Norway projection note OECD Economic Outlook November 2022

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Norway Mainland GDP growth is projected to slow to 0.7% in 2023 but rebound to 1.3% in 2024. Broad-based increases in prices will weigh on private consumption and investment. Even though headline inflation will ease as energy prices stabilise, helping domestic demand to recover, underlying price pressures will persist.

The unemployment rate will increase on the back of a softening economy, but the labour market will remain tight, putting pressure on wages.

Monetary policy tightening should continue, given that inflation is well above target and inflation expectations have risen. Fiscal policy should provide well-targeted and temporary support to cushion the impact of high energy costs on vulnerable groups, while not distorting incentives to enhance energy efficiency. Progress in the green transition needs to continue. Structural policies should focus on improving the business environment and promoting higher labour force participation.

High inflation affects growth momentum Mainland GDP growth bounced back following the lifting of pandemic-related restrictions earlier in the year.

However, rapidly rising prices have reduced household purchasing power, consumer confidence and private consumption, despite support from electricity price subsidies and the use of accumulated savings.

High prices, supply constraints and weaker global growth are weighing on business investment. Interest rate increases have put additional pressure on domestic demand. Headline consumer price inflation reached 7.5% in October, owing largely to higher food and energy prices, with the rise in the latter partly contained by the government electricity subsidy scheme. Underlying price pressures have also intensified, reflecting a broadening of inflation to non-energy items. Tight labour market conditions are likely to push wage growth in 2022 above the 3.7% increase agreed in this year’s wage negotiations.

Norway

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

2. Hypothetical CPI calculated by Statistics Norway showing the overall price growth if the government had not introduced the electricity subsidy scheme for households.

Source: OECD Economic Outlook 112 database; and Statistics Norway.

StatLink 2 https://stat.link/5hd01e

OECD ECONOMIC OUTLOOK, VOLUME 2022 ISSUE 2: PRELIMINARY VERSION © OECD 2022

186 

Norway: Demand, output and prices 2019

2020

Mainland GDP at market prices1 Total GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding² 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) Household saving ratio, net (% of disposable income) General government financial balance (% of GDP)

2022

2023

2024

Percentage changes, volume (2019 prices)

Current prices NOK billion

Norway

2021

3 063.0 3 563.5 1 579.1 867.7 957.8 3 404.5 106.1 3 510.7 1 292.2 1 239.4 52.8

-2.3 -0.7 -6.6 1.8 -5.6 -4.2 -0.4 -4.5 -1.2 -11.9 3.7

4.1 3.9 4.9 3.8 -0.9 2.9 0.2 3.0 4.7 2.3 0.8

2.9 2.5 6.4 0.1 1.4 3.3 2.3 5.9 1.2 11.4 -2.9

0.7 1.8 0.7 1.3 0.2 0.7 0.1 0.8 5.8 5.5 1.2

1.3 1.6 1.3 1.2 3.1 1.7 0.0 1.6 3.9 5.4 0.3

_ _ _ _ _ _ _ _

-3.6 1.3 2.7 4.7 14.2 -2.6 54.1 0.7

16.9 3.5 1.7 4.4 12.5 9.9 49.9 14.9

20.7 5.7 3.6 3.3 8.3 16.2 ..

23.5

3.1 4.5 4.4 3.6 7.6 16.3 ..

23.6

3.0 3.2 3.3 3.7 7.3 16.4 ..

23.3

General government gross debt (% of GDP) Current account balance (% of GDP) 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 112 database.

StatLink 2 https://stat.link/49a5ic

High global energy prices have fuelled inflation. The government has introduced a scheme to reduce households’ electricity bills in response to rising energy costs. However, high energy prices have also improved Norway’s terms of trade considerably, with record-high government petroleum-related revenues.

Gas sales are estimated to have increased by around 8% in real terms in 2022 over the previous year.

Norway plans on taking in around 40 000 Ukrainian refugees (equivalent to around 0.5% of Norway’s population) in 2022 and another 30 000 in 2023. The 2023 draft Budget allocates approximately 0.3% of mainland GDP to the provision of assistance for them.

Fiscal and monetary policies are tightening The draft 2023 Budget envisages a tightening of fiscal policy, mainly due to the phasing-out of COVID-19 support, resulting in lower petroleum revenue spending of 0.6 percentage points of mainland trend GDP. This is appropriate to contain inflationary pressures and ensure adherence to the fiscal rule which stipulates that over time the structural non-oil deficit should equal to 3% of the value of the oil fund (the Government Pension Fund Global). The Budget extends the household electricity support scheme until end-2023, at a cost of around 1.2% of mainland GDP. The subsidy scheme should be better targeted on lower-income households, while ensuring that it encourages greater energy savings. Monetary policy continues to tighten. The Norges Bank increased the policy rate further in November by 0.25 percentage points to 2.5%.

This is appropriate, given that inflation is well above the 2% target and inflation expectations have risen.

The OECD projections assume that the policy rate will peak at 3.25% in the first quarter of 2023 and remain at this level until end-2024.

OECD ECONOMIC OUTLOOK, VOLUME 2022 ISSUE 2: PRELIMINARY VERSION © OECD 2022

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Growth will recover in 2024 but remain moderate Mainland GDP growth will slow to 0.7% in 2023, as high inflation and policy tightening weigh on domestic demand, but will recover to 1.3% in 2024. The stabilisation of energy prices and easing demand will help reduce consumer price inflation, although the decline may be more limited if the electricity subsidy scheme is withdrawn in 2024. Following a slowdown, business investment is expected to pick up gradually over the projection period, with the implementation of projects related to the reduction of emissions and the strengthening of power supply, and helped by the pick-up in external demand. While declining, core inflation will remain well above the 2% target at the end of the projection period. The unemployment rate will rise as a consequence of the slowdown, but labour market conditions will remain tight in view of labour shortages. Higher-than-projected price and wage increases, or lower-than-expected trading partner growth could lower growth prospects further. On the upside, energy security risks are comparatively low, given that Norway is an exporter of oil and gas, and to some extent also electricity. Fast integration of Ukrainian refugees into the labour market could help alleviate skills shortages and wage pressures.

Ensuring sustainable and inclusive growth is key Advancing the green transition is essential for sustainable and inclusive growth. The focus of the draft 2023 Budget on emissions reduction, including through an increase in the tax on non-Emission Trading System emissions by 21%, and promotion of green-technology initiatives, notably the carbon-capture and storage (Longship) programme, go in the right direction. The electricity subsidy scheme to households should remain temporary, so that planned longer-term solutions, including facilitating more fixed-price contracts in energy supply chains to reduce price volatility, are not delayed. Improving conditions for innovation and technology adoption is essential to boost productivity. More effective insolvency procedures would help the reallocation of workers to sectors with greater potential. Further efforts should be made to strengthen labour force participation, including through disability benefit reforms to reduce incentives for early retirement.

OECD ECONOMIC OUTLOOK, VOLUME 2022 ISSUE 2: PRELIMINARY VERSION © OECD 2022