OECD Economic Outlook, Volume 2020 Issue 2

Norway

The recovery from a decline in mainland output of 3.2% in 2020 will be muted by continued localised restrictions to tackle COVID-19 outbreaks, weak oil-sector investment and continued disruption to travel, hospitality and related sectors. Real mainland GDP is projected to increase by 3.1% in 2021 and 1.4% in 2022. Labour market recovery will be correspondingly slow and consumer price inflation will remain muted. Diminished need for restrictions as an effective vaccine is rolled out, and associated pick-ups in hard‑hit sectors and rising confidence, will contribute to output growth in 2022.

The scale and timing of the monetary and fiscal policy response to COVID-19 has remained broadly appropriate. The fiscal rule that links mainland deficits to wealth-fund returns should remain firmly in place as it allows ample room to support the recovery while also providing long-term fiscal guidance. Recovery will be helped by measures proposed in the national budget 2021 to encourage further return to work, strengthen the business environment and encourage green growth.

National containment measures have been strengthened

Norway’s COVID-19 case and fatality numbers remain comparatively low. Second-wave case numbers have surpassed those of the first wave, but deaths have so far remained limited. National measures have been tightened. These include, for instance, advice to remain at home as much as possible and increased restrictions on the hospitality sector. Additional restrictions apply locally, notably in Oslo. However, as of mid-November there had been no outright closure of business activities and schooling.

Norway: Recovery and unemployment

1. The pre-crisis growth path is based on the November 2019 OECD Economic Outlook projection, with linear extrapolation for 2022 based on trend growth in 2021.

2. The registered unemployment data includes temporary layoffs.

Source: OECD Economic Outlook 106 and 108 databases and Norwegian Labour and Welfare Administration (NAV).

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Norway: Demand, output and prices

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The recovery is slowing

The recovery in economic activity was initially rapid. Mainland output troughed in April at 11% below pre‑crisis levels; by June, it was only 6% below. However, output growth since has been lower and more recently there has been an uptick in the rate of registered unemployment. The decline and the subsequent partial recovery in the global oil price in the first months of the crisis triggered exchange rate movements in the Norwegian krone. Uncertainty about future oil price developments is weakening investment in the resource sector. Meanwhile, the housing market has been buoyant, bolstered by lower interest rates and the lifting of some mortgage regulations. Headline consumer price inflation has fluctuated below the 2% target since the crisis began. The krone value of Norway’s main wealth fund has remained comparatively stable as the impact of initial international equity price falls has been offset by currency depreciation.

A comprehensive welfare system is limiting socio-economic damage

Norges Bank continues to provide substantial monetary support through a zero‑per‑cent policy rate and an extended loan programme for banks to the end of 2020. Norway’s comparatively large public sector, comprehensive welfare system and correspondingly high taxation have meant substantial automatic stabilisation. Flexibility in the fiscal rule is allowing for expansion of the structural non‑oil deficit of 4.5 percentage points of GDP in 2020.

The fiscal package to combat the economic downturn will equate to around 4% of mainland GDP. Around one-third of the outlays arises from government stepping in earlier to pay the wages of those temporarily laid off or on sick leave (the number of days employers must pay has been shortened). Large outlays are also expected for a scheme covering businesses’ fixed costs, loss provisions on business loan guarantees, aviation-sector support and extensions of income security for individuals. The national budget for 2021 focuses on nurturing economic recovery, including through increased spending on research and development and further support for hard-hit sectors.

The recovery in output and employment will be gradual

Localised containment measures are expected to continue into 2021 and weigh on the economy. Activity in travel, leisure and hospitality sectors will recover slowly as will business investment in general. By the end of 2022, output will be around 4.5% below that implied by pre-crisis trend growth. The fiscal balance will deteriorate substantially in 2020 but partially recover in 2021 as revenues rebound and support measures are retired. The path of the global oil price and the prospects for non-oil trading partners will remain key uncertainties. Pre-crisis concerns for macro-financial stability linked to high levels of household debt remain.

Policymakers must remain ready to react

Norway is in a relatively good position to deal with the uncertainties ahead. However, macro‑financial risks related to household borrowing must remain on close watch. Also, policy should focus on helping hard‑hit businesses survive the downturn, including through transitioning to new activities. There is scope to strengthen business dynamics through better routes to recovery for businesses in difficulty. In addition, Norway should leverage the crisis to make advances in environmental policy; for instance, the 2021 budget proposes a fund for developing carbon capture and storage technologies and an increase in the carbon dioxide tax.