On September 4, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Norway.
The Norwegian economy performed well in 2014 despite the sharp fall in oil prices toward the end of the year. Mainland (i.e. non-oil) GDP grew at 2.2 percent, with weaker investment demand being offset by stronger government consumption. Unemployment stayed at a low level in 2014, but has recently edged up to 4.5 percent in June according to the labor force survey. The registered unemployment rate is lower at 2.9 percent in June and more stable, having risen only 0.1 percentage points since June 2014. Inflation has been stable and close to the 2.5 percent target, helped by moderate wage growth. The exchange rate depreciated significantly in late 2014 and early 2015 with the decline in oil prices, pushing up prices of imported consumer goods. Meanwhile, house prices are rising rapidly again, albeit with large regional dispersion.
The 2014 structural non-oil deficit was 2.9 percent of Government Pension Fund Global (GPFG) assets and 5.8 percent of trend mainland GDP. This is below the deficit permitted under the authorities’ fiscal policy rule, but it still implies a positive fiscal impulse due to strong growth in GPFG assets. Banks’ profitability has been solid and banks have strengthened their capital ratios, but reliance on wholesale funding continues. This makes banks vulnerable to turbulence in global financial markets.
The near term outlook has weakened due to lower oil prices. Mainland GDP growth is projected to slow to 1.3 percent this year with weaker private investment and consumption as demand for mainland inputs to offshore sector declines. Looking further ahead, the medium and longer term presents challenges of managing a transition away from the oil-dependent growth model. With oil investment expected to decline further, resources need to shift from supplying the oil and gas sector and move toward other tradable sectors or exports of oil-related goods and services. Unemployment will likely increase in the process, and common currency unit labor costs will need to adjust downward from the current high level to facilitate this transition.
Downside risks remain. Deceleration of global demand or excess oil and gas supply could lead to a protracted period of low oil prices, which would undercut growth through a further reduction in the oil-related demand for mainland goods and services. A significant reduction in property prices could also occur, which could depress private demand. In addition, there is the risk that the expected decline in oil-related output in the mainland economy would not be offset by a pick-up elsewhere in the mainland economy.
Executive Board Assessment2
Executive Directors commended Norway’s strong economic performance last year with steady growth, low inflation, and low unemployment. However, they noted that the near-term outlook has weakened, with lower oil prices and an ongoing slowdown in offshore investment, while risks in the housing and financial sectors present a challenge. Directors urged vigilance and prudent policies to safeguard growth and financial stability. They also highlighted the need for reforms to raise productivity and transition away from the oil-dependent growth model.
Directors supported the current monetary policy stance, while urging a careful monitoring of inflation and financial stability risks. They agreed that monetary policy should be the first line of defense if growth turns out significantly weaker than projected, as long as inflation expectations remain well anchored. They recommended the timely implementation of macro-prudential measures to contain rising household credit, in order to leave room for monetary policy to support growth while pursuing the inflation target.
Directors noted that fiscal policy this year is broadly appropriate given the projected slowdown. A number of Directors also considered that maintaining the fiscal impulse next year would be appropriate in view of the risks to economic growth. Over the medium term, a more neutral stance would be necessary to allow the shift of resources to other tradable industries.
Directors welcomed the recent recommendations of the commission on the fiscal rule, which would help smooth the spending of oil revenues, and looked forward to the authorities’ adoption of rules along those lines. Directors welcomed the conclusions of the FSAP update that the Norwegian financial system is generally sound and well managed, and commended the significant measures that the authorities have taken to address financial stability risks. Nevertheless, they agreed that further measures are needed to reduce risks, including improving liquidity stress tests, stricter loan-to-value, loan-to-income or debt service ratios, more frequent comprehensive assessments of small banks, and strengthening the toolkit and funding arrangements for bank resolution.
