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.

GROWTH & INFLATION

Norway was severely hit by the Omicron variant despite preventative health restrictions introduced in late 2021. Business slumped under these restrictions and mainland GDP (excluding oil and gas activities) declined by 1% m/m in January, before picking up again in February and March (+0.6% m/m and +1.2%, respectively).

For the full quarter, Q1 2022 GDP contracted 0.6% q/q, but is still 2.7% higher than the pre-pandemic level. As a major energy producer (the world’s 8th and 15th largest producer of natural gas and oil, respectively), Norway is not very dependent on Russia (less than 8% of energy consumption) and consequently, is not hurt much by the Russia-Ukraine war.

Through no fault of its own, the country is even one of the big winners of the conflict because it benefits from both higher energy prices and new orders from countries seeking to diversify their supply sources. Nordea Bank estimates that oil and gas revenues will reach nearly NOK 1,500 bn in 2022 (about EUR 143 bn).

NORWAY: ACTIVITY INDICATORS

Compared to the other European countries, Norway has not been hit as hard by rising inflation (+6.2% in May 2022 y/y, compared to a Eurozone average of 8.1%). Despite more moderate inflation, the government has introduced several measures to boost purchasing power: direct subsidies, electrical power tax cuts, and higher housing allowances. The total cost of these measures should near NOK 9 bn (EUR860m).

Moreover, Norway’s unemployment rate has fallen to a very low level (2.9% in March 2022) and the number of job vacancies has risen significantly (+41.4% y/y in Q1), increasing the bargaining power of workers. Labour unions and corporate management are anticipating wage increases of 4% in 2022 according to the NorgesBank quarterly survey for Q2 2022. Thanks to the limited erosion of purchasing power, household consumption is holding up well (+0.6% m/m in April) and largely surpasses the pre-pandemic level (by 4.8% compared to year-end 2019).

In the face of inflationary pressures, NorgesBank was one of the first central banks to begin normalising its monetary policy. After holding at 0% through September 2021, the key rate was raised by 25 basis points (bp) on three occasions. Yet with prices accelerating more rapidly than expected, the national statistics institute (SSB) foresees an exceptionally big 50bp rate increase at the end of June, which would be the biggest rate increase in a decade. To bring policy in line with its price stability target, i.e. core inflation of close to 2% in the medium term, the central bank has already announced that the deposit rate could rise to 2.5% by year-end 2023.

At the same time, the government declared that it would do its part to fight inflation by limiting increases in public expenditure. This will entail the suspension of several construction projects. Norway thus stands apart for the co-ordination of the monetary and fiscal policy mix at a time when most of the other European countries are still pursuing support measures.

THE EXPERT ECONOMISTS WHO PARTICIPATED IN THIS ARTICLE

Other articles from the same publication

Global
Increasing concerns about the growth outlook

Increasing concerns about the growth outlook

The level of activity in the US and the euro area is very high but growth has already slowed down significantly and quarter over quarter growth should remain low for the remainder of the year [...]

Read the article
United States
Accelerated normalisation of monetary policy

Accelerated normalisation of monetary policy

Inflation’s unexpected rebound in May forced the Federal Reserve (Fed) to accelerate the normalisation of its monetary policy. In mid-June, the Federal Open Market Committee (FOMC) decided to raise the fed funds rate by 75 basis points (bp) [...]

Read the article
China
Weakening economic growth outlook

Weakening economic growth outlook

China’s economic activity contracted in April and May 2022 because of stringent mobility restrictions introduced in major industrial regions such as Shanghai. Since late May, restrictions have eased gradually and activity has started to rebound [...]

Read the article
Japan
Can Japan assume its singularity much longer?

Can Japan assume its singularity much longer?

Since early 2022, inflation has been rising, albeit moderately, for the first time since 2014, while growth contracted in Q1 [...]

Read the article
Eurozone
More inflation than growth

More inflation than growth

Until May, Eurozone growth has been relatively resilient to the series of shocks that have swept the region, but its pace should slow more significantly in the months ahead [...]

Read the article
Germany
After imported inflation, domestic inflation?

After imported inflation, domestic inflation?

Germany is one of the Eurozone countries hit hardest by the Russia-Ukraine war, which is leading towards feeble growth prospects and high inflation. German GDP is expected to barely increase by 1.3% in 2022, compared to a Eurozone average of 2.5% [...]

Read the article
France
The shock to purchasing power is smoothed but not fully eliminated

The shock to purchasing power is smoothed but not fully eliminated

The French economy is stuck between three developments with different effects: an inflation shock that is denting consumer spending, a negative supply shock (supply constraints in industry) and the lifting of public health restrictions (benefiting growth as of the second quarter, having held it back in the first quarter). Government measures that have limited inflation were unable to prevent negative growth in the first quarter. However, the positive impact of the lifting of public health restrictions and a rebound in purchasing power should allow for a recovery towards positive growth in the third quarter (+0.3% q/q).

Read the article
Italy
A better recovery in a more complex world

A better recovery in a more complex world

In contrast to the previous recessions, the Italian economy has already recovered what it lost in 2020. The carry over for 2022 is 2.6%. In Q1 2022, real GDP rose by 0.1%, with an annual growth rate above 6% [...]

Read the article
Spain
Significant resilience to shocks

Significant resilience to shocks

After a weaker economic rebound than its European neighbours in 2021, Spain is expected to report solid growth of more than 4% in 2022 [...]

Read the article
Netherlands
Inflation, but not just consumer price inflation

Inflation, but not just consumer price inflation

With an energy mix comprised of nearly 90% fossil fuels, the Netherlands have been hit by the full brunt of the sharp rise in oil and gas prices since the outbreak of the Russia-Ukraine war [...]

Read the article
Belgium
Wait for the rebound

Wait for the rebound

Belgian GDP grew by 0.5% in the first quarter of 2022, as inflation continues to reach new all-time highs. Consumer confidence took a hit at the start of the Russian invasion, with growth subsequently likely to have come to a standstill [...]

Read the article
Greece
Prospects are still encouraging

Prospects are still encouraging

After surging above 10% this spring, inflation will be the main headwind hampering Greek GDP growth in 2022. Yet the economy has proven to be resilient so far [...]

Read the article
United Kingdom
Heading toward recession?

Heading toward recession?

Inflation continues, driven by factors specific to the UK economy. On the one side, we have a labour market with full employment, favouring wage rises [...]

Read the article
Denmark
Industrial sovereignty: from dream to reality

Industrial sovereignty: from dream to reality

Denmark stands out for its vigorous economic recovery, which was much stronger than that  in the other European countries. The Danish economy quickly returned to pre-crisis levels and even exceeded its pre-pandemic growth trend [...]

Read the article