Country wrap-up Norway – Normalisation is the new policy

Norwegian economic activity remained dynamic in 2018 (1.7% YoY) owing to robust petroleum investment and higher income s. Yet, the expansion eased from 2.4% in 2017 as domestic demand weakened amid a challenging housing market (dwelling investment fell by 6%), while exports declined owing to a weaker global economy. Looking ahead, economic activity is expected to be shored up by strong public infrastructure and oil-related investment. Also, w hile the stock of unsold houses is still high , dwelling investment is likely to regain strength given signs of a stabilizing housing market, with housing prices growing at 3.2% in March. Finally, private consumption is set to grow strongly owing to a further decline in unemployment and rising wages. E xports should rebound this year despite an uncertain global outlook . In March this year , Norges Bank raised its policy rate to 1% and announc ed a gradual end to its ultra- accommodative monetary policy in place since June 2015 (<1%). Norwegian inflation has been on the rise since mid-2018 shored up by the fall in unemployment and a somewhat weaker krone. Core inflation gradually strengthened to reach 2.6% in February. Household earnings grew by 2.9% in 2018 and should further rise by 3% YoY this year thanks to labour market tightness and higher capacity utilization. The imported inflation will stay supportive this year, but the impact will lessen over time given robust growth prospects and gradual tightening by Norges Bank. Norges Bank is set to rise its key rate to 1.25% in September this year and by another 25bp to 1.5% in 2020. Downside risks: weaker than expected global economy and premature tightening could result in more subdued growth. One should stress that t he gradual normalization will translate to higher repayment costs of highly indebted Norwegian households.