## 2018 Article IV Consultation with Norway – Concluding Statement of the IMF Mission

_IMF News, June 7, 2018_

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## Bibliographic details
- Published: June 7, 2018

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### 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)*

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## References

- [Norway and the IMF](http://www.imf.org/external/country/NOR/index.htm)
- [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)
- [Mission Concluding Statements](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2018/06/07/2018-article-iv-consultation-with-norway-concluding-statement-of-the-imf-mission_