IMF Executive Board Concludes 2021 Article IV Consultation with Norway

IMF News, June 10, 2021

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Published: June 10, 2021

Overview

On June 2, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Norway on a lapse-of-time basis.
Norway experienced one of the mildest economic downturns in Europe in 2020 as a result of the authorities' substantial policy support actions and one of the lowest Covid infection and mortality rates.
The country entered the crisis with substantial buffers which allowed the Norwegian authorities to act fast with strong and effective fiscal, monetary and financial sector policies to support its people, while implementing strict containment measures.
Unemployment remains elevated (though well-below 2020 peaks), especially among the youth, foreign-born and low-income groups.

Economic outlook and projections

Norway’s real mainland GDP growth is projected at 3.2 percent in 2021.
The economy is expected to reach its pre-pandemic level by the end of 2021, helped by a rebound of domestic demand following a planned gradual unwind of restrictions.
Medium-term economic scarring is expected to be limited, though uncertainties remain, including from new strains of the virus, the pace of vaccine rollout, and the pace of decline in the offshore industry.
Fiscal and monetary authorities intend to adjust their exceptional policy support to the pace of economic rebound.
Once the recovery is firmly on track, policy attention should shift further towards reforms that promote inclusive growth and intergenerational fairness.

Executive Board assessment — main findings

The challenge ahead for Norway is to achieve the right balance and mix of support for recovery and adjustment.
Authorities are appropriately continuing exceptional policy support into 2021 to help affected sectors and prevent scarring, at levels consistent with the pace of the rebound in economic activity, as well as internal and external balances.
The staff assesses the current account to be broadly in line with what is implied by fundamentals and desirable policies.
Support is designed in a more targeted manner that aims to facilitate reallocation of capital and labor (and include green and digital spending).
The outlook is subject to substantial risks, including a slower-than-expected vaccine rollout, a prolonged pandemic and adverse external conditions. Authorities should remain flexible and closely adjust policies to reflect changing circumstances, given ample policy space.

Fiscal policy

The gradual phasing out of fiscal support, and the reversion to a neutral fiscal stance is appropriate, provided downside risks do not materialize.
The 2021 budget’s mix of support for private sector activity, employment and green and inclusive growth is welcome.
The stimulus should become smaller and more targeted as the recovery gathers traction, while continuing to protect those worst hit.
The government’s objective to integrate vulnerable groups into the workforce and improve the provision of education and skill-enhancing programs is noteworthy and should remain a priority.
In light of an expected decline in oil production after the mid-2020s, a projected increase in age-related expenditures, and the high level of government expenditure reached in 2020, the authorities should examine the composition of spending (possibly via an expenditure review by an external committee).
This would also help create space for any medium-term reductions in individual and corporate taxation to facilitate labor participation and private investment.
Social partners should pursue further changes to the sickness and disability benefit system. VAT reform, through broadening and simplification, remains important.

Monetary policy

Monetary policy is adequately accommodative, while countering financial stability risks.
Provided the economy continues to recover in line with Norges Bank’s forecasts, the projected gradual tightening of monetary policy is appropriate.
However, should the recovery and inflation expectations falter, Norges Bank should stand ready to loosen policies.
Norges Bank’s continued work on a Central Bank Digital Currency (CBDC) is welcome.

Housing, financial sector, and macroprudential measures

Authorities could draw on a broader set of policy tools to address the acceleration in housing prices.
Current reliance: gradual monetary policy tightening, expiration of crisis-related relaxation of borrower-based requirements, and the countercyclical capital buffer.
Authorities should consider tightening mortgage regulations if house price growth does not slow as expected and if other targeted measures, including easing restrictions that constrain the supply of new housing (e.g. related to land use) and a gradual phasing out of mortgage interest deductibility to curb demand are not implemented in a timely manner.
Banks have weathered the crisis well so far, but the outlook remains uncertain.
Financial sector risks from banks’ exposure to CRE have been exacerbated by the crisis, given potential receding demand for office, retail and hotel space.
Initiatives to upgrade data collection to allow enhanced monitoring of CRE-related risks are welcome; broadening the toolkit for mitigating CRE vulnerabilities could be considered.
Authorities should closely monitor bank balance sheets as bankruptcies could increase following the phasing out of support.
Progress in addressing AML/CFT deficiencies is welcome, but tools and methodologies of financial supervision need to be expanded, including by improving the frequency and coverage of inspections.

Structural and climate policy recommendations

Structural reform priorities: boosting labor force participation (including among vulnerable groups), raising non-oil productivity, and supporting green growth amid the decline in the offshore sector.
Authorities’ plans to strengthen investment in R&D, physical infrastructure and green technologies and efforts to promote digitalization, technology adoption and upskilling of vulnerable parts of the population are welcome.
Norway recently announced ambitious climate mitigation measures centered around carbon taxation and technology development, and regulations, and already leads the world in take-up of electric vehicles.
Current efforts to achieve climate mitigation objectives through 2030, centered on carbon taxation and other initiatives such as research and development of carbon capture, are welcome.
Norway’s commitment to become a low emission country by 2050, with net negative emissions when the uptake of carbon of Norwegian forests and other land is taken into account, is welcome; focus is now on implementation.
Norwegian policies regarding adoption of electric vehicles provide an important example to other countries; they could be recalibrated to strengthen cost effectiveness, including steps aimed at accelerating the replacement of the most polluting cars by EVs.

