Low growth in the Norwegian economy

Growth in the Norwegian economy slowed in 2023 and has since remained subdued. Employment is high, but unemployment has edged up in recent years.

Recently, international financial markets have been subject to substantial gyrations. At the beginning of August, yields and broad equity indexes fell, and credit and risk premiums rose. Market turbulence has since subsided, with some rebound in yields and equity indexes.

Firms and households have ample access to credit

In Norges Bank’s bank lending survey for 2024 Q2, banks reported unchanged credit standards. This means that banks’ credit assessments are not stricter than before, but higher interest rates have limited how much households and firms can borrow. Credit premiums in the corporate bond market have fallen since May and issue activity was high before summer. In the Bank’s overall assessment, households and firms have ample access to credit.

There is still a heightened risk that financial system vulnerabilities may amplify an economic downturn

Owing to a long period of low interest rates, debt and property prices rose faster than income, and financial system vulnerabilities increased. In recent years, the tightening cycle has slowed debt growth and property price inflation. However, there is still a heightened risk that vulnerabilities could materialise (see Financial Stability Report 2024 H1). This could amplify a downturn in the Norwegian economy and lead to bank losses.

Since May, debt growth has again risen slightly. House prices increased substantially earlier in 2024 but fell slightly in July. Activity in the secondary housing market has been higher than normal over summer.  Residential construction activity remains low, but new home sales have increased somewhat from a low level.

Higher interest rates have contributed to a marked rise in household interest expenses. The vast majority of households have the financial means to cope, reflecting high employment and savings to draw on. At the same time, developments ahead remain uncertain. A sharp tightening of household consumption may lead to higher bank credit losses. This may induce banks to tighten credit standards, thus amplifying a downturn.

The share of Norwegian firms facing debt collection was high through 2023 and has risen further so far in 2024. The rise has been most pronounced in real estate-related sectors. These sectors have also seen an increase in bankruptcies so far in 2024. The number of bankruptcies in most other sectors also increased somewhat, although the rates are still lower than before the pandemic. Banks’ corporate credit losses have edged up in 2024 but remain at a low level.

So far in 2024, commercial real estate (CRE) selling prices have remained unchanged since having fallen from summer 2022. A number of CRE firms have been adversely affected by weaker earnings and lower equity ratios over the past two years. Some of the firms have drawn on financial buffers, raised more equity or sold off property to be able to continue operations. High employment and growth in rental income enable most CRE firms to cope with higher interest expenses. However, many firms will have problems servicing debt if rental income proves markedly weaker than expected, for example, in the event of a pronounced decline in employment.

The capital requirements reflect the vulnerabilities in the Norwegian financial system

The countercyclical capital buffer rate of 2.5 percent helps banks to remain resilient. Norwegian banks satisfy capital and liquidity requirements by a solid margin, have low losses and are highly profitable. The stress test in Financial Stability Report – 2024 H1 illustrates that banks can maintain lending even if losses were to increase substantially owing to an economic downturn.

The Committee unanimously decided to keep the countercyclical capital buffer rate at 2.5 percent.

Ida Wolden Bache
Pål Longva
Øystein Børsum
Ingvild Almås
Steinar Holden 

14 August 2024