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2018-09-19 13:15:00

IMF: NORWAY IS BETTER

IMF: NORWAY IS BETTER

IMF - On September 12, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation with Norway.

Norway is in the midst of a healthy recovery from the oil downturn, supported by positive trends in oil prices and a strengthening labor market. In addition, banks remain profitable and well capitalized. However, household debt continues to increase and house prices have resumed their rise, especially in the Oslo area, after a correction during 2017.

Mainland growth is projected to increase from 2 percent in 2017 to 2½ percent in each 2018 and 2019, underpinned by solid consumption, stronger business investment and an export recovery. Petroleum investment will also pick up. As a result, output will likely start to exceed potential in 2019. Unemployment, which has already fallen below 4 percent, is expected to decrease somewhat further as labor market slack continues to diminish. Headline inflation is already above the 2 percent revised target, and core inflation is slowly converging towards it.

Risks to the outlook are broadly balanced. Externally, global trade tensions could be damaging to a highly open economy such as Norway. Domestically, the most prominent downside risk is related to high household debt and elevated house prices. With over 90 percent of mortgages being variable rate, highly-leveraged households and consumption are vulnerable should financial conditions tighten abruptly. Relatedly, a sharp decline in house prices could curb private consumption and create negative spillovers to banks' balance sheets. On the upside, the economic upswing may prove stronger than expected, not least through the impact of higher oil prices on consumption and investment.

The 2017 fiscal outturn implied a stimulus of 0.2 percent of mainland trend GDP. The non-oil structural balance stood at 7.5 percent of mainland trend GDP (equivalent to 2.8 percent of the GPFG). The revised 2018 budget maintains a neutral stance by saving stronger-than-expected gains from oil, and focuses on boosting long-term growth potential. Its key measures aim at scaling back and shifting the tax burden from direct to indirect taxes, improving public sector efficiency, enhancing infrastructure, and promoting innovation.

Executive Board Assessment 

Executive Directors agreed with the thrust of the staff appraisal. They commended the Norwegian authorities for the skillful deployment of countercyclical policies during the last downturn, which set the stage for the current recovery. Directors noted that economic growth is running above potential thanks to firm improvements in the labor market and favorable oil prices. Nevertheless, Directors cautioned that global trade tensions and an abrupt tightening of financial conditions could adversely impact Norway. Over the longer term, population ageing and slowing labor productivity could weigh on potential growth. Against this background, Directors recommended calibrated macroeconomic policies and structural reforms to sustain prosperity, by boosting productivity and promoting a successful transition away from oil.

Directors welcomed the decision in the revised 2018 budget to save the higher‑than‑expected oil windfall. They also advised that the 2019 budget should target a modestly contractionary stance to begin unwinding the significant fiscal stimulus provided during the last downturn. Arresting the rise in non‑oil deficits of the last two decades would help relieve pressure on the real exchange rate, thus preserving competitiveness. It would also give Norway a headstart on long term consolidation needed to address challenges from population ageing.

Directors welcomed the new monetary policy framework, which is not expected to result in major policy changes. They emphasized that the inflation outlook warrants a gradual tightening, as signaled by Norges Bank in its forward guidance. Directors noted the high levels of capital and liquidity in the banking sector but cautioned against financial stability risks, including from a combination of high household debt and fast rising house prices. In this context, Directors welcomed the recent extension of the macro‑prudential measures but underscored the need to tighten policies further, and on a regionally differentiated basis, if risks were to intensify. Further progress should also be made in relaxing constraints on housing supply and in reducing tax incentives in favor of home ownership.

Directors underscored the need for Norway to underpin competitiveness further. In this context, they recommended that the wage moderation achieved by social partners in recent years be carried forward to facilitate the needed transition of the economy out of oil and reinforce resilience against adverse developments in international prices. Reforms in recent years to support innovation and productivity growth should also be continued.

Directors noted that Norway's social model requires high labor participation to be sustainable. Recent agreements on private and public sector pensions will commendably lengthen working lives and foster labor mobility. However, reforms are still needed to enhance work incentives, notably changes in the sickness and disability schemes. There is also room to improve the integration of vulnerable groups into the labor market.

 

Table 1. Norway: Selected Economic and Social Indicators, 2013–19

               
           

Projections

 

2013

2014

2015

2016

2017

2018

2019

Real economy (change in percent)

             

Real GDP 1/

1.0

2.0

2.0

1.1

1.9

2.1

2.1

Real mainland GDP

2.3

2.2

1.4

1.0

1.9

2.5

2.4

Domestic demand

3.5

1.6

0.7

2.7

2.5

2.3

2.2

Unemployment rate (percent of labor force)

3.8

3.6

4.5

4.7

4.2

3.8

3.7

Output gap (mainland economy, - implies output below potential)

0.5

0.6

0.0

-0.9

-0.6

-0.2

0.2

CPI (average)

2.1

2.0

2.1

3.6

1.8

1.9

2.0

Gross national saving (percent of GDP)

38.1

38.6

35.5

33.1

34.3

36.1

36.4

Gross domestic investment (percent of GDP)

27.9

28.1

27.6

29.3

28.8

28.3

28.7

Public finance

             

Central government (fiscal accounts basis)

             

Overall balance (percent of mainland GDP) 2/

9.4

6.0

1.3

-3.1

-2.0

-0.7

-0.7

Nonoil balance (percent of mainland GDP) 3/

-4.8

-6.3

-7.1

-7.7

-8.0

-8.4

-8.5

Structural non-oil balance (percent of mainland trend GDP) 4/

-5.2

-5.9

-6.6

-7.3

-7.5

-7.6

-7.6

Fiscal impulse

0.4

0.7

0.6

0.7

0.2

0.1

0.0

in percent of Pension Fund Global Capital 5/

-3.3

-3.0

-2.7

-2.7

-2.8

-2.7

-2.8

General government (national accounts definition percent of mainland GDP)

