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Output growth in the mainland economy is projected to be sustained by the expansion of private consumption and investment, despite the slowdown in the housing market. Employment growth will further reduce the unemployment rate and consumer price inflation will gradually increase as the upturn in economic activity proceeds.
Given improved economic growth, the switch from an expansionary to neutral fiscal stance implied by the adjusted fiscal rule is appropriate. So too is the central bank’s signalling of policy rate increases. Structural policy needs to focus on improving the business environment, including further reforms to taxation financed by efficiency drives in public spending.
House prices now appear to be adjusting downwards after a prolonged period of growth, and their potential impact on the financial sector and the wider economy is the chief financial vulnerability. Close vigilance needs to continue and the authorities should be prepared to make a wide-ranging response in case of a hard landing in the housing market. This should include, as necessary, delay to monetary policy normalisation and targeted fiscal policy.
Economic Survey of Norway (survey page)