Directors emphasized the importance of further structural reforms to support the transition to a new growth model and improve the efficiency of the economy. In particular, they saw merit in reducing the preferential tax treatment for residential properties relative to productive investments, as well as further reforms to the pension system and sickness and disability benefits. They also stressed that investment in infrastructure, education, and research is key to raising productivity. Lowering Norway’s extensive agricultural protection and subsidies and relaxing unnecessary supply restrictions in the housing market would also be important.
|Population (2014): 5.2 million|
|Per capita GDP (2014): US$ 97,720||Quota (1883.7 mil. SDR/0.79 percent of total)|
|Main products and exports: Oil, natural gas, fish (primarily salmon)||Literacy: 100 percent|
|Real economy (change in percent)|
|Real GDP 1/||-1.6||0.6||1.0||2.7||0.7||2.2||1.0||1.3|
|Real mainland GDP||-1.6||1.8||1.9||3.8||2.3||2.2||1.3||1.7|
|Unemployment rate (percent of labor force)||3.2||3.6||3.3||3.2||3.5||3.5||4.0||4.1|
|Output gap (mainland economy, – implies output below potential)||-1.1||-1.3||-0.9||0.2||0.0||-0.1||-0.6||-0.8|
|Gross national saving (percent of GDP)||35.4||36.3||38.2||39.0||38.3||37.9||36.8||36.5|
|Gross domestic investment (percent of GDP)||24.8||25.4||25.8||26.5||28.3||28.4||28.1||28.3|
|Central government (fiscal accounts basis)|
|Overall balance (percent of mainland GDP) 2/||9.3||8.3||12.6||12.8||9.4||6.1||3.8||3.9|
|Structural non-oil balance (percent of mainland trend GDP) 3/||-5.1||-5.1||-4.5||-5.0||-5.1||-5.8||-6.4||…|
|in percent of Pension Fund Global capital 4/||-4.4||-4.1||-3.2||-3.4||-3.3||-2.9||-2.6||…|
|General government (national accounts basis, percent of mainland GDP)|
|Net financial assets||194.7||208.6||209.4||220.5||259.3||303.6||317.5||318.5|
|of which: capital of Government Pension Fund Global (GPF-G)||134.2||148.2||153.3||166.1||207.8||254.3||269.8||…|
|Money and credit (end of period, 12-month percent change)|
|Broad money, M2||2.4||5.2||6.2||3.8||6.1||5.3||…||…|
|Domestic credit, C2||2.9||6.1||6.9||5.9||6.8||6.0||…||…|
|Interest rates (year average, in percent)|
|Three-month interbank rate||2.5||2.5||2.9||2.2||1.8||1.7||1.4||1.4|
|Ten-year government bond yield||4.0||3.5||3.1||2.1||2.6||2.5||2.5||2.5|
|Balance of payments (percent of mainland GDP)|
|Current account balance||13.1||13.6||16.0||16.1||12.7||11.8||10.8||10.1|
|Exports of goods and services (volume change in percent)||-4.1||0.7||-0.8||1.4||-3.0||2.7||1.4||1.4|
|Imports of goods and services (volume change in percent)||-10.0||8.3||4.0||3.1||4.3||1.9||1.6||2.4|
|Terms of trade (change in percent)||-16.8||6.7||9.1||2.8||-0.6||-5.2||-2.0||-0.9|
|International reserves (end of period, in billions of US dollars)||48.9||55.6||52.8||51.7||57.9||66.8||67.7||77.3|
|Holdings of currency (percent of quota)||80.6||76.6||71.4||71.1||78.2||85.6||…||…|
|Holdings of SDR (percent of allocation)||102.4||102.0||97.5||96.1||95.1||94.8||…||…|
|Quota (SDR millions)||1,672||1,672||1,884||1,884||1,884||1,884||…||…|
|Exchange rates (end of period)|
|Bilateral rate (NOK/USD), end-of-period||6.3||6.0||5.6||5.8||5.9||6.3||…||…|
|Real effective rate (2010=100)||95.2||100.0||100.6||100.2||98.9||94.1||…||…|
|Sources: Ministry of Finance, Norges Bank, Statistics Norway, International Financial Statistics, United Nations Development Programme, and IMF staff calculations.|
|1/ Based on market prices which include “taxes on products, including VAT, less subsidies on products”.|
|2/ Projections based on authorities’s 2015 revised budget.|
|3/ Authorities’ key fiscal policy variable; excludes oil-related revenue and expenditure, GPF-G income, as well as cyclical effects.|
|4/ Over-the-cycle deficit target: 4 percent.|
1 Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
2 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.
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