Norway: Risk Assessment
Country Risk Rating
Business Climate Rating
- Oil and natural gas deposits
- High standard-of-living
- Broad political consensus
- Well-capitalized banking system
- Large sovereign wealth fund (around 300% of mainland GDP)
- Budget deficit excluding oil and gas revenues
- High household debt
- Significant labour costs
- Shortage of skilled workers
Domestic demand remains the main source of growth
The Norwegian economy should show a strong growth in 2020. This is less due to a kick-start at the beginning of 2020 than to an already stronger growth dynamic in the end of 2019. The main factor here are the higher investments into the offshore oil and gas exploitation. They increased as most development projects are planned to remain profitable even with oil prices falling below 60 USD/bbl, due to cost reductions and efficiency improvements. The energy sector represents 17% of GDP, 19% of investments, and 43% of exports. Business investments on the mainland however, will remain moderate, as sentiment indicators decreased through 2019, while housing investments should pick up further in 2020, due to slowly increasing housing prices and a pickup in construction activity since 2019. Private consumption should foster a stronger growth dynamic. However, several factors are affecting private households in different directions. The tight labor market with a low unemployment rate (3.9% in September 2019) and moderate wage, as well as the decreasing inflation rate are increasing the purchasing power of the Norwegian customers. However, household debt is at a high level (100.2% of GDP in Q2 2019) and continues to rise faster than income. Additionally, the Norges Bank kept on with its exit out of the ultra-expansionary monetary policy in 2019 with three rate hikes until November 2019. The key interest rate reached a level of 1.5%. Another rate hike is expected in March 2020, which will further increase the interest-rate environment for Norwegian households. For the rest of the year, the interest rate will probably be unchanged. Even with this stark discrepancy between the Norwegian monetary policy and the one of the Eurozone and other developed countries, the Norwegian krone depreciated by 6% year-over-year in October 2019. This will foster exports via a better price-competitiveness. The still mute economic growth in Europe, however, particularly in the United Kingdom, could affect Norwegian exports, since a significant part of them go to the UK (especially hydrocarbons, fish, aluminum, mechanical and electrical equipment and ships).
A solid financial situation that owes much to oil and gas
Fiscal policy is orientated on diversifying the economy to reduce the country's dependence on the energy sector, but also supporting low-income families and an increase in the defense budget in 2020. A special focus lays on environmental measures, with an expansion of the public transportation system and an increase of the CO2 tax on mineral products by 5% on top of the inflation adjustment. Even with these planned expenditures, the budgetary rule limiting withdrawals from the sovereign wealth fund (SWF) to 3% of the fund’s return will be respected, with planned spending of 2.6% of the SWF’s capital in 2020. However, the non-oil deficit will amount to over 7% of GDP, illustrating the dependence of public finances on oil revenues and SWF dividends. The burden of public debt will remain moderate, in the country with the world’s largest SWF.
The current account surplus is expected to shrink, mainly due to the goods balance, which stood at 7.0% of GDP in 2018. Since then, imports increased noticeably, reflecting vigorous domestic demand, while exports – concentrated around oil, natural gas and salmon – have suffered in part by the decrease of global demand and by the drop in energy prices. This development should stabilize in 2020. The current account surplus however will be supported by the income surplus linked to the wealth fund's foreign investments.
A stable government
Following the parliamentary elections held in September 2017, Prime Minister Erna Solberg of the Conservative Party leads a minority governing coalition with the Progress Party (FrP), and since January 2018, the Liberal Party. However, the government was still dependent on the support of the Christian Democrats. They finally joined the coalition in January 2019, which brought the government more stability. However, since 2017, the opinion polls for the right-wing libertarian FrP, which isinter aliafocused on restricting immigration, are falling, because immigration decreased and the main reason to vote for the FrP vanished. To find new topics, the FrP could shift more rightwards, which could jeopardize the cooperation with the Liberals and the Christian Democrats. We assume that the coalition will hold until the next election in September 2021. If that is not the case, then a snap election will not be possible under Norwegian law, and instead the remaining parties could form a minority coalition, or the Liberals and Christian Democrats could form a new coalition under the lead of the labor party.