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Eco Perspectives

To address inflation, a coordinated tightening of the policy mix
06/29/2022 •

After being severely hit by the Omicron variant, economic activity picked up again as of February, and the recovery is expected to continue with growth reaching 4% in 2022. Through no fault of its own, Norway is one of the big winners of the Russia-Ukraine conflict thanks to a substantial increase in oil and gas revenues, which are expected to reach NOK 1,500 bn in 2022 (about EUR 143 bn). Although inflation is milder than in the other European countries, the Norwegian central bank has expressed its determination to tighten monetary conditions as much as necessary to break the inflationary momentum. To bring inflation within its target range, NorgesBank plans to gradually raise its key deposit rate to 2.5% by the end of 2023.

Eco Perspectives

Solid foundations
12/16/2021 • By Jean-Luc PROUTAT

Faced with the Covid-19 pandemic, Norway managed to minimise the human toll as well as its economic losses. In 2021, the country largely benefited from the rebound in natural gas and oil prices. Activity has already exceeded pre-pandemic levels, the housing market is booming, and the public accounts have swung back into their usual surpluses. One of the very first central banks to raise its key rates, Norges Bank esteems that the current situation is in keeping with the normalisation of monetary policy. Yet the roadmap still depends on the health situation, which like elsewhere in the world, is deteriorating.

Eco Perspectives

An economy ready for take-off
07/06/2021 •

Largely spared by the Covid-19 pandemic, Norway reported one of the mildest recessions in Europe in 2020 (-2.5%). The economy is poised for a vigorous recovery in the second half, driven by the acceleration of global trade and the rebound in household consumption. In the light of these favourable prospects, and concerned about the acceleration in house prices, Norges Bank intends to begin raising its key rate gradually as of September, even though core inflation is low.

Eco Perspectives

One of the least affected developed economies
12/16/2020 •

Norway was not hit as hard by the Covid-19 pandemic as most its European neighbours. Moreover, the economy has been able to count on considerable support from the fiscal and monetary authorities. In its draft budget for 2021, presented in October, the government has pledged to maintain an expansionist policy, even if spending will logically not be as high as in 2020. What’s more, faced with an upturn in Covid-19 cases and tighter restriction measures, the central bank has adopted a more conciliatory tone. 

Eco Perspectives

Back to growth despite two large shocks

09/30/2020 •

Not only was Norway affected by the Covid-19 pandemic, but the country also had to face a big fall in the price of its main export: oil. Nevertheless, these two shocks have been cushioned by the structure of the Norwegian economy and the authorities’ fiscal and monetary response. The country’s economy is now one of the best positioned to return to its pre-pandemic levels. Indeed, it is already showing signs of improvement.

Eco Perspectives

The other shock
04/07/2020 • By Jean-Luc PROUTAT

With the coronavirus epidemic and its impact on oil prices, which are plummeting, the Norwegian economy is heading for a contraction in 2020. Exports, which account for 41% of GDP, are likely to be hit first. Norway’s central bank cut its key rate to nearly zero and has considerably increased NOK and USD lending, injecting liquidity into the economy while supporting the currency. The government has introduced fiscal measures to buffer the shock for companies and households.

Eco Perspectives

Resilient growth
10/09/2019 •

The Norwegian economy is expected to report robust GDP growth through the end of 2019, thanks to dynamic oil sector investments in Norway and abroad. Growth is expected to slow thereafter in a less favourable international environment. Moreover, investment in the Norwegian oil sector is expected to ease up in 2020. However household consumption should continue to grow at a relatively sustained pace, buoyed by wage acceleration. The central bank of Norway will not opt for any further rate increases in the quarters ahead. Inflation should hold near the central bank’s target of 2%, while external risks are on the rise.

Thanks to oil and gas in the North Sea, Norway has become one of the richest countries in Europe in terms of income per capita. The revenues from the petroleum industry have allowed the country to build up substantial reserves for the Government Pension Fund Global. It now holds assets worth three times the Norwegian GDP. The fund is integrated into the government budget. One fundamental principle of Norwegian fiscal policy is the so-called budgetary rule, which says that over the course of a business cycle, the government may spend only the expected real return on the fund, estimated at 3% per year, roughly equivalent to around 8% of GDP.

After suffering from the decline in oil prices and the oil industry in 2016, the Norwegian economy picked up due to stronger domestic demand and a favourable global cyclical environment. GDP growth continued to be strong up until the Covid-19 crisis despite a slowdown in most advanced economies. In fact, the robust economy allowed the Norges Bank to raise its base rate by 100 basis points, to 1.50%, in 2018 and 2019 in order to keep inflation around its 2% target.

However, faced with the Covid-19 crisis and the fall in oil prices in the first months of 2020, the central bank had to reverse course and cut its base rate to 0%, its lowest level ever. Oil prices and the Norwegian krone have recovered since, but the environment remains challenging for the economy, notably due to the slowdown in trade. In the longer term, one of the key challenges for policymakers will be to rebalance the economy further away from oil and gas.