OECD Economic Outlook, Volume 2023 Issue 1

Norway

Mainland GDP growth is projected to slow to 1.2% in 2023. High inflation and policy tightening are weighing on domestic demand. The economy will strengthen gradually but output growth will remain moderate at 1.3% in 2024. Economic activity will benefit from a decline in energy prices. Underlying inflation will also fall, albeit sluggishly, due to the tight labour market and the recent weakening of the Norwegian currency that will feed through to inflation with a lag. Unemployment will edge up as the economy softens but remain around pre-pandemic levels.

Monetary policy tightening is appropriate to bring inflation towards the central bank target of 2%. Fiscal support to households on account of high energy costs should be phased out, with protection of the vulnerable being provided through the social safety net. Structural reforms should focus on facilitating the green transition, encouraging higher labour force participation and fostering skills for the digital era.

High inflation continues to weigh on domestic demand

Mainland GDP growth slowed in the first quarter of 2023 compared to the previous quarter. High inflation and interest rate increases have continued to weigh on real incomes, consumer confidence and investment activity in the housing sector. Even so, private consumption has been supported by electricity price subsidies and the reversal of the excess household saving observed during the pandemic. Large fluctuations in car sales have also impacted economic activity. Vehicle purchases surged towards the end 2022, ahead of the announced car tax changes from 2023, and then contracted as the temporary effects dissipated, affecting consumption growth in 2023. Headline consumer price inflation peaked in October 2022, but was still 6.4% in April 2023. Nominal wages grew by 4.3% in 2022, exceeding the increase agreed in wage negotiations, with tight labour markets fuelling wage growth. Ongoing wage negotiations point to wage growth of around 5¼ per cent in 2023.

Norway: Inflation and labour market indicators

1. Core inflation is Statistics Norway's CPI-ATE measure which adjusts for tax changes and excludes energy products.

2. Hypothetical CPI calculated by Statistics Norway showing overall price growth if the government had not introduced the electricity subsidy scheme for households.

Source: Statistics Norway.

Statlink

Norway: Demand, output and prices

Statlink

Elevated global energy prices have boosted Norway’s terms of trade and pushed petroleum-related revenues to record highs. Oil and gas investment is likely to pick up, countering a contraction in recent years, in view of the number of projects submitted by the oil companies towards the end 2022. Norway plans on taking around 40 000 of Ukrainian refugees in 2023, in addition to the 35 000 received in 2022.

Taming inflation is key

Fiscal policy was initially planned to have an approximately neutral effect on economic activity, but after a revision of the 2023 Budget it is expansionary, spurring economic activity by 0.3-0.4% of GDP for the mainland and thereby adding to inflationary pressure. Expenditure has been raised by around 0.5% of GDP to reflect higher-than-foreseen inflation and wage growth and by 0.2% of GDP on account of increased support for Ukraine via the Nansen Programme. Households will continue to receive the electricity support subsidy until end‑2023. The Norges Bank increased the policy rate further by 0.25 percentage points in May 2023 to 3.25%. Inflation remains well above target, inflation expectations are rising and the Norwegian currency has depreciated considerably this year, calling for additional monetary tightening. The OECD projections assume that the policy rate will peak at 3.75% in the fourth quarter of 2023 and remain at this level until end-2024.

Growth will strengthen gradually but remain moderate

Mainland GDP growth is projected to slow to 1.2% in 2023 amid high inflation and tighter policies. The economy will recover gradually over 2023-24 but output growth will remain moderate at 1.3% in 2024. Lower energy prices and easing demand should help bring headline inflation down, to around 3¼ per cent by late 2024. Business investment will benefit from more buoyant external demand and implementation of climate-related projects in 2024. The labour market will remain tight given labour shortages, despite some increase in unemployment, keeping wage growth strong. Core inflation will fall slowly as a result and remain well above the 2% target at the end of projection period. The growth outlook is uncertain. Price and wage inflation could remain higher than expected, lowering growth prospects. Higher borrowing costs could exacerbate risks related to high household indebtedness. Weaker growth in Norway’s trading partners could also dent prospects. On the upside, successful labour market integration of Ukrainian refugees could help ease labour market and wage pressures.

Boosting productivity and green growth

Enhancing innovation and technology adoption are essential for high productivity growth. There is scope to strengthen skills that are relevant for the digital era by increasing the number of students graduating from sciences, technology, engineering and mathematics (STEM), and addressing regional disparities in digital infrastructure. The female employment rate is high in Norway and the gender wage gap is comparatively low. The workforce attachment of men and women needs to strengthen, however, including through disability benefit reforms to reduce incentives for early retirement. Accelerating the climate transition is another key priority for sustainable growth. Continued support for the promotion of green-technology initiatives would help with the transition.