone is helping to lift price growth in the future as well.

– If a currency is initially in free fall, it takes a while to turn around, says Dørum.

However, after the marked weakening of the krone this year, NHO believes in a strengthening of the krone next year.

The the import-weighted krone exchange rate the import-weighted krone exchange rateThe cross-section of the currencies from the countries we trade with the most. strengthened from the turn of the millennium until 2013, but in the last ten years has weakened by around 50 per cent.

Dørum, like many others, thinks it is difficult to explain the weakening, but points to a combination of interest rate difference vis-a-vis abroad,interest rate difference vis-a-vis abroad,The difference between interest rates in Norway and other countries. If we raise the interest rate as much as others, the interest rate differential is unchanged. Higher interest rates in isolation imply a stronger currency. troubled times where many prefer safer investments, and in the longer term a transition away from an economy with the phasing in of oil money.

– And then I am very unsure of how much this with uncertain framework conditions and Swiss refugees means. I have yet to see proof of it. But that there is an effect here I think is obvious, because on the margin there will be some who might have chosen to place money in Norway and who do not do so anyway, he says.

– But it is hard to believe that it will have such major consequences. It is not just Norway that has a problem with the framework conditions, he adds, citing the budget problems in the USA as an example.

Interest rate cut in the new year

The rise in interest rates this year will lead to weaker activity in the Norwegian economy in the coming years, higher unemployment and subdued price growth. Thus, NHO also believes that the interest rate will be cut in the new year.

Dørum emphasizes that a lot can happen before that time, and that it will also take time before we see the full effects of the interest rate increases that have already come. Norwegians in general have also had savings to tap into after the pandemic, which is now about to reverse.

He also points out that housing prices have remained “surprisingly robust” considering the rapid rise in interest rates.

This year, NHO expects a house price fall of 1.5 per cent, while prices will be close to flat next year, before rising to just under 3.5 per cent in 2025.

– Risk that stronger lye will have to be added

Although the NHO companies now state that they see the future prospects a little less gloomy than in the previous quarter, the uncertainty is greater than before the pandemic.

Since the third quarter of last year, there has been a marked increase in NHO companies reporting that unpredictable framework conditions are an obstacle to growth. It was in this quarter that the government proposed land rent tax on salmon farming and wind power.

The share decreased somewhat in the second quarter, partly driven by lower electricity prices, but is still high. This may be a sign that companies will be more reluctant to invest, according to NHO.

Overall, economic activity continues to surprise and NHO is revising its growth forecasts for the third quarter in a row. Now it is time for a growth in GDP for mainland NorwayGDP for mainland NorwayGross domestic product (GDP) is equal to the sum of all goods and services produced in a country, minus the goods and services used during production. Mainland GDP includes production from all industries in Norway, apart from the extraction of oil and gas, pipe transport and pipe transport and foreign shipping. of 1.4 per cent this year, one tenth more than in the previous forecast. It is still much lower than last year’s growth of 3.8 per cent.

Dørum points to several reasons why things have gone better than feared: price inflation has moderated, the interest rate peak seems in sight, the bottlenecks in the value chains have disappeared, the stock exchanges are on the way up and people have tolerated price and interest rate increases better than feared.

– But there is an underlying concern that this is going too well, says the chief economist.

– The risk of weaker development is high. Primarily, this is related to the danger of inflation taking hold, and that a stronger policy is needed to bring it down again, he adds.