IMF NEWS

Radhus in Oslo, capital of Norway. (Photo: Kim Kaminski/Alamy Stock photo)

• IMF Country Focus

Norway’s Economic Outlook in Seven Charts

June 12, 2019

Norway's economy has performed well over the past year, especially compared to its neighbors.  It is enjoying low unemployment and a broadly neutral budget, while its economy continues to grow.  Given its strong momentum, now would be the ideal time for the country to address long-term challenges, suggests the IMF in its latest assessment of the Norwegian economy.  Here are seven charts that tell the story.

• Growth in many advanced economies has slowed, but Norway’s economy continues to expand strongly. The weaker krone is helping exporters, low unemployment is boosting incomes, and oil prices remain materially above break even levels, supporting investment. Although global trade tensions and uncertainty about European growth cloud the horizon, Norway’s outlook remains positive.
  
• In good times, it is important to avoid complacency. On fiscal policy: in recent years, the budget has been broadly neutral, neither adding nor subtracting from economic growth. This marks an improvement from the past, when the deficit kept rising even when growth was healthy. However, in the current upturn there is a strong case for reducing the deficit. Smaller deficits now would generate fiscal buffers to counteract the next slowdown.
  
• Low unemployment and rising wages are pushing inflation higher, leading Norway’s central bank, Norges Bank, to hike interest rates twice in the last nine months. How fast should the central bank lift rates going forward? Raising rates too slowly could lead to high inflation, while hiking too aggressively could expose households to sharp increases in interest rates. In our view, the tightening projected by Norges Bank strikes the right balance between these risks.
  
• House prices had been growing too fast until last year, raising concerns about disruptive price falls. Since then, house price gains slowed, and valuations now appear less stretched. But Norwegian households still have one of the highest debt levels globally, and indebtedness keeps rising. For these reasons, mortgage regulations should not be relaxed. Developments in commercial real estate should also be monitored, as valuations appear stretched, notably in Oslo’s prime segment.
  
• Good times provide the ideal opportunity to address longer-term challenges. In the future, oil and gas revenues are expected to drop, as reserves are progressively depleted. Simultaneously, pensions and health-related costs will continue to climb because of aging. These two forces imply that over time Norway’s budget will face increasingly hard choices, which will require finding new sources of revenue or savings to accommodate new spending.
  
• Sustaining high living standards as the population ages will require expanding the labor force as much as possible. Reforming sickness and disability benefits is a priority. Compared to other Nordic countries, a significantly higher share of Norwegians is on these programs and not working. Social partners will soon convene to discuss the reform proposals of an expert commission. In the IMF's view, these recommendations are a good starting point for a reform.
  
• As the economy continues to transition away from oil and gas, other sectors will have to become more competitive. The weak kroner has helped, but this won’t be enough on its own. Continued wage moderation, underpinned by a sense of shared trust and responsibility, will also be needed.