In an update to clients, the research house forecast that the housing and energy booms which shielded Norway from the anaemic global recovery, enabling it to outperform most other western economies, will “probably weaken, or even reverse, in the coming years”.
Momentum in the housing market is already “petering out”, Capital Economics noted, with prices last month recording their first annual decline since 2009. Further weakness will both encourage households to reduce their debt loads and lead to a reduction in construction, it predicted.
In addition, declining North Sea production will see energy firms increase investment by only 5% in 2014 – down from almost 20% in recent years. Given that two-fifths of Norwegian companies sell to the petroleum sector, this “will spill over into the mainland economy”, the update warned.
Tailwinds are not enough
“Admittedly, the economy will benefit from other tailwinds in the coming years,” Capital Economics continued. “The gradual recovery in the world economy, combined with the krone’s 11% (nominal trade-weighted) depreciation in 2013, should buoy exports.
“But taking into account high unit labour costs, the krone’s real exchange rate is still high by historical standards. And with non-energy-related exports accounting for a fairly modest 25% of GDP, the external sector alone will struggle to power strong growth.”
As a result, Capital Economics forecast annual economic growth of just 1.5% for Norway in 2014 and 2015 – well below official and consensus expectations of 2.2% and 2.5% respectively.
Nordea slashes forecasts
The predictions echo those of Nordea, which sharply revised down its expectations for Norway towards the end of 2013.
As Expert Investor Europe reported, last September the bank forecast Norwegian growth of more than 2% in 2014 and 2015.
In December, however, Nordea substantially reduced its forecasts for both Norway and Finland (see table).
Wariness on the domestic economy was evident among Norwegian fund selectors at our Oslo conference in November. Just 40% of investors who attended the event were upbeat on the outlook for Europe, compared with 60% who were positive on the macroeconomic picture.