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Saturday, April 13, 2024

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Norway

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GDP: USD579.3bn (World ranking 24)
Population: 5.5mn (World ranking 118)
Form of state: Constitutional Monarchy
Head of government: Jonas Gahr Støre (PM)
Next elections: 2025, Legislative

Strengths

  • Full integration in the EU’s internal market and free travel zone
  • Strong business environment supported by a wide political consensus
  • Highly skilled and educated workforce
  • Profitable banking system and financial stability
  • Robust fiscal framework and ample support by the Government Pension Fund Global

Weaknesses

  • Persistently low energy prices
  • Low diversification of the economy
  • Very high household debt level
  • High corporate and personal tax rates
  • High unit labor costs

Economic overview

Cooling of economic growth

After a negative GDP growth rate of -1.9% in 2020, Norway recovered strongly in 2021, surpassing its pre-crisis GDP level and continued strong growth of +3.2% in 2022. To counter the effects of the health crisis, the Norwegian administration introduced a household income-protection program by offering higher wage subsidies for temporary layoffs, higher unemployment benefits and expanded health care. Heavily affected companies were also able to benefit from a compensation program. Key hard-hit sectors such as health care were strengthened. The unemployment rate fell from 4.4% in 2021 to 3.2% in 2022, with slight increases to expected over the next years.

High inflation and policy tightening are weighing on domestic demand and the slowing of the global economy led GDP to grow only very moderately in 2023. The economy will strengthen gradually but output growth will remain moderate at +0.6% in 2024 and +1.9% in 2025. Solid export growth and high energy prices led to a current account surplus of 30.3% of GDP in 2022. Despite a reduction in the trade balance surplus due to the moderation of energy prices, the current account surplus stayed high throughout 2023. Similar to other Nordic countries, Norway’s recovery has been accompanied by strong employment growth and the low recovery in immigration will continue to push the unemployment rate to a new record low, keeping upside pressures on wages. Against a strong recovery, the central bank has been one of the first among advanced countries to start normalizing. The peak policy rate stood at 4. 5% in December 2023. As a consequence, the housing market rally is paused but without major corrections.

Comfortable fiscal space to maneuver

Norway’s economy is robust and has been able to resist and take advantage of the health care crisis to ensure growth. There are three elements to be monitored in the coming years: (i) the government’s intention to diversify its economy, (ii) the maintenance of low public debt and finally (iii) the government’s support for employment, given the tightness of the labor market. Beyond the health care crisis, the Norwegian government is likely to focus its efforts on diversifying the economy away from the oil sector. Norway has more fiscal room to maneuver than most other European peers, with a fiscal surplus of 9.4% of GDP in 2021, a high of 19.4% of GDP in 2022 and more than 25% in 2023. Norway will be able to launch new stimulus measures without a significant impact on public debt, which remained low at 37% in 2022. Public debt will continue to drop to 36% for both 2024 and 2025.

Vulnerabilities in the medium run, notably in terms of financial stability, might come from excessive household debt, which was more than 190% of gross disposable income in 2022. Further vulnerabilities include high house and commercial property prices. So far house prices in Norway continue stronger than expected in 2023. But high interest rates will contribute to tighter financing conditions. This will trigger a tightening of household consumption and result in increased losses on banks’ loan portfolios.

Strong business environment

Norway has a strong business environment, particularly when it comes to enforcing contracts and resolving insolvency. In recent years, the government has implemented a series of reforms to make it easier to enforce contracts.

A minority center-left coalition led by the Labor Party took office in October 2021. Political stability remains assured even in the absence of a parliamentary majority, underlining the country’s strong historical capacity for cooperation. Policies to diversify the economy and pursue green initiatives are likely to be progressive and we do not expect any major disruption to the oil sector despite pressure from some smaller parties.

CEOWORLD magazine - Insights - Norway