Norway - OECD Economic Outlook June 2020

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Norway Norway’s mainland GDP is projected to fall by 8.7% in 2020 if there is a new virus outbreak later in the year and associated shutdown (the double-hit scenario) and by 7% if this is avoided (the single-hit scenario). The recovery will be muted in both scenarios, and output will not reach pre-COVID-19 levels by the end of 2021.

Similarly, unemployment will not have returned to pre-crisis levels. A sharp increase in the mainland’s fiscal deficit will imply a substantial drawdown from the wealth fund. Weak demand will push consumer price inflation down.

The monetary and fiscal policy response to COVID-19 has been prompt and capacity remains for further measures should these be required. The fiscal rule that links mainland deficits to wealth-fund returns should remain firmly in place as it allows ample room to support the recovery while also providing long-term fiscal guidance. An overly slow withdrawal of business-support measures should be avoided. Meanwhile, the oil market shock potentially brings opportunities to transition further towards a green economy.

The lifting of containment measures started in April Norway’s first cases of COVID-19 appeared in late February with a rapid rise thereafter. Overall, however, the scale of the pandemic has been comparatively limited, despite relatively large numbers in high-risk age groups -- a little under 20% of the population is aged 65 years and over.

Norway Mainland real GDP will dip sharply

The increase in registered unemployment has been very large

Mainland real GDP

Registered unemployment¹

Index 2019Q4 = 100,s.a.

110

Single-hit scenario

% of labour force 12

Double-hit scenario

105

10

100

8

95

6

90

4

85

2

80

2019

2020

2021

0

0

03-2020

04-2020

05-2020

0 06-2020

1. The registered unemployment data includes temporary layoffs.

Source: OECD Economic Outlook 107 database aqnd Norwegian Labour and Welfare Administration (NAV).

StatLink 2 https://doi.org/10.1787/888934139803

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION © OECD 2020

280 _

Norway: Demand, output and prices (double-hit scenario) 2016

2017

2018

2019

2020

2021

Norway: double-hit scenario

Current prices NOK billion

Mainland GDP at market prices1

2 691.6

2.0

2.2

2.3

-8.7

1.5

Total GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding2

3 098.1 1 411.4 754.7 780.8 2 946.9 89.9 3 036.8 1 098.6 1 037.3 61.3

2.3 2.2 1.9 2.6 2.3 0.2 2.4 1.7 1.9 0.0

1.3 1.9 1.4 2.8 2.0 0.1 2.1 -0.2 1.9 -0.7

1.2 1.5 1.7 6.1 2.8 -0.2 2.4 1.5 5.2 -1.1

-7.5 -11.9 3.3 -16.1 -9.1 -0.3 -9.2 -7.8 -12.3 1.5

1.3 2.0 2.5 0.7 1.8 0.0 1.7 0.1 1.4 -0.4

4.0 1.9 1.7 4.2 5.0 44.9 4.7

5.8 2.7 1.2 3.8 7.8 45.8 7.1

-0.6 2.2 2.6 3.7 6.4 46.9 3.9

-1.1 0.6 2.0 6.3 -2.4 ..

1.7

0.5 0.6 0.7 5.6 -0.1 ..

0.9

Total domestic demand Exports of goods and services Imports of goods and services Net exports2 Memorandum items GDP deflator Consumer price index Core inflation index3 Unemployment rate (% of labour force) General government financial balance (% of GDP) General government gross debt (% of GDP) Current account balance (% of GDP)

_ _ _ _ _ _ _

Percentage changes, volume (2017 prices)

1. GDP excluding oil and shipping.

2. Contributions to changes in real GDP, actual amount in the first column.

3. Consumer price index excluding food and energy.

Source: OECD Economic Outlook 107 database.

The principle measures to contain the spread of COVID-19 were enacted on 12 March. These included school closures, obligatory shutdown or severe restrictions of service sectors and travel restrictions. In addition, distancing rules were introduced and teleworking strongly encouraged. A lifting of restrictions began on 20 April with a start to reopen schools. Other de-restrictions have included allowing the reopening of businesses involving one-to-one contact, such as physiotherapists and hairdressers.

StatLink 2 https://doi.org/10.1787/888934138473

The economy has contracted sharply The COVID-19 crisis is bringing an additional economic shock due to the sharp falls in the global price of and demand for oil. Indeed, the Norwegian government has imposed a schedule of oil-production ceilings as part of producers’ coordinated efforts to limit supply. The crisis initially prompted a depreciation of over 15% in the krone-euro exchange rate and the Oslo All Share Index declined by around 30%. These downswings have been reversed only partially. The krone value of Norway’s main wealth fund has remained comparatively stable as the impact of international equity price falls has largely been offset by the currency deprecation. In the labour market, the registered unemployment rate soared when confinement measures were introduced, mainly due to benefit applications by those temporarily laid off.

