A BIG WINNER OF THE RUSSIA-UKRAINE WAR, BUT EXTERNAL SHOCKS WILL WEIGH ON GROWTH

Since the start of the war in Ukraine, and even more, since the cut-off of natural gas supply from Russia to Germany (Sept. 2022), Norwegian gas and oil exports (60% of all goods’ exports in 2021) have been critical to European energy security. This situation will continue in 2023. Although the European consumer countries are looking for alternatives, e.g., with the construction of LNG terminals, these projects still need a few quarters until the European energy market adapts to the new situation. At the time of writing, in early 2023, Norway was already delivering gas to Europe at maximum capacity. Nevertheless, new gas projects are in the pipeline, some came online in late 2022, and others will be developed over 2023. At the start of 2022, over 53 new production licenses were granted covering the North, Norwegian, and Barents Seas. Additional licenses in the Barents Sea are to be awarded in January 2023. Furthermore, oil production should rise due to the full implementation of a fifth oil mining platform at the Johan Sverdrup oil field. Norway exports about 95% of its gas via an extensive subsea pipeline network linking it to terminals in Germany, Britain, France, and Belgium, among others. The new Baltic Pipe project, a gas pipeline for Norwegian gas from Denmark to Poland, came online in October 2022 (operating at total capacity from the end of Nov. 2022) and will cover roughly 60% of Poland’s previous gas imports from Russia. In this context, despite a slowdown of global economic activity over the 2022-2023 winter, the demand for Norwegian energy should remain firm and increase in spring when the natural gas storages are likely to be depleted. This should support total Norwegian exports of goods (around 33% of GDP in 2021) as exports from the non-oil industry (such as fish, aluminum, machinery, and equipment) could falter due to the slowdown/recession in Western Europe. Although Norway has a high-energy reservoir (oil and gas represent around 27.5% of the energy mix in 2020 as hydropower is the mainstay of the Norwegian electricity system), even for Norwegian consumers and corporations, fuel and food prices have enormously increased, especially electricity prices due to low rainfall. This is eroding purchasing power and limiting private consumption (45% of GDP) and investments in the non-oil sector. On that score, together with the healthy position of the labor market, which fully recovered from the pandemic, wages are noticeably increasing, putting even more pressure on inflation. While an average inflation rate of just under 6% is relatively low compared to Scandinavian and Western European neighbors, it is still above the central bank’s target of 2%. In 2022, Norges Bank lifted the key interest rate five times from 0.5% to 2.75%. According to central bank projections, further rises to 3% are likely over 2023, albeit with more gradual frequency. Government spending is expected to remain modest, with fiscal expansion limited to support households and companies to deal with higher energy bills (the initial program was due to end in late 2022, but the government is expected to extend it in 2023).

THE CURRENT ACCOUNT SURPLUS REACHED A RECORD HIGH

The strong demand for energy products and soaring prices have skyrocketed Norwegian goods exports. Even despite higher imports, a decrease in the services trade deficit balance (due to the expectation of fewer foreign tourists), and a decrease in overseas investment revenues, this is more than enough to bring the current account balance far above the highest level ever seen in the period that started in 1981. From the fiscal side, expenditures will remain roughly unchanged, with state support to cope with high energy prices as well as support for refugees from Ukraine. However, tax revenues are expected to increase so that the structural government non-oil deficit will decrease from 6.5% of GDP in 2022 to 5% in 2023. However, this will more than balance out via withdrawals from the sovereign wealth fund (SWF). Although the share of withdrawals in 2023 will be lower with 2.5% of the profits, these were so strong that the total budget surplus would remain the highest in decades. Therefore, the public debt burden will continue to decline sharply in 2023 and stay moderate.

CONSERVATIVES MORE POPULAR THAN THE GOVERNING LABOUR PARTY – ENERGY INFRASTRUCTURE IN THE LIMELIGHT

Since September 2021, Prime Minister Jonas Gahr Støre of the social-democratic Labor party (48 out of 169 seats in the Parliament) has led a minority government with the populist-agrarian Center Party (28 seats). The coalition is supported by the Socialist Left (13 seats) in Parliament, which declined to enter the coalition in 2021 after disagreements over welfare policies. Minority governments are typical in Norway. Since the election, the Labor Party has lost some of its popularity and was already overtaken by the Conservative Party, the biggest opposition party, in December 2021, because of the harsh pandemic measures that the government implemented. Since then, the gap between the Conservative and the Labor Parties has widened and reached eight percentage points by late 2022. One reason for this further loss of popularity is the increasing electricity prices for Norwegians. Nevertheless, Prime Minister Støre should stay in office until the next election in September 2025 due to a vast consensus in the political system and because of the geopolitical threat from Russia (Russia and Norway share a small border).

While military conflict is unlikely, Norwegian authorities will tighten its energy infrastructure security after the explosions at the Nord Stream gas pipelines in the Baltic Sea in late September 2022 (the investigation is still ongoing). Additionally, suspicious drones were seen near Norwegian offshore oil platforms in the autumn of 2022, which forced the country to deploy military action to protect its oil and gas installations.