Q1's GDP data showed that the decline in oil prices hit the economy fairly hard. While policymakers have the tools to prevent a more severe downturn, growth is likely to remain slow by past standards.



Overall GDP growth slowed more sharply than expected, from 0.9% q/q in Q4 to just 0.2% in Q1. This was due to a contraction in oil and shipping, which shrunk by 0.7%. While investment in the sector rose by a modest 0.8%, this did little to reverse the 7.0% decline in Q4. And oil exports fell by 6.0%.



At first glance, the pick-up in mainland GDP growth, which excludes the oil and shipping sectors, looks more encouraging. Consensus had expected growth to slow. But quarterly growth edged up from 0.4% to 0.5%, and annual growth remained at 2.0%. But the breakdown of GDP revealed that the improvement in quarterly growth was largely due to a pick-up in stock-building, which tends to be volatile.



Meanwhile, consumption and government spending growth both slowed, investment contracted and non-oil net exports fell sharply. What's more, last year's mainland GDP data were revised downwards, particularly in the second half of the year. One might therefore have expected growth to pick up more strongly from these weaker levels.



Looking ahead, the decline in oil prices since last summer has been associated with a substantial weakening of the krone. This should help to cushion the oil sector against the effects of lower prices, and provide a boost to non-oil exporters. But as Q1's contraction in non-oil exports showed, it may take time before the benefits of the weaker krone start to be felt.



Overall, growth this year is likely to remain sluggish by past standards. Capital Economics forecasts the mainland GDP growth of just 1.0% this year, although Q1's data suggest that the risks to this forecast lie slightly to the upside.