The scale of the initial impact on output is emerging, with early estimates indicating that mainland GDP fell by 14% between and first and second half of March. Meanwhile, there are some early indicators of economic recovery now that confinement measures have been eased. For example, the rate of registered unemployment has been declining quite rapidly.

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION © OECD 2020

_ 281

Norway: Demand, output and prices (single-hit scenario) 2016

2017

2018

2019

2020

2021

Norway: single-hit scenario

Current prices NOK billion

Mainland GDP at market prices1

2 691.6

2.0

2.2

2.3

-7.0

4.9

Total GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding2

3 098.1 1 411.4 754.7 780.8 2 946.9 89.9 3 036.8 1 098.6 1 037.3 61.3

2.3 2.2 1.9 2.6 2.3 0.2 2.4 1.7 1.9 0.0

1.3 1.9 1.4 2.8 2.0 0.1 2.1 -0.2 1.9 -0.7

1.2 1.5 1.7 6.1 2.8 -0.2 2.4 1.5 5.2 -1.1

-6.0 -9.9 3.3 -14.0 -7.6 -0.3 -7.7 -6.1 -11.0 1.6

4.7 6.2 2.5 7.1 5.4 0.0 5.2 3.6 5.0 -0.5

4.0 1.9 1.7 4.2 5.0 44.9 4.7

5.8 2.7 1.2 3.8 7.8 45.8 7.1

-0.6 2.2 2.6 3.7 6.4 46.9 3.9

-1.1 0.8 2.0 5.9 -1.4 ..

1.7

0.8 1.3 1.2 4.6 1.4 ..

0.9

Total domestic demand Exports of goods and services Imports of goods and services Net exports2 Memorandum items GDP deflator Consumer price index Core inflation index3 Unemployment rate (% of labour force) General government financial balance (% of GDP) General government gross debt (% of GDP) Current account balance (% of GDP)

_ _ _ _ _ _ _

Percentage changes, volume (2017 prices)

1. GDP excluding oil and shipping.

2. Contributions to changes in real GDP, actual amount in the first column.

3. Consumer price index excluding food and energy.

Source: OECD Economic Outlook 107 database.

StatLink 2 https://doi.org/10.1787/888934138492

The policy response has been substantial Norges Bank has provided economic and financial-sector support through policy rate cuts and measures to support liquidity. The fiscal rule specifies that the quantitative target is achieved “over time”, thus giving flexibility for mainland deficits to expand in response to a downturn. Norway’s comparatively large public sector, comprehensive welfare system and correspondingly high taxation bring substantial automatic stabilisation in the event of an economic downturn. In addition, many active steps have been taken, which are estimated to widen the structural mainland budget deficit in 2020 by around 5% of mainland trend GDP. For households, the measures include tax deferrals, a temporary increase in length and pay out of unemployment benefits, and support for the self-employed and free-lancers. Measures for businesses have included the government stepping in earlier to pay the wages of those temporarily laid off, financial support to cover businesses’ fixed costs, social contribution cuts, and, credit and loan-guarantee support.

Targeted support for a wide range of sectors has been announced, notably including the aviation and oil sectors.

Recovery in output and employment will be muted For the projections it is assumed that the spring 2020 confinement measures, when fully operating, limited total economic activity to around 80% of pre-crisis levels, principally due to reduced activity in service sectors. This has brought sharp near-term declines in consumption, investment and external demand. A second round of confinement would depress activity in the final quarter of 2020 resulting in an 8.7% decline in annual GDP. Consumer price inflation is expected to fall initially. Recovery in output and employment OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION © OECD 2020

282 _ will be sluggish and not sufficient to achieve pre-crisis levels by the end of 2021. The absence of a further interruption to the recovery in the single-hit scenario will bring stronger outcomes by the end of the projection. The fiscal balance will deteriorate substantially in 2020 but partially recover in 2021 due to a rebound in tax revenues and the termination of temporary support measures.

Risks will remain elevated. In addition to the possibility of renewed COVID-19 outbreaks, prolongation of the low price of and weak demand for oil would have a profound effect on Norway’s offshore and mainland economy. Norway’s economic recovery will also depend strongly on the pace of the recovery in Europe.

In financial markets, pre-crisis concerns for macro-financial stability linked to high levels of household debt have become more relevant.

Unwinding of support needs to be well timed Support for aggregate demand will likely be required for some time and policymakers need to ensure contingency plans for a renewed COVID-19 outbreak. If the initial oil-market shock becomes a permanent downshift in production and exploration activity, additional support to affected regions and sectors will be required. This support could be linked to green investment and employment. Meanwhile, care will be needed in timing the unwinding of measures; if prolonged, the very favourable lay-off conditions and fixed-cost subsidy for businesses could start acting as a brake on the business-sector recovery.

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION © OECD 2020