             

Overall balance

13.7

10.8

7.2

4.6

5.2

6.9

6.9

Net financial assets

262.6

305.6

335.4

325.3

350.3

333.2

328.9

of which: capital of Government Pension Fund Global (GPF-G)

207.7

253.2

284.6

276.4

302.8

287.6

285.6

Money and credit (end of period, 12-month percent change)

             

Broad money, M2

7.3

6.4

0.6

5.1

6.0

Domestic credit, C2

6.8

6.0

6.1

4.7

6.3

Interest rates (year average, in percent)

             

Three-month interbank rate

1.8

1.7

1.3

1.1

0.9

1.1

1.4

Ten-year government bond yield

2.6

2.5

1.6

1.3

1.6

1.9

2.1

Balance of payments (percent of mainland GDP)

             

Current account balance

13.0

13.0

9.4

4.4

6.5

9.5

9.4

Exports of goods and services (volume change in percent)

-1.7

3.1

4.7

-1.8

1.1

2.0

2.4

Imports of goods and services (volume change in percent)

5.0

2.4

1.6

2.3

2.8

1.9

2.9

Terms of trade (change in percent)

0.0

-6.3

-11.7

-9.9

4.9

1.1

0.8

International reserves (end of period, in billions of US dollars)

57.9

66.9

58.5

60.9

65.1

73.3

78.7

Fund position

             

Holdings of currency (percent of quota)

78.2

85.6

89.8

93.9

93.5

Holdings of SDR (percent of allocation)

95.1

94.8

96.4

88.3

102.7

Quota (SDR millions)

1,884

1,884

1,884

3,755

3,755

Exchange rates (end of period)

             

Exchange rate regime

Floating

       

Bilateral rate (NOK/USD), end-of-period

5.9

6.3

8.1

8.4

8.3

Real effective rate (2010=100)

99.0

94.2

86.5

86.6

87.4

               

Sources: Ministry of Finance, Norges Bank, Statistics Norway, International Financial Statistics, United Nations Development Programme, and Fund staff calculations.

1/ Based on market prices which include "taxes on products, including VAT, less subsidies on products".

2/ Projections based on authorities' 2018 budget.

       

3/ Projections based on authorities' 2018 budget removes both petroleum revenues and expenditures.

       

4/ Authorities' key fiscal policy variable; excludes oil-related revenue and expenditure, GPFG income, as well as cyclical effects.

5/ Over-the-cycle deficit target: 3 percent of Pension Fund Global Capital

 

 

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Earlier:

NORWAY'S FUND: $1 TLN + $20 BLN
2018, August, 22, 13:05:00

NORWAY'S FUND: $1 TLN + $20 BLN

NORWAY'S FUND - The Government Pension Fund Global returned 1.8 percent, or 167 billion kroner, in the second quarter of 2018.

 

 

NORWAY'S PETROLEUM PRODUCTION: 1.911 MBD
2018, August, 17, 11:25:00

NORWAY'S PETROLEUM PRODUCTION: 1.911 MBD

NPD - Preliminary production figures for July 2018 show an average daily production of 1 911 000 barrels of oil, NGL and condensate, which is an increase of 64 000 barrels per day compared to June.

 

 

NORWAY'S KEY PRIORITY
2018, August, 15, 10:35:00

NORWAY'S KEY PRIORITY

BLOOMBERG - The Norwegian government in June made its first deposit into its wealth fund since the end of 2015. Now that the economy is in full recovery and the labor market is tightening, winding down fiscal stimulus is a key priority in next year’s budget, the prime minister said in an interview in Arendal, on Norway’s southern coast.

 

 

NORWAY'S OIL PRODUCTION: 1.747 MBD
2018, July, 12, 10:15:00

NORWAY'S OIL PRODUCTION: 1.747 MBD

NPD - Preliminary production figures for June 2018 show an average daily production of 1 747 000 barrels of oil, NGL and condensate, which is an increase of 88 000 barrels per day compared to May.

 

 

 U.S. WANT NORWAY'S MONEY
2018, June, 27, 10:35:00

U.S. WANT NORWAY'S MONEY

REUTERS - Norway, which shares an Arctic border with Russia, lacks a “credible plan” how to meet NATO’s spending target, U.S. President Donald Trump said in a letter to the country’s prime minister, the Norwegian daily VG reported on Tuesday.

 NORWAY'S OIL PRODUCTION 1.629 MBD DOWN 236 TBD
2018, June, 20, 12:45:00

NORWAY'S OIL PRODUCTION 1.629 MBD DOWN 236 TBD

NPD - Preliminary production figures for May 2018 show an average daily production of 1 629 000 barrels of oil, NGL and condensate, which is a decrease of 236 000 barrels per day compared to April.

 NORWAY'S OIL EXIT
2018, May, 23, 10:00:00

NORWAY'S OIL EXIT

BLOOMBERG - The fund shocked markets around the world in November when it asked for permission to divest oil and gas companies to reduce financial risk, arguing Norway as a whole is already heavily exposed to oil as western Europe’s biggest petroleum producer. At the time of the proposal, the fund held about $40 billion of shares in oil giants such as Exxon Mobil Corp. and Royal Dutch Shell Plc. 

 

 

Tags: NORWAY, OIL, GAS, ECONOMY, FINANCE

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