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WORKING IN NORWAY

Will wage increases from strike deal lead to higher prices in Norway?

This week the parties in the wage settlement negotiations agreed on a framework to increase wages by 5.2 percent. But it might not all be good news as a prominent Norwegian economist has warned.

Published: 21 April 2023 17:11 CEST
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On Thursday, the unions rejoiced over what they deemed a significant victory, but economists swiftly cautioned about the possible negative impact of the deal that ended Norway's general strike. Photo by Nicolas J Leclercq on Unsplash

A four-day general strike in Norway’s private sector ended on Thursday afternoon after the parties in the labour conflict reached an agreement.

The Norwegian Confederation of Trade Unions (LO) and the Confederation of Vocational Unions (YS) represented the employees, while the Confederation of Norwegian Enterprise (NHO) represented the employers.

The two sides agreed on a framework of 5.2 percent wage growth, with a large proportion of this given in general supplements.

While the unions were celebrating what they called a “historic win,” economists were quick to warn about the potential adverse effect of the deal on inflation.

A wage-price spiral in the making?

The agreement between the unions and businesses in this year’s wage settlement could lead to price pressure, chief economist Harald Magnus Andreassen at Sparebank 1 Markets told the news bureau NTB on Friday.

“If we set aside the industry and the power producers, then the rest of the business world is not doing so well. The increased prices were less than the rise in costs last year,” Andreassen said.

With wage growth of 5.2 per cent, these companies will be clearly pressured to increase prices, according to the economist, who believes the business world outside of industry and energy sectors will struggle with this year’s wage settlement.

Furthermore, the chief economist warned that the combination of the wage settlement and increased productivity could lead to inflation over time being well above 2 percent, which is the inflation target of Norway’s central bank (Norges Bank).

Other economists have also warned of the danger of a wage-price spiral forming, as rising wages put upward pressure on prices and inflation.

What will happen with interest rates?

In the run-up to the 2023 wage settlements talks, there has also been some discussion in Norwegian media on whether the outcome of the negotiations could – indirectly – lead to higher interest rates down the road.

Andreassen thinks the settlement will not lead to higher interest rates than what is already planned by Norges Bank.

“Norges Bank assumed wage growth of 5.1 percent. So this does not change much for them; Norges Bank will not reassess the outlook for wage and price growth (based on this outcome),” Andreassen said.

He pointed out that it is difficult to say anything for sure about inflation and interest rate trends, but he encouraged people to be aware that interest rates will rise.

“We could very well get a mortgage interest rate of around 5 percent. Adjust your personal finances today, and expect interest rates to rise. Use less money and pay down more debt. For many who have a lot of debt today, that is obviously the most sensible thing to do,” he said.

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MONEY

What the Norwegian krone’s fresh slump means for your finances

The Norwegian krone has slumped significantly against major currencies such as the euro, US dollar and British pound since the beginning of summer. The currency's weakness could have a big impact on your finances.

Published: 25 July 2024 12:04 CEST
What the Norwegian krone's fresh slump means for your finances

Norway’s krone has slumped to a four-year low against the euro, with a euro costing more than 12 kroner for the first time since March 2020 on Thursday.

The krone has weakened significantly compared to the start of the year when a euro traded for 11.22 kroner.

Furthermore, the krone recently hit a 24-year low against the pound. On Thursday morning, a pound was worth 14.30 kroner. At the turn of the year, the pound was trading for around 13 kroner.

A dollar was trading for just over 11 kroner, and the Swedish krone has become more valuable than its Norwegian counterpart since July. The Danish krone has also strengthened against the krone as it is tied to the euro. One Danish krone costs 1.53 Norwegian krone.

What’s behind the weakness?

A falling stock market following disappointing quarterly results for several US firms has been cited as one contributor to the weaker krone.

“(A) stock market crash in the USA and weak development in oil prices have probably contributed to keeping the krone weak,” Kally Chen, analyst at DNB Markets, wrote in a report for the bank on Thursday.

Economists believe that lower-than-expected inflation figures have contributed to a weaker krone.

According to Statistics Norway (SSB), prices in Norway increased by 2.6 percent from June 2023 to June 2024.

Lower inflation may appear to be a good thing for the Norwegian economy, but the markets believe this weakens the Norwegian krone as it may mean that interest rates will be cut in Norway.

When interest rates in Norway are higher than in other countries, the value of the krone is supported. If interest rates are cut earlier in Norway and are more in line with other countries, the krone loses its edge and weakens.

Jan Ludvig Andreassen, chief economist at Eika, an alliance of 77 local Norwegian savings banks, told The Local recently that when it came to the pound, it was a matter of market preferences.

“The markets actually like Starmer & Co. [ The government led by recently elected UK Prime Minister Keir Starmer.]. He will be a voice of reason in a world where that seems to be missing more and more. Our own government seems to inspire little confidence in business circles these days,” the chief economist said.

READ MORE: Why is the British pound surging against the Norwegian krone?

Rory Fennessy, a senior economist at Oxford Economics, told The Local that global factors, the krone’s illiquidity, and interest rates all contributed to its weakening.

What does this mean for your finances?

While inflation in Norway has slowed significantly compared to the peak of 7.5 percent in the autumn of 2022, a weak krone can prevent price increases from moderating even more.

This is because less favourable exchange rates will increase the cost of imported goods, making them more expensive for Norwegian consumers.

One of the biggest questions for homeowners and those with loans will be whether the weakness of the krone will trigger a shock interest rate hike. Since the most recent weakening in mid-July, some economists have warned this may be the case.

“The krone cannot weaken much more until Norges Bank raises the interest rate,” Ole Håkon Eek-Nielsen, a currency analyst at Nordea Markets, told the business and financial site E24.

He added that there was a 60-70 percent interest rates could rise based on the current exchange rate.

READ MORE: Could Norway’s weak krone trigger a shock interest rate hike?

However, rates will remain the same if the krone picks up.

A higher interest rate would make loans and mortgages even more expensive. The key policy rate is currently 4.5 percent, with commercial banks charging more for lending.

The weakening of the krone also makes travel abroad to most countries more expensive.

For foreigners in Norway who still have regular payments to make in other countries, transferring money from the krone to the local currency will be more expensive. Those with student loan repayments, mortgages, or family to support will find the slump particularly difficult.

Still, foreigners with savings in other countries will benefit from the weaker krone if they convert it and use it in Norway. This could reduce their living expenses in Norway – or make big-ticket items better value for money.

Be aware that when you exchange currency, it will be at a lower rate than the market rate. There are also other associated fees and costs.

What’s next for the krone?

Eek-Nielsen told E24 that the krone was most likely to strengthen from its current level. This means that an interest rate hike might be avoided.

Fennesy said that much would depend on the difference between interest rates in Norway and those in other economies.

“With regard to interest rates, Norges Bank will only begin to cut rates once other central banks have already done so, as core inflation in Norway is still running way too high for Norges Bank’s liking due to high wage growth and a large share of imported goods items in core inflation – which a weak krone will exacerbate,” he told The Local.

He predicted a more optimistic outlook for the krone in the latter half of the year.

“We see a more optimistic outlook for the krone in the second half of the year as the Fed (Federal Reserve), ECB (European Central Bank), and BoE (Bank of England) cut rates, while Norges Bank may not cut rates until March 2025 at the earliest. This will help increase the attractiveness of Norwegian investments and allow the currency to appreciate.”

However, if other central banks don’t cut rates, this will negatively affect the Norwegian krone.

Decreased energy price volatility will also act as a stabilising factor for the krone, Fennesy said.

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