Norway: Selected Issues

IMF Staff Country Reports, September 17, 2018

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Norway may have to downwardly revise its expectations for wage growth to avoid a significant loss of competitiveness and manage the transition to a less oil-dependent economy.
Norway was able to afford very high wage growth in the past thanks to good fortune in its terms of trade.
Going forward, it would be prudent not to count on being fortunate twice: wage moderation would help build resilience in case of less favorable trends in international prices.
Wage moderation would also help facilitate the needed transition out of oil by supporting sectors that did not benefit from past terms of trade gains.
Communication from the government can continue to help in managing public expectations.

Fiscal policy plays a key role in promoting competitiveness and containing the spending effect of Dutch Disease.
After a prolonged expansion of fiscal policy—partly enabled by large valuation gains of the sovereign wealth fund—it is now appropriate to gradually start tightening fiscal policy.
The ongoing up-cycle provides an ideal setting to get started on structural consolidation, which will ultimately be needed to face to address aging pressures.

Findings:
- Past very high wage growth was sustained by favorable terms of trade.
- Continued high wage growth without favorable external conditions risks a significant loss of competitiveness.
- The spending effect associated with resource wealth (Dutch Disease) can undermine other tradable sectors.
Recommendations:
- Pursue wage moderation to build resilience against adverse international price developments and to support non-oil sectors.
- Use government communication to manage public expectations about wage and income prospects.
- Gradually tighten fiscal policy after a prolonged expansion, using the current up-cycle to begin structural consolidation.
- Implement measures to contain the spending effects of Dutch Disease to protect competitiveness and facilitate economic transition.
- Prepare for aging-related fiscal pressures through structural consolidation.

Subject: Asset bubbles, Asset prices, Financial crises, Housing, Housing prices, Labor, National accounts, Prices, Wages
Keywords: Asset bubbles, Asset prices, CR, financial asset, GDP, Global, house price, Housing, Housing prices, IFNW signal, IMF staff estimate, ISCR, mainland GDP, Norway, terms of trade gain, Wages