2018 Article IV Consultation with Norway – Concluding Statement of the IMF Mission
IMF News, June 7, 2018
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- Published: June 7, 2018
Overview and short-term outlook
- Date: June 7, 2018.
- Norway is described as "in the midst of a healthy recovery" and "on the verge of full employment."
- Recent performance and near-term projections:
- Mainland economic activity grew by 1.9 percent in 2017.
- Mainland economic activity is expected to grow by about 2½ percent this year and next.
- Risks to the recovery:
- Rising global trade tensions pose downside risks for a small, highly open economy.
- High and rising household debt, much of which is in the form of variable-rate mortgages, increases vulnerability to abrupt tightening in financing conditions.
- Upside risk: rising oil prices could have a bigger than expected impact on business investment and aggregate demand.
- Structural challenges:
- Population aging and falling labor productivity will weigh on potential growth going forward.
- Non-oil fiscal deficits have risen steadily over the last fifteen years.
- Past solid income growth was driven in part by favorable terms of trade that may not be repeated.
Fiscal policy — current stance and recommendations
- Assessment of 2018 budget:
- This year’s budget appropriately targets a neutral stance.
- Authorities are commended for maintaining neutrality in the revised budget and not using windfall gains to increase spending.
- Positive emphasis on shifting tax burden from direct to indirect taxes and promoting research and innovation.
- Recommendation for next year:
- Target a modest consolidation while improving budget composition.
- Staff project output to exceed potential next year; a structural consolidation of ¼-½ percent of mainland GDP may be warranted.
- Continue broadening the VAT base and further reduce tax incentives on home ownership and leverage.
- Long-term concerns and targets:
- Non-oil deficits increased from about 2 percent of mainland GDP in the early 2000s to some 7½ percent now.
- Government consumption has increased by about 5 percentage points of mainland GDP.
- Public net savings currently stand at 370 percent of mainland GDP.
- Ensuring long-term fiscal solvency will require 4-5 percent of mainland GDP in spending cuts or revenue increases at some point in the future.
- Recommendation that fiscal deficits stay below the 3 percent rule for the foreseeable future.
- Structural non-oil deficit is estimated at 2.7 percent of the sovereign wealth fund following several years of expansionary fiscal policy, below the long-term fiscal guideline of 3 percent.
- Institutional and policy notes:
- Welcome initiatives to strengthen value for money in the public sector, but these must deliver net savings and not be recycled into other spending.
- Recently adopted public sector occupational pension reform is important to lengthen working lives; preserving actuarially fair private and public pension systems is necessary.
Monetary and financial sector policies
- Monetary policy:
- A gradual normalization of monetary policy is appropriate.
- The output gap is closing; the labor market is strengthening; recent negotiations point to an acceleration in wage growth.
- Core inflation is projected to gradually rise towards headline inflation, which already stands at the newly revised 2 percent target.
- The path of interest rate tightening projected by Norges Bank under forward guidance appears appropriate.
- The revised inflation-targeting framework provides flexibility to adjust guidance if baseline forecasts change.
- Banking sector resilience:
- Banks are resilient: profitability remains high, asset quality is strong, and banks comfortably meet Norway’s capital, leverage, and liquidity requirements.
- Stress tests suggest high capital buffers position banks to withstand even severe macroeconomic shocks.
- Financial vulnerabilities identified:
- Household debt keeps rising from already elevated levels; high proportion of variable-rate mortgages poses risks to household consumption if financial conditions tighten abruptly.
- House prices are rising again; despite the 2017 correction, price levels remain high, notably in Oslo and surrounding municipalities, where prices are vulnerable to further correction.
- Commercial real estate (CRE) valuations have seen rapid increases and represent an important exposure for banks.
- Banks’ reliance on external wholesale funding remains a long-standing vulnerability, though funding profile has improved over the last decade, including through the use of covered bonds.
- Prudential policy recommendations:
- The mortgage regulations introduced in early 2017 should be extended; they expire at the end of June.
- Preferably, mortgage regulations should be made a permanent part of the prudential toolkit with parameters adjusted according to the financial cycle.
- Consider regionally differentiated mortgage regulations if house price valuations and financial stability concerns diverge across regions.
- To durably address housing risks, further reduce tax incentives for home ownership, which remain generous by international standards.
- Tighter monetary policy, while not primarily aimed at financial stability, could help mitigate financial stability concerns now that the real and financial cycles are better aligned.
Wage formation and structural policies
- Wage developments and competitiveness:
- Over the last two decades, Norway experienced wage increases in excess of productivity in most sectors and ahead of wages in trading partners.
- Favorable terms of trade (energy, fisheries, metals) enabled this without a disproportionate loss of competitiveness, though some tradable sectors suffered.
- Going forward, similar wage increases would not be sustainable unless terms of trade improve further; wage moderation achieved by social partners during the recent downturn should be carried forward to build resilience.
- Labor market and participation policies:
- Norway’s labor participation rate is among the highest in the OECD, but prime-age participation has been falling since 2008.
- Recommendations to sustain high labor participation amid demographic and technological pressures:
- Tighten eligibility requirements for sickness and disability schemes while reducing disincentives to work.
- Expand working hours among women, for example by making child care even more flexible.
- Consider higher flexibility in temporary work contracts and wages to prevent permanent exclusion from the labor market, while weighing tradeoffs with Norway’s social model.
- Continue aligning education with private sector skill demand to reverse decreasing employment rates among young cohorts.
- Implement well-designed training and integration programs to increase employment rates of immigrants and refugees.
- Reducing protection and government support to the agricultural sector would enable more efficient resource allocation and benefit low-income groups, particularly through lower food prices.
- Strengths noted:
- Norway’s high education levels, tradition of responsible policy making, and strong social trust and consensus position the country well to handle future challenges.
Closing
- The mission team thanks the Norwegian authorities and other counterparts for candid and insightful discussions and warm hospitality.
Concluding Statement of the IMF Mission — 2018 Article IV Consultation with Norway (June 7, 2018)