IMF Executive Board Concludes 2016 Article IV Consultation with Norway
IMF News, July 5, 2016
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- Published: July 5, 2016
Economic developments and near-term outlook
- Growth and activity:
- Growth fell to 1 percent in 2015—the lowest level since the global financial crisis.
- Mainland GDP growth is set to be 1.1 percent in 2016, with a recovery expected to take root in 2017 alongside a gradual upturn in oil prices and a slowing of the pace of decline in oil investment.
- Private domestic demand is set to remain depressed in 2016; public sector demand and mainland exports support activity.
- As the oil-related parts of the mainland economy adjust, unemployment is projected to rise further in 2016 before declining in 2017.
- Labor market and prices:
- Unemployment increased to 4.7 percent as of March 2016; the rise is mainly concentrated in oil-dependent regions.
- Core inflation reached 3.3 percent in April 2016 after peaking at 3.4 in February, above the 2.5 percent target.
- Headline inflation is projected to be 2.8 percent in 2016 and is expected to return to the 2.5 percent target in 2017.
- Housing and household balance sheets:
- House price inflation accelerated recently after the slowdown throughout 2015, with large regional variation.
- Household debt remains elevated at 220 percent of disposable income.
- Banking sector:
- Banks remain profitable and are well-positioned to meet regulatory capital requirements.
Fiscal position and policy stance
- Past and current fiscal metrics:
- The 2015 structural non-oil deficit was 2.6 percent of the Government Pension Fund Global (GPFG) assets, equivalent to 6.25 percent of mainland trend GDP.
- This provided a fiscal impulse of .5 percent of mainland trend GDP.
- The structural non-oil deficit remains well below the 4 percent of GPFG assets that the fiscal rule targets.
- The revised 2016 budget envisions a rise in the structural non-oil deficit to 7½ percent of mainland trend GDP (2.8 percent of GPFG assets), which will provide a fiscal impulse of 1.1 percent of mainland trend GDP.
- Directors' assessment and recommendations:
- Directors considered the expansionary stance of fiscal policy in 2016 to be broadly appropriate given the output gap, rising unemployment, and the ample fiscal space.
- They stressed the need for well-targeted temporary measures that also promote rebalancing the economy toward non-oil tradable sectors.
- Directors recommended a gradual shift to a more neutral fiscal stance as the economy returns to potential.
- They supported recent reforms to shift from personal and corporate income taxation to promote productive investment.
- Directors welcomed the ongoing review of the fiscal rule to ensure continued prudent management of the country’s oil wealth, taking into account the interests of future generations.
Monetary policy and financial stability
- Monetary policy guidance:
- Given slack in the economy and well-anchored inflation expectations, monetary policy should remain accommodative until there are firm signs of durable recovery.
- Directors welcomed the authorities’ readiness to reduce the policy rate further if warranted.
- They noted the challenge of balancing support for growth against the risk of inflation from further exchange rate depreciation and financial stability concerns from rising house prices.
- Macroprudential and banking sector recommendations:
- Directors recommended that the authorities continue monitoring household debt and house prices, and promptly tighten macroprudential measures to address emerging financial stability risks.
- Directors observed that banking sector performance remains relatively strong and welcomed progress in implementing Financial Sector Assessment Program recommendations.
- They encouraged further efforts to mitigate systemic risks from high household indebtedness and banks’ reliance on external wholesale funding, including by further strengthening the framework for crisis management and resolution, as well as regional cooperation.
Risks and contingent scenarios
- Downside risks predominate:
- Lower than expected growth in key advanced and emerging economies would negatively affect oil prices and traditional exports.
- Combined with a sharp property price correction, this would weigh on consumption and domestic firms, especially in retail and construction sectors.
- A delay in the transition to a less oil-dependent economy could lead to higher unemployment for longer, weakening confidence and consumption.
- In a downturn, a rise in defaults on corporate loans would pressure banks’ balance sheets.
- Tighter or more volatile global financial conditions could raise financing costs of Norwegian banks reliant on wholesale funding.
Structural reforms and social integration
- Structural reform priorities:
- Continued structural reforms are needed to support the transition away from oil dependence and improve efficiency and productivity.
- Directors saw merit in continued restraint in wage settlements and further reforms to reinvigorate productivity growth.
