Growth in Norway, Western Europe’s biggest oil producer, will slow sharply next year as the offshore energy sector contracts and the central bank will likely have to cut rates to prop up the economy, Statistics Norway predicted on Thursday. GDP growth on the mainland, or excluding offshore oil and gas, will slow to 1 percent in 2015 from this year’s 2.6 percent but rebound to 2.2 percent in 2016 as the economy goes through a “clear but short-lived downturn,” the agency said in its quarterly report.
Norway generates a fifth of its GDP and half of its exports from oil and gas, and energy companies are cutting back investments and laying off workers as the 30 percent drop in crude prices since June makes many projects uneconomic. Oil investments will fall for four straight years with the drop already starting this year, then accelerating to 12.8 percent in 2015 and 7.2 percent in 2016, the agency predicted. The economic downturn will be so quick and deep that the central bank, which still has a tightening bias, will abandon plans to raise rates in 2016 and will actually cut the 1.5 percent benchmark rate by 50 basis points, it predicted.
“I think the revisions of the forecasts from Statistics Norway increases the probability for a downward adjustment from the central bank,” DNB bank economist Kyrre Aamdal said. “With such a weak picture and 1 percent GDP growth, we can expect a rate cut next year.” The central bank will release its latest policy report on Dec 11 and analysts expect unchanged rates even as the market has priced in a significant chance of a cut.
The bank’s main sentiment indicator, its survey of businesses around the country published last week, indicates a slowdown but also showed considerable resilience on the mainland as many exporters were actually benefiting from the weaker currency. Statistics Norway sees unemployment rising to 3.9 percent next year from 3.3 percent in 2014 and expects house price growth slowing close to zero.