Norway: Staff Concluding Statement for the 2025 Article IV Consultation Mission
IMF News, June 26, 2025
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- Published: June 26, 2025
Overview
- Norway’s economy has shown resilience amid global uncertainty, supported by strong fiscal buffers and credible policy frameworks.
- Mainland real GDP growth is forecast to increase to 1.5 percent in 2025 (from 0.6 percent in 2024) and is projected to remain steady at around that level over the medium term.
- The labor market has held firm. Despite contractionary monetary policy, inflation remains above target; bringing inflation back to target is the most pressing near-term policy priority.
- The financial system is sound, and buffers are robust, but systemic vulnerabilities remain elevated, reflecting high levels of household debt and concentrated exposures to real estate.
- Main IMF staff recommendations summarized: i) maintain restrictive monetary policy until inflation easing is confirmed; ii) do not ease macroprudential settings further; iii) move toward a broadly neutral fiscal stance; iv) continue structural reforms to increase labor supply and inclusion.
Recent developments and key statistics
- Overall real GDP grew by 2.1 percent in 2024, driven by record-high natural gas extraction.
- Mainland GDP expanded by 0.6 percent in 2024, primarily due to increased public spending.
- Unemployment rate edged up to 4 percent.
- Mainland GDP growth is forecast to rise to 1.5 percent in 2025 and is expected to remain around 1.5 percent over the medium term.
- Policy rate developments: held at 4.5 percent from January 2024; lowered to 4.25 percent in June 2025 with signals of further reductions during 2025.
- Under staff’s baseline scenario, headline and core inflation will fall to 2.2 and 2.6 percent by end-2025 and return to target by 2027.
- Fiscal indicators: structural non-oil deficit projected to reach about 13 percent of trend mainland GDP in 2025; withdrawals from the Government Pension Fund Global (GPFG) expected to be around 2.7 percent of the GPFG’s 2024 market value (below the fiscal rule’s 3 percent guideline).
- Estimated fiscal impulse in the 2025 budget: about 2.5 percent of trend mainland GDP.
- Government signaled progressive defense spending toward 5 percent of GDP over the medium term.
Outlook and risks
- Growth risks: tilted to the downside due to rising global tensions (including higher trade tariffs), potential pressure from continued tight financial conditions on indebted households and firms, demographic headwinds, and structural erosion of oil-related revenues.
- Inflation risks: balanced. Upside risks include faster-than-expected domestic demand recovery or higher oil prices; downside influences include currency appreciation and higher productivity gains (e.g., faster uptake of AI or automation).
- Baseline scenario: disinflation to target by 2027 while keeping current restrictive monetary policy to achieve that path.
Monetary policy recommendations
- Norges Bank should proceed cautiously with monetary policy normalization, ensuring further evidence that underlying inflation is firmly on a path back to target.
- Under staff’s baseline, the current restrictive monetary policy is broadly appropriate to bring core inflation to target by 2027.
- Recommended enhancements to policy process:
- Expand the use of scenario analysis.
- Refine communication strategies to maintain well-anchored expectations.
- Continue monitoring medium-term inflation expectations and underlying inflation before further rate reductions.
Financial stability and macroprudential policy
- Financial system assessment: sound with strong buffers, but systemic vulnerabilities elevated (high household debt; concentrated real estate exposures).
- Concerns about recent macroprudential easing:
- Increase in loan-to-value (LTV) limit for mortgages could fuel house-price increases and household indebtedness.
- Recommendation: do not ease macroprudential policy settings further while systemic risks remain elevated.
- Recommended macroprudential and supervisory measures:
- Preserve capital buffers; be prepared to raise the countercyclical capital buffer if cyclical vulnerabilities increase.
- Ensure banks’ models properly reflect credit risks.
- Strengthen contingency planning amid continued pressure on the commercial real estate (CRE) sector.
- Consider borrower-based measures on CRE lending and sector-specific capital surcharges for insurance-sector CRE exposures.
- Address increased bank reliance on covered bonds.
- Participate in a Nordic-Baltic regional stress test exercise to assess cross-border interlinkages and risks.
- Continue work on findings from the 2024 Nordic-Baltic crisis management exercise and the 2020 FSAP recommendations.
- Structural housing-market measures advised:
- Gradually phase-out mortgage interest deductibility (starting with a cap on income-tax deductions).
- Tighten eligibility for subsidized mortgages.
- Address supply-side constraints: expand rental market, increase land availability in urban areas, reduce construction costs, and reform tax incentives that encourage mortgage debt.
Fiscal policy and public finance recommendations
- Move toward a broadly neutral fiscal stance to support disinflation and improve macro policy coherence.
- The 2025 budget implies a significant fiscal impulse (~2.5 percent of trend mainland GDP) despite dampening factors from imports and transfers abroad.
- Fiscal-framework enhancements recommended:
- Reinforce countercyclicality and spending discipline.
- Complement the fiscal rule with explicit medium-term expenditure limits.
- Strengthen multi-year budgeting and public investment management.
- Conduct systematic spending reviews and set efficiency targets.
- Benchmark and expand the mandate of the Advisory Panel on Fiscal Policy Analysis against best practices for independent fiscal councils.
- Tax and benefit reforms to bolster resilience and labor supply:
- Consolidate multiple VAT rates and enhance incentives for work and investment.
- Reform disability and sickness benefits to reduce work disincentives, increase labor force participation, and contain long-term fiscal costs.
Structural reforms and medium-term growth
- A broad reform agenda is essential to accelerate productivity and mitigate geoeconomic fragmentation.
- Priority reforms include:
- Advance the “reinforced work line” to reduce reliance on disability benefits and raise labor force participation among youth and immigrants.
- Strengthen education-to-work transitions and promote full-time employment.
- Accelerate digitalization to boost productivity.
- Further measures likely needed to achieve Norway’s 2035 emission reduction targets.
Closing
- Continued close monitoring of inflation, financial vulnerabilities, and fiscal developments is emphasized.
- The IMF team thanks the Norwegian authorities and other counterparts for their hospitality and constructive discussions.
Norway: Staff Concluding Statement for the 2025 Article IV Consultation Mission — June 26, 2025