OECD Economic Outlook, Volume 2019 Issue 1

Norway

Mainland GDP growth will ease slightly as capacity constraints bind further. GDP growth will remain above trend and the narrowing of spare capacity will transmit into higher wage growth and continued reductions in unemployment.

Given above-trend growth, Norges Bank’s gradual tightening of monetary conditions and the neutral stance of fiscal policy are appropriate. However, the authorities must remain vigilant given the risks surrounding the housing market and mortgage borrowing, along with elevated oil-price uncertainties amid the weakening global outlook. Structural policy should focus on improving the employment prospects of vulnerable groups and public-sector spending efficiency.

Economic growth has eased somewhat

Mainland output growth (i.e. abstracting from oil and gas production) has eased a little in recent quarters but remains above potential. Labour and product markets continue to tighten. The rate of unemployment is falling, wage growth is picking up and headline inflation has moved above the 2% target, partly due to exchange-rate depreciation. Rising oil prices following the end-2018 low point are reviving oil‑related activity. Solid household consumption growth and a bottoming out of housing construction have supported overall activity. In addition, import growth has been comparatively weak. Recent non-oil export data show a mixed picture, pointing to weakness in services but strength in goods.

House-price increases have resumed following some downward adjustment, but at a moderate pace. However, the stock of unsold houses remains high and properties are taking longer to sell, which may foreshadow a further downward correction. The debt-to-income ratio among households remains elevated.

Economic activity and house prices: Norway

1. Estimates for 2019Q1.

Source: OECD Economic Outlook 105 database; Statistics Norway; and Real Estate Norway (Eiendom Norge).

Statlink

Norway: Demand, production and prices

Statlink

Fiscal and monetary support has been reduced

Central government fiscal budget outcomes for 2018 confirm the successful switch to a neutral fiscal stance to reflect the upswing in output growth and to ensure adherence to the fiscal rule -- that the structural deficit over time should equal 3% of the value of the oil fund (the Government Pension Fund Global). The structural deficit has in recent years been kept below the 3% reference line and the government is expected to continue its neutral stance, provided above-trend growth continues. Norges Bank is expected to follow up on the two rate increases since September 2018 (the latest, a policy-rate increase from 0.75% to 1% in March) with some further tightening.

Tightening labour market conditions are laying bare labour supply and skills issues. A government‑appointed commission has made wide-ranging recommendations, many aimed at resolving the policy‑design issues that have resulted in elevated numbers of sick-leave and disability-benefit claimants — many of them from vulnerable segments of society. Greater attention to public-spending efficiency will be needed as budget challenges intensify over the longer term due to the prospect of a steady decline in the value of the oil fund relative to GDP, public-spending pressures from population ageing and tax‑base shrinkage, notably in vehicle (and related fuel) taxation.

Mainland output growth will ease amidst substantial downside risks

Mainland output growth is projected to remain above potential but will ease to around 2% in 2019 and 2020. Capacity constraints will intensify further, including additional falls in the rate of unemployment. Consumer-price inflation will decline in the near term as price pressures from exchange-rate depreciation wear off, but then rise again gradually.

Risks to the outlook are weighed on the downside. Weaker global economic prospects may lower oil prices, feeding through to incomes and output, although the petroleum sector’s substantial cost reductions have increased resilience to this type of shock. A more extensive downturn in Europe could further dent non-oil exports. Also, substantial adjustment of the housing market and the potential for a negative fall‑out from the large amount of household credit remain sizeable risks, particularly for household consumption. Meanwhile, wage growth may be stronger than expected, boosting overall demand and cushioning any negative feedback from the housing market.