Selected economic and social indicators (exact figures from source)

Population (2020): 5.4 million
Per capita GDP (2020): US$ 67,176.4
Quota (3754.7 mil. SDR/0.78 percent of total)
Main products and exports: Oil, natural gas, fish (primarily salmon)
Literacy: 100 percent

Projections (selected series, change in percent unless otherwise noted):

Real GDP: 2019: 0.9; 2020: -0.8; 2021: 3.0; 2022: 3.6; 2023: 2.9; 2024: 1.8; 2025: 1.3
Real mainland GDP: 2019: 2.3; 2020: -2.5; 2021: 3.2; 2022: 2.2
Final Domestic demand: 2019: 2.1; 2020: -4.2; 2021: 3.5; 2022: 4.1; 2023: 2.5; 2024: 1.9
Private consumption: 2019: 1.4; 2020: -7.6; 2021: 4.8; 2022: 5.0; 2023: 2.0
Gross fixed capital formation: 2019: 4.0; 2020: -3.9; 2021: 2.8; 2022: 5.2; 2023: 3.3
Exports: 2019: -7.4; 2020: 4.6; 2021: 3.1; 2022: 2.4
Imports: 2019: 5.3; 2020: -12.5; 2021: 3.8; 2022: 7.2
Total Domestic demand (contribution to growth) 2/: 2019: -5.2; 2020: 3.4
Net exports (contribution to growth): 2019: -0.9; 2020: -0.2; 2021: -1.1; 2022: -0.1
Offshore GDP: 2019: -6.1; 2020: 8.0; 2021: 6.6; 2022: 6.1; 2023: 1.6; 2024: -0.6; 2025: -0.7
Gross capital formation: 2019: 8.9; 2020: -7.5; 2021: 1.5; 2022: 0.3; 2023: 8.5; 2024: 9.1; 2025: 6.0; 2026: -0.3
Unemployment rate (percent of labor force): 2019: 3.7; 2020: 4.3; 2021: 3.9
Output gap (mainland economy, - implies output below potential): 2019: 0.2; 2020: -2.8; 2021: -1.3; 2022: 0.0
CPI (average): 2019: 2.6
Non-oil balance (percent of mainland GDP): 2019: -14.2; 2020: -10.5; 2021: -8.7; 2022: -6.4; 2023: -5.8
Structural non-oil balance (percent of mainland trend GDP) 3/: 2019: -7.9; 2020: -12.3; 2021: -12.1; 2022: -10.1; 2023: -9.3; 2024: -9.2; 2025: -9.1
Fiscal impulse: 2019: 0.4; 2020: 4.5; 2021: -2.0
in percent of Pension Fund Global Capital 4/: 2019: -2.9; 2020: -3.7; 2021: -3.2
Overall balance (general government, percent of mainland GDP): 2019: 7.4; 2020: -6.9; 2021: -5.6; 2022: 5.4
Net financial assets (general government): 2019: 391.1; 2020: 421.6; 2021: 405.6; 2022: 402.8; 2023: 403.2; 2024: 405.2; 2025: 407.4; 2026: 409.7
Capital of Government Pension Fund Global (GPF-G): 2019: 328.8; 2020: 358.7; 2021: 346.3; 2022: 348.9; 2023: 352.9; 2024: 357.0; 2025: 361.2
Current account balance (percent of total GDP): 2019: 5.6; 2020: 4.7
Exports of goods and services (volume change in percent): 2019: 0.5; 2020: 4.4
Imports of goods and services (volume change in percent): 2019: -12.2; 2020: 7.0
Terms of trade (change in percent): 2019: -16.9; 2020: 14.9; 2021: -2.4; 2022: -2.3; 2023: -1.7
International reserves (end of period, in billions of US dollars): 2019: 65.0; 2020: 73.6
Gross national saving: 2019: 32.5; 2020: 32.2; 2021: 34.4; 2022: 33.8; 2023: 33.6; 2024: 33.0; 2025: 32.4; 2026: 32.0
Gross domestic investment: 2019: 29.7; 2020: 30.3; 2021: 28.9; 2022: 28.8; 2023: 29.0
Crude Oil Price: 2019: 61.4; 2020: 41.3; 2021: 58.5; 2022: 54.8; 2023: 52.5; 2024: 51.3; 2025: 50.7; 2026: 50.5
Real effective rate (2010=100): 2019: 83.7; 2020: 78.2

Sources noted in original: Ministry of Finance, Norges Bank, Statistics Norway, International Financial Statistics, United Nations Development Programme, and IMF staff calculations.

IMF Executive Board Concludes 2021 Article IV Consultation with Norway — Press Release No. 21/165 (June 10, 2021).