OECD Economic Outlook, Volume 2021 Issue 2

Norway

Real mainland GDP growth of 4.2% is projected for both 2021 and 2022, as the economy recovers to its pre-pandemic path. In 2023 output growth will be 1.7%, in line with potential. Consumption growth will remain strong as households lower their saving ratio. Employment already exceeds the pre-pandemic level and unemployment will fall further. Headline consumer price inflation should ease as electricity price increases and supply bottlenecks unwind, then rise gradually, along with wage growth, as spare capacity is absorbed. However, the current price pressures may spark an earlier acceleration in overall wage and price growth.

Monetary policy normalisation should continue given the outlook for price inflation, the output recovery and the ongoing financial imbalances reflected in high household indebtedness. Most temporary government support for households and businesses has been withdrawn. This is helping bring the mainland fiscal deficit towards target. Measures aimed towards the green transition, higher labour force participation, and a better environment for business should continue.

Output growth has been strengthening

More than 70% of Norway’s population is fully vaccinated against COVID-19. However, a recent surge in cases has brought a rise in the number of hospitalisations. Economic recovery, damped by restrictions early this year, has resumed apace; mainland output grew by 2.6% in the third quarter (non-annualised). Savings accumulated during lockdowns are boosting household spending power. Most of the sectors worst affected by the crisis have substantially recovered. Indeed, strong demand in the hospitality industry has contributed to a spike in job vacancies and wage pressures in that sector. Continuing strength in the global oil price and large increases in natural gas prices are bolstering income and brightening prospects for investment. Headline consumer price inflation has seen sharp increases in recent quarters, largely due to electricity price increases. Pressures on consumer prices from global supply bottlenecks are present but, so far, have played only a minor role. The benchmark annual wage increase in the centralised bargaining system was set at 2.7% for 2021. Strong wage growth in the third quarter suggests increases may exceed this benchmark in some sectors. Norway’s strong house price growth during the pandemic has added to already substantial long-term increases. Household borrowing has also increased further. However, the market may be cooling; prices in Oslo have been flat in recent months.

Norway: Economic activity and inflation indicators

1. The pre-crisis output path is based on the November 2019 OECD Economic Outlook projection, with linear extrapolation for 2022 and 2023 based on trend growth in 2021.

2. Core inflation is Statistics Norway's CPI-ATE measure which adjusts for tax changes and excludes energy products.

Source: OECD Economic Outlook 106 and 110 databases; and Statistics Norway.

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Norway: Demand, output and prices

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Macroeconomic support is sensibly being reduced

Fiscal revenues have grown and spending on government transfers has diminished as economic activity has strengthened. The government has been able to remove most of the temporary support provided to households and businesses. The projections envisage a substantial decrease in the oil-adjusted fiscal deficit in 2022. Norges Bank began raising its key policy rate in September with an increase from zero to 0.25%. The projections assume an increase in the policy rate to 1.5% by the end of 2023. The Bank emphasised concern for financial imbalances, including the high level of household indebtedness, in its decision to start rate normalisation. The new coalition government is committed to increasing the price of carbon to NOK 2 000 per tonne (around EUR 200) by 2030. Compensation for heavily affected groups and industries is planned.

Economic output is set to reach pre-pandemic trend

From 2022 economic output is projected to be running slightly above the pre-pandemic path. Annual economic growth is expected to be 4.2% in both 2021 and 2022. Household consumption will continue to contribute significantly to the recovery and the household saving ratio will fall. The mainland economy is expected to be running roughly at its potential growth rate in 2023, with an increase of 1.7%. The projection envisages that current cost and price pressures, notably from electricity price increases, will ease in the coming months without triggering widespread higher price and wage inflation. The latter nevertheless remains a risk. Further restrictions to combat the spread of COVID-19 also remain a risk.

Policy makers can now turn more fully to structural challenges

Going forward, policy should focus on advancing the green transition, facilitating business sector productivity growth and ensuring high levels of employment. Application of carbon pricing to more sectors of the economy would be a welcome follow-up to the planned price increases. Continued support is needed for research into technological solutions to facilitate the green transition, including carbon capture and storage projects. Meanwhile, policy needs to help business sector productivity and employment, including through improvements to insolvency processes. Further efforts should be made to increase labour force participation, including through a reform of sickness benefits and disability pensions which are a major channel of early retirement. Reforms bringing more affordable housing would also be welcome, including more support for low-income renters, fewer tax concessions favouring home ownership, and planning reforms that give more scope to new property development.