The Nobel Economist: Norwegian Economics 101

Norwegian Economics 101

In my previous chapter I described how I predicted the price of oil and the devaluation of the norwegian NOK. Now, we will take a deep insight about what this means for the Norwegian economy, and for your private household!

Before that, some basic macroeconomical concepts:

The country has had sound and has solid finances, despite a 6% fiscal deficit (which is financed by oil money). It is solvent and has the best credit ratings. GDP x capita has been amongst the highest in the world, considering that it is western europe’s biggest Oil & Gas exporter and that it is a country of only 5 million people. This is called “productivity”, it means that every citizen in Norway produces much more than other countries. Many people misunderstand, they believe GDP x capita equals SALARY. So if GDP x capita is USD 6.000 a month, that would mean that in Norway an average salary is 6.000 USD a month? WRONG. In Norway, salaries after taxes average from 2.000 – 3.000 USD a month. Productivity is explained ONLY by the oil sector. Not by the company YOU work for (unless oil related). It does NOT mean efficiency. Efficiency would be that you are using your capacity at it’s best, and getting the most out of your resources.
GDP vs. exports: now another myth that I have heard is that the oil & gas sector represents only 25% of the economy. Oil & Gas represents only 25% of the GDP, true, which is the size of the economy, but 70% of the EXPORTS. Now the exports are what creates employment in the private sector. So if companies are suffering to export, that will mean less job creation in the private sector.
The Oil Fund: which is a fund invested abroad to secure the pensions. It is not money that is deposited in your bank account. By policy it is not invested in the local economy, it is not for you to go on vacation. It is to secure your PENSION. As I mentioned before, Norway has probably the best pension system in the world. The proof of this is how difficult it is for business owners to get financing in Norway. The money, by policy, is invested abroad.

But all that has to do with PUBLIC FINANCES. So the government is rich, but does that mean that YOU are rich? We will find out soon… Let’s now talk about your PRIVATE finances:

The devaluation of the NOK: a weaker currency has a lot of meanings. Imported goods will be more expensive. 70% of what you buy at the supermarket is imported. So you should adjust your food budget, prices will rise. Travelling abroad will also be more expensive, as well as electronics and clothes. Your salary will surely remain the same, so your disposable income will be less (disposable income is the amount of money you are left with after paying housing, expenses, food, etc).
Private household debt: in Norway, except for me, everyone is deep into debt. Private household debt amounts to 200% of disposable income, representing one of the countries with higher household debt in the world. Not just housing, but cars, vacations, electronics, everything in Norway is paid with credit cards!!! In order to pay for your debts, you must have a job. Of course, the people in Norway projected to “heaven” and considered there would always be low unemployment and high oil prices. Well, the people of Norway were wrong, things do change!!!

The job market: this is the most important factor of all. Even if the news are speaking of only 30.000 jobs lost so far in the oil industry, this will impact the whole economy. Applying the multiplying factor seen before in Keynesian theory, we can see that less disposable income means less money to purchase goods and services. This means less money for business owners, for ex, restaurants will now get fewer customers. The restaurant owner himself will have less money for goods and services. He will buy less clothes, cut his budget on food, etc. So the supermarkets will also have less customers. Many of them will close down, laying off even more people. This will create a downward spiral, with an estimate of 330.000 jobs lost including both direct and indirect.
NAV: now of course people say, ok, so I lose my job, who cares? I can just live off NAV. We have a great system here. Yes, but… Consider that in order to be eligible for NAV, you should: be open to take a job anywhere in Norway, take whatever job available, and lastly but most importantly, be willing to take a lower salary than in your previous employer!!! This means that the laid-off workers in the oil industry that before got 1 million NOK a year will now have get half of that. But don’t complain, it’s not allowed, we have a great system here! Besides, the support you get from unemployment in NAV only lasts so long (I understand that a couple of years). Then you go through another line in the welfare system that pays less. Whether you like it or not, you still need a job to go to every day to pay your bills!!!
Unemployment: it will not rise as much as you would expect, at least officially. The skill workers that are not needed will be “sent back to their country” and they will not be reflected in the statistics. The unemployed that are not even qualified enough to re-enter the market will probably be “concealed” in the mass of handicap people (of which a large part are not handicap). The social pyramid will probably push those people who are not so well connected to the bottom of the pyramid. The people who live in West Oslo will probably keep their jobs and continue to travel to Disneyland (although they will now find it more expensive). The rest of the population, depending on their social class, will be more affected.
Housing market: this is the most important issue of all, since I predict… a collapse!!! How are prices formed in a housing market? In the cause of Norway, immigration has pushed the prices up continuously over the past 20 years. This has been due to the oil boom. I how found a direct correlation between the oil price and the price of housing in Norway. But technical factors must always be explained by fundamental factors in order for things to make sense. Higher oil prices mean more level of activity, and higher salaries, which in turn attracts immigrants. With a hostile job market, downsizing in big companies and the “spiral effect” I mentioned, many immigrants will leave, and much fewer immigrants will come. I mean, even if they do come, it will be almost impossible for them to find a job in a downwards market. Since I don’t like to compare countries, I prefer to compare cities or regions. Something similar happened in what was called the “californian housing boubble effect”. In the crisis of 2008 in the US, the Mexicans were sent back to their countries creating a collapse of the real estate market. It is very typical when the prices are sustained by immigration that follows trends, instead of by real factors in the economy. Now, there have been some people blogging about a potential housing bubble in Norway, but nobody really understands that this is an oil driven economy. Most people justify a bubble burst when interest rates go up. I consider that the interest rates will remain low, since they follow policy making in Berlin. With a weak Eurozone, interest rates will not be raised in Europe. Norway has a slightly higher interest rate that core European countries. My opinion is that the Eurozone will remain weak for many years to come, so a steep raise in the interest rate is out of the question.

See the following chart reflecting the price of oil. Few remember the downturn in the oil markets in the late 1980s. People were forced to sell their houses and prices collapsed.

See now the following housing index (adjusted by inflation). Notice how prices went down to a 1/3 in the Oil market crash of the late 80s. When the price of oil started recuperating in the late 1990s, housing prices picked up full speed. The reason, as explained before, is that high levels of activity in the oil industry create an influx of immigrants that come to the country to work (usually). If that influx is reversed, I can only assume that housing prices will take a heavy toll.

But, how low will they go?? No country can be studied in isolation. Without a booming oil sector, Norway becomes the same as any other European economy. In this case worse, since it is mainly an oil driven economy. My prediction is that prices will go back it’s levels in 2011, representing at least 50% correction, if not more. The reason is that these last 5 years of growth have been an Illusion, not pushed by fundamental factors by only by the price of oil. In that sense, the Norwegian housing market should follow the path of Denmark and the Netherlands, which suffered similar downturns and whose housing markets have not yet recovered. The correction could be more though, considering that there will not be so much activity in the private sector with the crisis in the oil sector.