OECD Economic Outlook, Volume 2024 Issue 1

Norway

Mainland GDP is projected to increase by 0.5% in 2024, with an acceleration to 1.6% in 2025 as domestic demand strengthens. High inflation and monetary policy tightening have dampened activity, with stagnation in most non-oil sectors and a sharp decline in construction, whereas oil and gas extraction has remained buoyant. Inflation is set to decline only slowly, held up by exchange rate depreciation and cost pressures, given the still tight labour market and weak productivity growth.

Monetary policy needs to remain restrictive for some time to ensure that inflation approaches the target. The fiscal stance should not add inflationary pressures. It should turn increasingly restrictive in the medium term, making space to cope with spending pressures from population ageing. Structural reforms that limit early retirement, as well as sickness and disability benefits, are key for inclusive growth and fiscal sustainability.

Domestic demand remains weak

Mainland GDP grew by 0.7% in 2023, after 3.7% in 2022. Although slowing, both headline and core inflation remain high, standing at 3.9% and 4.5% respectively in March 2024. High inflation and interest payments have weighed on private consumption, which contracted by 0.7% in 2023, with savings built up during the pandemic providing limited support. Non-oil business investment slowed and housing investment contracted, owing to higher interest rates. Oil investment surged and is expected to remain strong in the near term given the number of submitted projects. As the labour market remained tight, wages increased strongly but were outpaced by inflation in 2023. Unit labour costs have risen strongly partly due to weak productivity growth, sustaining cost pressures.

The fall in global energy prices in 2023 reduced the terms of trade and petroleum revenues. Nonetheless, the latter remained very high by historical standards, contributing to a very large budget surplus. Norwegian exports continue to benefit from strong energy demand from trading partners to replace Russian gas supply. The recent decline in global gas prices is projected to pull down petroleum revenues in 2024. The depreciation of the Norwegian krone exerts upward pressure on prices and heightened geopolitical tensions in the Middle East have raised shipping costs.

Norway: Activity and labour market indicators

Source: OECD Economic Outlook 115 database.

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Norway: Demand, output and prices

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Inflation is set to decline and monetary policy will become less restrictive

The non-oil structural budget deficit will remain large in 2024, at 10.3% of mainland GDP according to government estimates. This deficit increased substantially in 2020 and has not declined much since then. Nonetheless, the non-oil structural budget deficit will remain below the fiscal rule level of 3% of the value of the oil fund, which has considerably increased over the past years. The fiscal space created by the transfers from the oil fund is expected to decline in the medium term, which calls for rationalising inefficient expenditures. This will also help to safeguard some fiscal space, as the government plans to significantly ramp up military spending. As inflation remains well above the central bank’s 2% target, the OECD projections assume that the policy rate will remain at 4.5% until autumn 2024 and will be gradually reduced to 3.25% towards the end of 2025.

Mainland GDP growth will recover gradually

Mainland GDP growth is projected to be weak in 2024 before picking up to 1.6% in 2025. Inflation will gradually moderate but still remain close to 3% on average in 2025. While firms’ profitability remains high, real wages are expected to increase, which should push up private consumption. Lower interest rates will support both housing and non-oil business investment in 2025. As growth in Norway’s trading partners recovers, non‑oil exports will regain momentum. Household debt service costs could remain higher than projected, which could dampen household consumption and endanger financial stability given very high household indebtedness. Global energy prices may rise substantially, which would boost Norway’s petroleum revenues as well as energy-related services exports.

Making growth more inclusive and ensuring fiscal sustainability

Reforms to increase work incentives would not only increase labour force participation, alleviating wage pressures, but also help ensure fiscal sustainability. Income taxation, which remains high in international comparison, should be lowered notably for low-income earners. Spending on disability pension and sickness benefits as a share of GDP is by far the highest across OECD countries, which tends to weaken labour market attachment and encourage early retirement. Sick-leave compensation should be lowered and employers’ participation in funding should be extended. Eligibility rules for disability benefits need to be applied more strictly, and treatment and rehabilitation requirements should be strengthened. With pension expenditure as a share of GDP expected to rise by around 1.2 percentage points in the coming 15 years, Parliament’s recent decision to raise the statutory pension age is welcome.