On September 12, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation [1] with Norway.
Norway is in the midst of a healthy recovery from the oil downturn, supported by positive trends in oil prices and a strengthening labor market. In addition, banks remain profitable and well capitalized. However, household debt continues to increase and house prices have resumed their rise, especially in the Oslo area, after a correction during 2017.
Mainland growth is projected to increase from 2 percent in 2017 to 2½ percent in each 2018 and 2019, underpinned by solid consumption, stronger business investment and an export recovery. Petroleum investment will also pick up. As a result, output will likely start to exceed potential in 2019. Unemployment, which has already fallen below 4 percent, is expected to decrease somewhat further as labor market slack continues to diminish. Headline inflation is already above the 2 percent revised target, and core inflation is slowly converging towards it.
Risks to the outlook are broadly balanced. Externally, global trade tensions could be damaging to a highly open economy such as Norway. Domestically, the most prominent downside risk is related to high household debt and elevated house prices. With over 90 percent of mortgages being variable rate, highly-leveraged households and consumption are vulnerable should financial conditions tighten abruptly. Relatedly, a sharp decline in house prices could curb private consumption and create negative spillovers to banks’ balance sheets. On the upside, the economic upswing may prove stronger than expected, not least through the impact of higher oil prices on consumption and investment.
The 2017 fiscal outturn implied a stimulus of 0.2 percent of mainland trend GDP. The non-oil structural balance stood at 7.5 percent of mainland trend GDP (equivalent to 2.8 percent of the GPFG). The revised 2018 budget maintains a neutral stance by saving stronger-than-expected gains from oil, and focuses on boosting long-term growth potential. Its key measures aim at scaling back and shifting the tax burden from direct to indirect taxes, improving public sector efficiency, enhancing infrastructure, and promoting innovation.
Executive Board Assessment [1]
Executive Directors agreed with the thrust of the staff appraisal. They commended the Norwegian authorities for the skillful deployment of countercyclical policies during the last downturn, which set the stage for the current recovery. Directors noted that economic growth is running above potential thanks to firm improvements in the labor market and favorable oil prices. Nevertheless, Directors cautioned that global trade tensions and an abrupt tightening of financial conditions could adversely impact Norway. Over the longer term, population ageing and slowing labor productivity could weigh on potential growth. Against this background, Directors recommended calibrated macroeconomic policies and structural reforms to sustain prosperity, by boosting productivity and promoting a successful transition away from oil.
Directors welcomed the decision in the revised 2018 budget to save the higher‑than‑expected oil windfall. They also advised that the 2019 budget should target a modestly contractionary stance to begin unwinding the significant fiscal stimulus provided during the last downturn. Arresting the rise in non‑oil deficits of the last two decades would help relieve pressure on the real exchange rate, thus preserving competitiveness. It would also give Norway a headstart on long term consolidation needed to address challenges from population ageing.
Directors welcomed the new monetary policy framework, which is not expected to result in major policy changes. They emphasized that the inflation outlook warrants a gradual tightening, as signaled by Norges Bank in its forward guidance. Directors noted the high levels of capital and liquidity in the banking sector but cautioned against financial stability risks, including from a combination of high household debt and fast rising house prices. In this context, Directors welcomed the recent extension of the macro‑prudential measures but underscored the need to tighten policies further, and on a regionally differentiated basis, if risks were to intensify. Further progress should also be made in relaxing constraints on housing supply and in reducing tax incentives in favor of home ownership.
Directors underscored the need for Norway to underpin competitiveness further. In this context, they recommended that the wage moderation achieved by social partners in recent years be carried forward to facilitate the needed transition of the economy out of oil and reinforce resilience against adverse developments in international prices. Reforms in recent years to support innovation and productivity growth should also be continued.
Directors noted that Norway’s social model requires high labor participation to be sustainable. Recent agreements on private and public sector pensions will commendably lengthen working lives and foster labor mobility. However, reforms are still needed to enhance work incentives, notably changes in the sickness and disability schemes. There is also room to improve the integration of vulnerable groups into the labor market.
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