Norway: Risk Assessment
Country Risk Rating
Business Climate Rating
- Huge 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 when excluding oil and gas revenues
- High household debt
- Significant labor costs
- Shortage of skilled workers
Relatively fast recovery after a punctual recession
The COVID-19 pandemic hit the Norwegian economy in the spring of 2020 in a swift and punctuated manner, not only because the government had to introduce a lockdown of several weeks (all public social activity was shut down, although shops remained open), but also because of the collapse of the oil price due to the absence of energy demand from abroad. The Norwegian energy sector accounts for 17% of GDP, 19% of investments and 52% of exports. After the lockdowns in Europe were lifted in spring and the demand for Norwegian oil and gas increased with it, the economy recovered very dynamically because, among other things, the COVID-19 outbreak in Norway had remained relatively limited. Private consumption picked up over the summer for goods, but also services, as most Norwegians spent their holidays at home due to closed borders (Norway has a negative tourism-service balance). Furthermore, oil investments recovered quickly thanks to the partial rebound of the oil price and the government’s tax relief package for the oil industry, which will apply to all new development projects started by the end of 2022. Towards the end of 2020, a second wave of the COVID-19 pandemic hit Norway, which led to a renewal of restriction measures (shops remained open). The growth dynamic in the winter half-year 2020/21 is therefore expected to be muted. In spring, consumption should again show a recovery, as the unemployment rate should slowly return to more sustainable levels. The unemployment rate of the Labour and Welfare Administration (NAV) reached an all-time high of 10.6% in March 2020. It should revert to a more sustainable level, but not to the pre-COVID-19 level of 2.1%. Moreover, the majority of Norwegians will again stay at home for the 2021 summer holidays, which will therefore further increase private consumption. The economy will probably be supported by the oil industry, as the Brent-oil price is likely to reach a level of USD 50 per barrel in 2021, from an average of around USD 42 per Barrel in 2020, due to higher demand and still active production cuts of the OPEC. While the government cushioned the recession in 2020 via support measures worth NOK 166 billion (4.5% of total 2019 GDP), most of them will have faded out by the end of the year. The new budget for 2021 includes a new impulse of NOK 128.5 billion (3.6% of GDP), which is mostly concentrated in infrastructure projects, green energy development and defense expenditures. Some of this will be financed via the increase of the CO2 tax by 5%. On the other hand, the Norges Bank cut its key interest rate from 1.50% to 0% in 2020. Moreover, it provided additional liquidity to banks in the form of loans of diverse maturities. For 2021, the Bank should hold its key interest rate at 0%. However, due to the robust economic development, we cannot rule out a first rate hike of 25 basis points at the end of 2021.
Financial situation remains balanced thanks to the sovereign wealth fund
With still high expenditures on exceptional support measures and slowly increasing oil and gas revenues, the government’s net lending should be still very negative in 2021, albeit to a lesser extent (-6.9% of GDP after -9.5% in 2020). However, this will be more than balanced out via withdrawals from the sovereign wealth fund (SWF). In normal times, these are limited to 3% of the fund’s return. In 2020, they reached 3.9%, but should return to 3% in 2021. The burden of the public debt will therefore remain moderate. The decreasing goods trade balance was the only brake pad of the current account, while the services balance went positive and the primary balance remained solid in 2020. For 2021, we expect a stronger demand from Norway’s main export destinations, which will help to increase the current account surplus again.
Government on a rocky road until the next election in September 2021
Prime Minister Erna Solberg of the Conservative Party (45 out of 169 seats in the parliament) is leading a minority government coalition with the Liberal Party (8 seats) and the Christian Democratic Party (8 seats). The former coalition partner, the Progress Party (FrP, 26 seats) left the coalition in January 2020. The government coalition still needs its support, which is increasingly harder to gain. Solberg’s Conservative Party gained support with its successful handling of the COVID-19 outbreak, bringing back its poll result from 18% in February to a stable 24% in the summer of 2020 (the support level enjoyed in the last election in September 2017). The longer the pandemic lasts, the more willingness to work together decreases in the parliamentary system. However, the coalition is expected to hold until the next election on 13 September 2021.