OECD Economic Outlook, Volume 2019 Issue 2

Norway

Mainland GDP growth has been robust, but will slow as capacity constraints bind further and export and investment growth diminish. Price pressures will be muted and employment growth will begin to ease.

Given slowing growth, Norges Bank’s signalling that the policy interest rate will most likely remain on hold after recent increases is appropriate. The neutral stance of fiscal policy is also appropriate given that growth is set to remain above potential. However, the authorities must remain vigilant to the risks around oil prices, the weakening global outlook and, domestically, the housing market and mortgage borrowing. Structural policy should focus on improving long-term growth prospects, including through increasing employment among some groups and improvements in public-sector spending efficiency.

Economic growth remains robust

Mainland output growth (i.e. abstracting from oil and gas production) has been robust in recent quarters, remaining above potential. A continuing rebound in oil-sector investment and a return to growth in housing investment have supported output growth. Meanwhile, non-oil exports have slowed recently. Household consumption growth has declined somewhat, partly reflecting slowing income growth. Wage growth continues to pick up, but employment growth has slowed slightly according to labour force surveys. Unemployment continues to fall. Headline inflation has headed down towards the 2% target as the effects of exchange‑rate depreciation have worn off.

Economic activity and house prices: Norway

Source: OECD Economic Outlook 106 database; Statistics Norway; and Real Estate Norway (Eiendom Norge).

Statlink

Norway: Demand, output and prices

Statlink

House prices continue to climb following the downward correction in 2017, but still at a moderate pace. Stocks of unsold houses remain high and properties are taking longer to sell, which may foreshadow another correction. The debt-to-income ratio among households remains elevated but stable.

A broadly neutral stance of fiscal policy is appropriate

The 2020 Budget proposal essentially retains the broadly neutral fiscal stance adopted in budgets since 2017, envisaging a small fiscal contraction between 2019 and 2020. This stance aligns well with continuing above-potential output growth. Deficits will remain below the reference target value (the “3% path”). As such, the fiscal stance also represents a welcome prudent interpretation of the fiscal rule ‑ that the structural deficit over time should equal 3% of the value of the oil fund (the Government Pension Fund Global). Norges Bank is expected to keep rates on hold following the four increases implemented since September 2018.

Structural policy needs to help reverse the decline in potential output growth, while also ensuring the economy is on target to meet climate change goals and retaining a high priority on inclusiveness. Labour supply and skills issues, including the elevated numbers of sick‑leave and disability‑benefit claimants, are being addressed by a government-appointed commission. Tackling these issues is important for economic inclusiveness, as well as labour supply. Under current policies, programmed measures for reducing domestic non-European Trading System (ETS) emissions will need to be combined with non-ETS reductions purchased from EU countries for goals to be met. Structural policy also needs to help budgets stay on target; this should principally be achieved through greater attention to public-spending efficiency.

Mainland output growth will slow and risks remain elevated

Mainland output growth is projected to slow to 1.7% by 2021, principally due to an end to the rebound in oil investment, and slowing growth of exports and household consumption. Nevertheless, capacity utilisation will remain high with a low rate of unemployment. Consumer‑price inflation will rise gradually.

Risks are tilted to the downside. Weakening economic prospects globally, and particularly in Europe, may accelerate the slowdown in non‑oil export growth. 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. Uncertainty surrounding oil prices remains elevated, and is a source of both upside and downside risks. The petroleum sector’s substantial cost reductions have increased resilience.