Norway: Economy recovers in Q1, but investment is still weak
May 12, 2016
Following the startling 1.4% contraction in the last quarter of 2015, Norway’s economy showed signs of recovery in Q1 with total GDP expanding a robust 1.0% over the previous quarter. The collapse in oil prices has led to a drastic contraction in oil-extraction-related investment in Norway that dragged on economic growth in 2015. This is still evident in the first quarter of 2016, although other areas of the economy are beginning to show signs of recovery. The expansion in total GDP came as a surprise to the markets, which had expected a much softer increase of 0.1%.Much of the expansion can be explained by an unexpected increased electricity production and was not the result of a broad-based economic recovery.
Although headline growth was impressive, much of the increase has to do with strong electricity production at the beginning of the year. This is partly due to a colder start to the year than usual and record-high water levels in electricity generating reservoirs.
Although total GDP saw a sharp quarterly expansion, Mainland GDP—which comprises all domestic production activity except for the extraction of crude oil and natural gas (including related services), pipeline and ocean transport—only managed a 0.3% expansion over the previous quarter (Q4: -0.1% quarter-on-quarter). While total consumption growth in Norway remained unchanged in Q1 (Q4:+0.5% qoq; Q1: +0.5% qoq), consumption growth dynamics have varied somewhat. Government consumption accelerated substantially from 0.4% in Q4 to 0.9% in Q1 as outlays have increased as part of the government’s planned fiscal stimulus. Unemployment in Norway has crept up, particularly in the Southern and Western regions of the country which are more dependent on the oil industry, and mainland growth has been modest in recent quarters. This has prompted the government to begin making record withdraws from its sizable sovereign wealth fund in order to support growth. Conversely, private consumption growth edged downward in Q1 (Q4: +0.5% qoq; Q1: +0.3% qoq). The deceleration was likely the result of a softer labor market impacting consumers’ spending decisions.
Fixed investment growth continued to fall in Q1, though the figure did mark an improvement over Q4’s more drastic contraction (Q4: -1.3% qoq, Q1: -0.9% qoq). Fixed investment continues to recoil from last year’s collapse in investment in the oil industry, particularly in the area of exploration. Lower cash flows to oil companies effect the capacity of such companies to invest in production, particularly in the area of oil and gas extraction. Extraction activities are easy for companies to cut and have little effect on short-term production capabilities. However, non-oil business investment and investment in the housing market both increased slightly. Total investment, which includes inventory spending, grew a sizable 4.0% over the previous quarter, contrasting the 0.1% decrease in Q4. Statistics Norway’s forward-looking investment intentions survey suggests that total investment will continue to decline in 2016, dragged down by contractions in extraction- and pipeline-related activities. This paints a bleak picture for future growth for this year, although investment is expected to pick up in 2017.
The external sector continued to drag on growth in Q1, although to a lesser extent compared to Q4, as the contraction in exports softened (Q4: -3.5% qoq; Q1: -1.2% qoq), and imports swung from a 0.7% expansion in Q4 to a 0.4% contraction in Q1. Q1’s drop in exports was the result of a continued decrease in traditional goods exports, such as refined oil products, while the deterioration of imports may reflect consumer’s softer appetite for foreign goods in the face of a weaker krone. As a result, the external sector’s negative contribution to growth softened from negative 1.6 percentage points to negative 0.4 percentage points in Q1.
Author: Robert Hill, Economist