OECD Economic Outlook, Volume 2023 Issue 2

Norway

Economic growth has slowed amid high inflation and monetary policy tightening. Mainland GDP growth is projected to slow to 1.1% in 2023 and 0.5% in 2024, before picking up to 1.3% in 2025 as domestic demand strengthens. Headline inflation has been declining on the back of lower electricity prices and is set to ease further. Underlying inflation will drift down more slowly, held up by wage pressures and the lagged effects of the weakening of the Norwegian currency. The unemployment rate is expected to rise as economic activity softens, but to remain around its pre-pandemic level.

Monetary policy needs to remain tight for some time to contain inflation and ensure that inflation expectations are anchored. The fiscal stance should not add to inflationary pressures while ensuring well-targeted support to vulnerable groups. Making room for new spending is essential in view of pressures, notably from population ageing. Structural reforms that reduce incentives for early retirement, boost productivity and promote the green transition are key to inclusive and sustainable growth.

Economic activity has slowed

Mainland GDP growth has slowed during 2023 as high inflation and interest rate increases continued to weigh on domestic demand. Private consumption has weakened due to the rising cost of living, even though subsidies for households’ electricity bills and a decline in accumulated savings during the pandemic have provided support. Reduced car purchases, following the surge that preceded the reduction in tax incentives, have also curbed consumption. Housing investment has fallen markedly due to high construction costs and lower house price growth. Business investment growth has also slowed. After falling for four consecutive months, headline inflation increased to 4% in October 2023, as electricity prices edged up. Underlying inflation has also eased but remains elevated. A tight labour market is fuelling wage growth, with ongoing wage negotiations pointing to wage growth of around 5½ 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. Percentage share of regional network contact businesses responding that labour shortages are curtailing production/sales.

3. Long-term average of reported labour shortages between Q1 2000 and Q3 2023.

Source: Statistics Norway; and Norges Bank.

Statlink

Norway: Demand, output and prices

Statlink

Lower global energy prices are expected to weaken Norway’s terms of trade and related revenues. However, Norwegian exports should continue to benefit from strong energy demand from trading partners to replace mostly Russian gas supply, as well as buoyant energy services exports driven by higher investment in global energy production. Oil and gas investment is expected to increase in view of the number of submitted projects by the end of 2022, halting the decline in the past few years. Thus far Norway has admitted 68 000 Ukrainian refugees and it expects to admit another 37 000 refugees in 2024.

Containing inflation remains key

The 2024 draft budget increases petroleum revenue spending (transfers from the oil fund to the budget) by 0.4% of mainland trend GDP but its impact on economic activity is broadly neutral according to the government. Support for Ukraine via the Nansen Programme, for instance, accounting for 0.4% of mainland GDP, has a limited effect on domestic demand. The budget extends the electricity support scheme until end-2024 at an expected cost of around 0.2% of mainland GDP. Monetary policy has continued to be tightened, with the policy rate increasing to 4.25% by September 2023. Monetary policy needs to remain tight for some time. While easing, inflation remains well above the target and the Norwegian currency has substantially weakened, pointing to continued inflation pressures. The OECD projections assume that the policy rate will peak at 4.5% in the fourth quarter of 2023 and remain at this level until early 2025, gradually falling to 4% by the end of that year.

Economic activity will slowly recover

Mainland GDP growth is expected to slow to 1.1% in 2023 and 0.5% in 2024, before edging up to 1.3% in 2025 as domestic activity strengthens gradually due to lower inflation and monetary easing. Headline inflation is projected to decline to around 3% by the end of 2025, helped by lower energy prices and the slowdown in demand. Investment will benefit from an improvement in the external environment and the implementation of climate-related projects. Lower financing costs and potential housing shortages could progressively stimulate housing investment, following a sharp decline in 2023. A still tight labour market, despite some rise in unemployment, will keep wage growth strong. Improved profitability in the manufacturing sector, the front-runner in wage settlements, also points to high wage growth. The outlook is surrounded by uncertainties. Wage growth could be stronger than expected, fuelling inflation. Sluggishness in the housing market could become more pronounced than projected, potentially leading to a sharper fall in housing investment. Higher borrowing costs could intensify risks related to high household indebtedness due to the high share of variable-rate loans. On the upside, households could spend more of the excess savings accumulated during the pandemic, spurring consumption, while faster than foreseen labour market integration of Ukrainian refugees could help ease labour market pressures.

Ensuring strong and inclusive growth

Making fiscal room is essential to address spending pressures, particularly from population ageing, and to ensure sustainable and inclusive growth. OECD estimates suggest that health and long‑term care expenditure will increase by 1.2 percentage points of GDP between 2024 and 2040, with a similar rise in pension expenditure over the same period. More cost-effective implementation of large transport infrastructure projects, which account for a substantial share of public investment, along with a broadening of the ex-post assessment of such projects would create scope for new spending initiatives. Reforms to boost labour force participation by reducing incentives to enter disability pension and sickness benefit schemes, and efforts to enhance innovation and the adoption of new technologies, including by increasing the number of students with ICT skills, are also important. Advancing the green transition is crucial for sustainable growth. Support for green technology initiatives, including carbon-capture and storage projects, needs to continue.