- Aligning public sector pensions with recent private sector reforms and reforms to sickness and disability pensions could increase labor force participation.
- Scope exists for efficiency gains from reducing tax preferences for owner-occupied housing and relaxing supply restrictions in the housing market.
- Refugee integration:
- Directors commended the Norwegian government for efforts to absorb the increased number of refugees and noted that accelerating integration into productive employment would help reduce fiscal costs and raise output.
Selected economic and social indicators, 2010–17 (highlights)
- Population (2015): 5.2 million
- Per capita GDP (2015): US$ 74,500
- Main products and exports: Oil, natural gas, fish (primarily salmon)
- Literacy: 100 percent
- Real GDP growth (selected years):
- 2010: 0.6
- 2011: 1.0
- 2012: 2.7
- 2013: 2.2
- 2014: 1.6
- 2015: 0.9
- 2016 (projection): 1.4
- Real mainland GDP (selected years):
- 2010: 1.8
- 2011: 1.9
- 2012: 3.8
- 2013: 2.3
- 2014: 1.1
- 2015: 1.7
- 2016 (projection): (noted elsewhere as 1.1 percent for 2016 mainland GDP)
- Unemployment rate (percent of labor force):
- 2010: 3.6
- 2011: 3.3
- 2012: 3.2
- 2013: 4.4
- 2014: 4.7
- 2015: 4.5
- Output gap (mainland economy, - implies output below potential):
- 2010: -1.3
- 2011: -0.9
- 2012: 0.2
- 2013: 0.0
- 2014: -0.1
- 2015: -0.7
- 2016 (projection): -1.4
- 2017 (projection): -1.0
- CPI (average):
- 2010: 2.4
- 2011: 1.3
- 2012: 0.7
- 2013: 2.1
- 2014: 2.8
- 2015: 2.5
- Gross national saving (percent of GDP):
- 2010: 36.3
- 2011: 38.2
- 2012: 39.0
- 2013: 40.2
- 2014: 37.6
- 2015: 34.4
- 2016 (projection): 34.9
- Gross domestic investment (percent of GDP):
- 2010: 25.4
- 2011: 25.8
- 2012: 26.5
- 2013: 27.9
- 2014: 28.3
- 2015: 28.6
- 2016 (projection): 28.8
- 2017 (projection): 28.4
- Central government overall balance (percent of mainland GDP):
- 2010: 8.3
- 2011: 12.6
- 2012: 12.8
- 2013: 9.5
- 2014: 6.0
- 2015: -3.2
- 2016 (projection): -2.7
- Structural non-oil balance (percent of mainland trend GDP):
- 2010: -5.1
- 2011: -4.5
- 2012: -4.8
- 2013: -5.8
- 2014: -6.3
- 2015: -7.5
- Fiscal impulse (selected entries):
- 2010: -0.6
- 2011: 0.3
- 2012: 0.8
- 2013: 0.5
- General government net financial assets (percent of mainland GDP):
- 2010: 209.3
- 2011: 210.1
- 2012: 221.4
- 2013: 260.6
- 2014: 304.8
- 2015: 334.6
- 2016 (projection): 325.9
- 2017 (projection): 329.1
- Capital of Government Pension Fund Global (GPF-G) (percent of mainland GDP):
- 2010: 148.2
- 2011: 153.3
- 2012: 166.1
- 2013: 208.2
- 2014: 254.6
- 2015: 286.0
- International reserves (end of period, in billions of US dollars):
- 2010: 55.6
- 2011: 52.8
- 2012: 51.7
- 2013: 57.9
- 2014: 66.9
- 2015: 58.5
- 2016 (projection): 57.0
- 2017 (projection): 53.6
- Exchange rate regime: Floating
- Bilateral rate (NOK/USD), end-of-period (selected years):
- 2010: 5.6
- 2011: 5.8
- 2012: 6.3
- 2013: 8.1
- Real effective rate (2010=100):
- 2010: 100.0
- 2011: 100.6
- 2012: 100.2
- 2013: 98.9
- 2014: 94.1
- 2015: 86.3
Prepared by IMF Communications Department; Executive Board concluded Article IV consultation with Norway on June 29, 2016.