Norway: Staff Concluding Statement of an IMF Staff Visit
IMF News, November 17, 2016
Source details
- Canonical URL
- Norway: Staff Concluding Statement of an IMF Staff Visit
Other formats
Bibliographic details
- Published: November 17, 2016
Recent Developments and Outlook
- The economy is slowly recovering from the shock of low oil prices.
- Mainland GDP: remained largely flat last year; expanded at a slow pace in the first three quarters this year.
- Policy backdrop: aided by supportive monetary and fiscal policies.
- Inflation: remains above the 2.5 percent target, largely reflecting lagged effects of last year’s krone depreciation on imported consumer goods prices.
- Wage growth: very modest.
- Unemployment: expected to peak this year—albeit still at a low level—and is mainly concentrated in oil-dependent regions as the economy adjusts to declining offshore demand.
- Krone: has strengthened somewhat this year alongside the recovery in oil prices.
- Housing: house price inflation accelerated again recently, particularly in Oslo and surrounding areas.
- Household debt: remains elevated at 224 percent of disposable income.
- Growth projections and risks:
- Mainland growth projected to remain at about 1 percent this year, and to accelerate to 1¾ percent next year, supported by a pick-up in investment and export growth and improving consumer and business sentiment.
- Unemployment projected to peak this year before declining in 2017.
- Inflation: set to return gradually to target next year as low capacity utilization weighs on domestic inflation and krone depreciation effects dissipate.
- Downside risks: weaker-than-expected growth in key advanced and emerging economies, persistently lower energy prices, and a domestic housing market correction that could abruptly reduce consumption and residential investment with ripple effects on corporate earnings and banks.
Policy Challenges — Supporting Transition and Addressing Structural Vulnerabilities
Monetary Policy
- Recommendation: Monetary policy should stay accommodative to support the recovery.
- Rationale:
- Core inflation returning to target and inflation expectations remained close thereto, allowing policy to remain on hold for now.
- As the recovery strengthens, a gradual return to the neutral rate will be needed over time.
- Financial stability approach: Given significant slack, housing-market-related financial stability risks should be tackled by targeted macroprudential and other measures, including gradually phasing out the large tax subsidy for housing investment.
Fiscal Policy
- Assessment of 2017 budget: The expansionary 2017 budget is broadly appropriate, but fiscal measures should be pro-transition and pro-growth.
- Justification for stimulus: Level of fiscal stimulus planned for 2017 is justified given the significant output gap, the level of unemployment, and ample fiscal space.
- Recommended focus for fiscal measures:
- Well-targeted measures that facilitate rebalancing toward non-oil tradable sectors.
- Consider other tax policy changes to promote a more efficient allocation of resources in addition to the further reductions in personal and corporate income tax rates contained in the 2017 budget.
- Reduce tax preferences for housing to channel new investment toward more productive uses and alleviate pressure on rising house prices.
- Temporary funding to combat unemployment in oil-dependent regions is welcome; emphasis on retraining and mobility-enhancing measures (e.g., promoting housing supply and related infrastructure in job-abundant urban areas) to move unemployed workers into non-oil private tradable sectors rather than replacing declining oil-related employment with public sector employment.
- Fiscal stance over the medium term:
- Shift to neutral as the economy returns to potential.
- The non-oil structural deficit has stayed well below 4 percent of GPFG assets in recent years.
- GPFG growth has outpaced the economy, allowing increased spending of oil revenues as a share of mainland GDP.
- New global norm of low interest rates and high equity valuations suggests likely returns to GPFG assets to be considerably lower than 4 percent for the next decade; the Mork Commission reached a similar conclusion.
- The fiscal rule’s 4 percent target is no longer appropriate as operational guidance; a target of about 2.5-3 percent of GPFG assets would be needed to conserve oil revenue to address long-run fiscal challenges even if the equity allocation of the GPFG is increased.
- A revised rule should ensure non-positive fiscal impulse when the economy is at or above capacity, thereby relieving so-called “Dutch disease” pressures.
Structural Reform
- Need: Continued structural reforms are crucial to transition to a new growth model.
- Observations:
- Low wage growth and the 2013-15 krone depreciation improved cost competitiveness, but productivity growth remains sluggish.
- Norway’s unit labor costs are still well above those of peer countries.
- Policy priorities:
- Continued wage restraint by social partners.
- Reforms to reinvigorate productivity growth in areas identified by the Productivity Commission, including education, research and innovation, mobilization of the workforce, and public sector efficiency.
- Increase labor market efficiency: complete public sector retirement reform similar to private sector pension reform; tighten sickness and disability benefits.
- Relax constraints on new property construction, particularly in main urban areas less affected by low oil prices, to boost housing supply, reduce pressure on elevated housing prices, and facilitate labor relocation between regions.
Financial Sector Policy
- System assessment: Banking system is well capitalized and profitable, but important structural vulnerabilities remain.
- Identified financial stability risks (2015 FSAP update): elevated household debt, overvalued house prices, and banks’ heavy reliance on external wholesale funding.
- Current developments: House prices and household debt have been growing considerably faster than household disposable income and have accelerated recently at an unsustainable rate, particularly in the Oslo area.
- Recommended macroprudential and regulatory measures:
- Higher mortgage risk weights.
- Tighter loan-to-value limits.
- Introduction of debt-to-income (DTI) or debt-service-to-income ratio limits.
- Support for recent proposals by the FSA and the Norges Bank to make permanent and tighten current regulation on requirements for new residential mortgage loans, including reducing the speed limit and introducing a DTI ratio.
- Continue to enhance stress tests for banks to take account of funding risks.
- Regional cooperation:
- Strengthen regional cooperation on financial stability given the need to calibrate macroprudential measures to economic conditions of host countries.
- Important in view of the intended conversion of Nordea Bank Norge from a subsidiary into a branch.
- Enhanced supervisory cooperation among the Nordic finance ministries, central banks, and financial supervisors should safeguard host country treatment and information exchange to better ensure financial stability and a level playing field for banks.
Closing
- The mission expressed gratitude to the Norwegian authorities and other counterparts for their warm hospitality and for candid and high-quality discussions.
IMF Communications Department, November 17, 2016.