Activity in the Norwegian economy is expected to see a marked increase this summer as a result of the vaccination program. The key policy interest rate is likely to return to the pre-pandemic level of 1.5 per cent in 2024, reads the recent report of the Statistics Norway on economic trends for Norway and abroad.
In January 2021, the level of activity in the Norwegian economy was 1.5 per cent lower than in February 2020. By the start of March this year, just over 7 per cent of the population had received at least one vaccine dose. According to the Norwegian Institute of Public Health, the numbers vaccinated will increase significantly in the coming months, and it is likely that infection control measures will be eased in May, once the risk groups have been vaccinated.
“We believe economic activity will see a marked increase this summer, once large parts of the population have been vaccinated and the repercussions of the pandemic have been reduced,” says researcher Thomas von Brasch.
The consequences of the infection control measures will nevertheless impact on the Norwegian economy for a long time to come, and unemployment is not expected to return to what is considered to be a more normal level until towards the end of 2024. The forecasts show that the key policy interest rate will be raised to 0.25 per cent in the second half of 2021, and then gradually increase to 1.5 per cent by the end of 2024.
Thomas von Brasch explains that a large degree of uncertainty surrounds the further development of the Norwegian economy.
“We have assumed that many of the measures will be eased in the summer, but this depends on the vaccination program being successful and infection rates falling. It is also uncertain how well the population will actually continue to follow the stringent infection control measures,” says Thomas von Brasch.
“If the stringent measures need to be continued beyond this summer, the economic backlash will last longer than that indicated in our current calculations,” he adds.
Vaccines and highly expansive economic policies seem to be increasing the prospect of hope becoming reality in relation to future developments in the international economy. As a result, the recovery in economic activity of the trading partners of the Norway is expected to be somewhat stronger in the years ahead than the researchers previously envisioned.
“The forecasts are based on the fact that our trading partners are on the verge of a strong and imminent economic upswing. However, the potential transmission of viral mutations that are immune to current vaccines represents a major downside risk,” says researcher Roger Hammersland, who produces the forecasts for the international economy.
Fiscal policy has helped to reduce the negative impact of the pandemic on the Norwegian economy. In 2020, the Storting passed a number of economic measures and temporary amendments to regulations in order to compensate households and businesses for losses in income. These measures have increased the budget expenditure considerably. In total, the pandemic-related economic measures in 2020 amounted to US$ 15,495,138,500 (NOK 131 billion).
According to the fiscal rule, petroleum revenue spending over time should amount to 3 per cent of the oil fund, but a large emphasis must also be placed on smoothing out fluctuations in the economy to ensure good capacity utilization and low unemployment, as was seen in 2020. The structural non-oil public deficit for 2020 in the balanced central government budget for that year is estimated at US$46,403,489,125 (NOK 392.5 billion).
This corresponds to around 3.9 per cent of the oil fund’s market value at the start of the year. For 2021, adopted and proposed pandemic-related measures amount to US$7,719,798,650 (NOK 65.3 billion). This gives a budget balance of 3.3 per cent, measured by the structural non-oil public deficit as a proportion of the oil fund. In 2022 and 2023, the researchers expect the budget balance to be reduced to about 3 per cent of the oil fund.
