Norway: Staff Concluding Statement of the 2019 Article IV Mission
IMF News, May 6, 2019
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- Published: May 6, 2019
Key findings and immediate assessment
- Norway’s economic momentum remains strong; inflation is now above target.
- House prices remain overvalued, albeit less so than last year; household debt continues to rise.
- Risks from the commercial real estate market are growing and should be closely monitored.
- Favorable macroeconomic conditions provide an opportunity to address longer-term challenges: enhancing competitiveness, containing looming budgetary pressures, and sustaining high employment despite demographic trends.
Outlook, risks, and medium-term challenges
- Growth projections and output gap
- Mainland economic activity grew by 2.2 percent in 2018.
- Mainland economic activity is expected to rise by about 2.5 percent in 2019.
- Growth is projected to slow to 2.1 percent in 2020.
- The output gap is currently around zero and is projected to move into positive territory later in the year.
- Upside and downside risks
- Downside: persistent global trade tensions, uncertainty about European growth, global market turbulence and higher risk premia raising debt service costs, and high household leverage lowering consumption.
- Domestic: residential house price growth has softened, while commercial real estate (CRE) prices are growing strongly.
- Upside: oil prices have been above the level underpinning the GDP projections.
- Structural headwinds to sustaining growth
- Recent pension reforms have boosted labor supply, but population aging requires further measures to support employment.
- Non-oil exports have begun to recover in part due to the krone depreciation in 2013-2015.
- As the petroleum-sector growth impulse abates, non-oil competitiveness must be strengthened further.
Fiscal policy: assessment and recommendations
- Recent stance and recommendation
- Fiscal policy has been broadly neutral over the last three years.
- Following the better than expected outturn—and negative fiscal impulse—last year, the 2019 deficit is likely to imply a positive impulse in 2019.
- The structural non-oil deficit will be broadly unchanged over the 2017-19 period.
- Recommendation: With growth projected to be above potential in 2019 and 2020 and the output gap turning positive, the authorities should target a ¼ to ½ percent of GDP annual fiscal consolidation to build fiscal space for the next cyclical downturn.
- Long-term fiscal challenge and required adjustment
- Demographic changes, dwindling oil and gas reserves, and already high non-oil fiscal deficits will require a permanent fiscal adjustment of 4-5 percent of GDP in the long term.
- Norway’s strong net asset position implies the adjustment could be spread over many years, but without more immediate action, space under the fiscal rule will be increasingly constrained over the next decade.
- Possible revenue and expenditure measures
- Revenue-side
- VAT efficiency is only slightly above average internationally; exemptions and multiple rates undermine efficiency.
- A realistic improvement in VAT efficiency through base broadening could yield an additional 1½ percent of GDP in annual revenue.
- Additional revenue measures could include less generous tax incentives for home ownership.
- Expenditure-side
- Reforms of sickness and disability pensions would raise employment and have positive budgetary impacts.
- Spending on sickness and disability benefits is 2-3 percent of GDP higher per year than in other Nordic countries.
Monetary and financial sector policies
- Policy rate and monetary stance
- The key policy rate is at 1 percent after the recent increase.
- Norges Bank signals a preference for higher interest rates for the period up to end-2020 relative to its communication late last year.
- Both the tightening and the steepening of the interest rate path are considered appropriate given above-target inflation and strong projected GDP, employment, and wage growth for 2019 and 2020.
- Faster tightening is not warranted because inflation expectations remain well anchored and high share of flexible-rate mortgages makes household consumption sensitive to interest rate changes; rapid rate increases could induce a self-induced slowdown and unwanted capital inflows.
- Housing market and macroprudential stance
- Residential housing risks
- House prices remain overvalued in the IMF view: around 5-20 percent in Oslo and 0-10 percent nationally.
- Household debt continues to increase from high levels.
- Mortgage regulations should not be relaxed, nor should the stricter Oslo “speed limit” be increased to the national level.
- Commercial real estate (CRE) risks
- CRE prices have increased substantially; price growth is especially high among prime properties in Oslo where yields are lower than in many other major European cities.
- Norwegian banks have substantial exposure to CRE loans.
- Support for the increase in the countercyclical buffer requirement from end-2019.
- Authorities should improve CRE data to better assess risks.
- Banking sector buffers and AML/CFT
- Capital and liquidity metrics
- Average common equity tier 1 (CET1) is 15.7 percent (2018:Q3).
- Aggregate liquidity coverage ratio stands at 140 percent.
- Net stable funding ratio stands at 115 percent.
- AML/CFT framework
- Recent allegations of money laundering in several Nordic banks make a solid de-facto and de-jure AML/CFT framework paramount.
- Parliament approved a new AML/CFT law granting sanction powers to the FSA.
- The FSA has received higher budgetary resources to step up supervision of AML/CFT compliance.
- Ongoing efforts to close remaining gaps and strengthen regional cooperation are welcomed.
Structural policies and labor market
- Rebalancing away from oil and gas
- Norway has diversified more than many commodity exporters, helped by responsible management of oil revenues.
- Oil and gas production are projected to start declining relatively soon, underscoring the need for rebalancing.
- The weak krone is aiding competitiveness in fish and tourism; traditional manufacturing has responded less than expected to the 2014-15 depreciation.
- Wage restraint will be important to deepen competitiveness gains.
- Nominal wage growth in manufacturing was settled to 3.2 percent in the referenced bargaining round.
- Employment, sickness, and disability reforms
- About 10 percent of the working age population receives permanent disability pensions; still more are on temporary disability—much higher than Nordic peers.
- Increasing numbers of young beneficiaries risk remaining trapped out of the labor force long term.
- The government-appointed commission’s recommendations are welcomed; a suitable reform package should aim to:
- (i) tighten eligibility criteria and certification procedures;
- (ii) enhance education and retraining programs for beneficiaries, particularly those with limited employment opportunities;
- (iii) reduce benefit levels, which are high compared to peer countries, especially for the young.
- Distributional consequences must be carefully weighed, as poorer and less educated people are more likely to be on sickness and disability benefits.
- Integration and labor market participation of immigrants and refugees
- Norway scores relatively highly on integration of non-OECD immigrants and refugees among international peers.
- Planned standardization of the Integration Program curriculum and making program duration more flexible should enhance effectiveness.
Closing note
- The IMF team thanks the Norwegian authorities and others met during the visit for candid and insightful discussions and warm hospitality.
Staff Concluding Statement of the 2019 Article IV Mission, May 6, 2019.