Perspectives

Back to growth despite two large shocks

Eco Perspectives // 4th quarter 2020 (completed on 30 September 2020)  
economic-research.bnpparibas.com  
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NORWAY  
BACK TO GROWTH DESPITE TWO LARGE SHOCKS  
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.  
Since the start of this year, Norway has suffered from two major  
GROWTH AND INFLATION (%)  
shocks to its economy. First, the country has been affected by the  
Covid-19 pandemic, even if the restriction measures put in place by the  
GDP Growth  
Forecast  
Inflation  
Forecast  
government have managed to contain the progression of the virus – in  
fact, Norway has infection and death rates among the lowest in Europe.  
5
4
4
.0  
.5  
.0  
3.0  
3.0  
In addition, Norway had to deal with a big fall in oil prices. Between  
3.5  
3
.0  
2.3  
3
1 December 2019 and 21 April 2020, the price of Brent dropped by  
2.5  
1.5  
2
.0  
.5  
1.3  
1.2  
1
more than 70%, dragging the Norwegian krone down. Oil prices have  
rebounded since and the price of Brent has doubled, but it remains 40%  
below where it was at the start of the year.  
1.0  
0.3  
0
.5  
0.0  
0.5  
1.0  
-
-
-1.5  
-
-
-
-
-
2.0  
2.5  
3.0  
3.5  
4.0  
THE CONSEQUENCES FOR THE ECONOMY  
-4.5  
-
-
5.0  
5.5  
Over the first half of 2020, Norway’s GDP dropped by nearly 7%, and  
-6.0  
-
-
6.5  
7.0  
-5.5  
mainland” GDP, which excludes the oil sector, declined by more than  
% – which is about the same as the fall in Sweden, where restriction  
2018  
2019  
2020  
2021  
2018  
2019  
2020  
2021  
8
measures have been softer.  
CHART 1  
SOURCE: EUROPEAN COMMISSION, BNP PARIBAS  
Like elsewhere, fiscal and monetary authorities came rapidly to the  
1
rescue . For the first time since the mid-1960s, the general government  
balance has recorded a deficit. In the second quarter, the deficit  
amounted to NOK 64 bn, which is equivalent to about 8% of GDP. Meanwhile, the Norges Bank has already adopted a more hawkish  
Deficits are unusual in Norway because the government can count stance at its last meeting. The weakening of the krone that accompanied  
on revenues from the oil sector, which have been gathered in the Oil the drop in oil prices has raised fears about upward pressures on  
Fund (Government Pension Fund-Global, GPFG) since 1990. However, inflation. While SSB forecasts the CPI inflation rate to stand at 1.5%  
2
the use of the Fund is regulated . Over time, transfers to the central this year, it estimates that the underlying inflation rate (CPI-ATE) will  
government budget (the structural non-oil deficit) cannot exceed reach 3.1%. It is certainly with that in mind that the Norges Bank is  
4
the expected real return on the Fund, which is currently estimated already anticipating rate hikes in the coming years , which no other  
at 3%. Nevertheless, this leaves some flexibility, as excesses can be major central bank is planning at the moment.  
compensated over the years. What’s more, “significant emphasis” is  
placed on “evening out economic fluctuations to contribute to sound  
capacity utilisation and low unemployment”. This means that, even  
if the structural deficit exceeds 3% this year, fiscal rules will not be  
breached.  
As far as monetary policy is concerned, the Norwegian central bank  
(
Norges Bank) could count on large room for manoeuvre compared to  
the Swedish Riksbank or the ECB for instance. The Norges Bank there-  
fore has been able to ease monetary policy substantially by lowering  
its base rate from 1.5% to 0%, its lowest level ever.  
SIGNS OF IMPROVEMENT  
Thanks to the lifting of restriction measures and to both fiscal and  
monetary policy support, the Norwegian economy has bounced back  
over the past few months. GDP rebounded in May and has kept rising  
in June and July. Overall, the economy has made up half of lost ground.  
Furthermore, the country’s statistics bureau (SSB) is quite optimistic,  
forecasting that activity will have returned to its pre-pandemic level  
3
before the end of 2021 , which will probably be sooner than most other  
European countries.  
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https://www.regjeringen.no/en/topics/the-economy/economic-policy/economic-measures-in-norway-in-response-to-covid-19/id2703484/  
https://www.regjeringen.no/en/topics/the-economy/economic-policy/economic-policy/id418083/  
https://www.ssb.no/en/nasjonalregnskap-og-konjunkturer/artikler-og-publikasjoner/better-times-in-sight-but-situation-remains-serious  
https://www.norges-bank.no/en/news-events/news-publications/Press-releases/2020/2020-06-18-press-release-rate/  
The bank  
for a changing  
world  
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