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.
