IMF Executive Board Concludes 2022 Article IV Consultation with Norway

F.P. Report

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Norway on September 14, 2022.

Norway’s economy continues to grow strongly. In 2021, real GDP grew 4.2 percent, supported by record high private consumption, as the high household savings accumulated during the pandemic unwound. Public spending continued to contribute to growth. Despite production constraints due to labor shortages and global supply disruptions, capacity utilization remained high. Activity remained buoyant in the first half of 2022, benefiting from higher energy prices.

Due to high growth and external developments, core inflation came under pressure, reaching levels significantly above the 2 percent target. Real wage growth remained moderately strong, although expectations going forward are fairly high on the back of historically low unemployment. House sales remained vibrant in 2021, price inflation continued to be moderate, while investment remained sluggish, not least due to higher interest rates and substantially higher construction costs.

Ample policy space provides room to mitigate adverse shocks from risks which are relatively balanced in the short-term. Mainland real GDP growth is expected to be somewhat below 4 percent in 2022 with the forecast being especially sensitive to energy prices developments. While household consumption could be affected by high global energy prices, compensatory electricity subsidies, together with the agreed wage increase, should help support real incomes and spending. The current account is projected to remain in a high surplus, with net exports contributing positively to growth. Indirect effects from the war in Ukraine, a potentially lower demand from Europe for non-energy exports, and continued supply bottlenecks weigh on the outlook.

Executive Board Assessment [2]

Executive Directors noted that Norway has rebounded strongly from the COVID-19 pandemic, benefitting from sound policies and solid economic fundamentals. While the outlook remains favorable, it is subject to uncertainties and risks, including from the spillovers from Russia’s war in Ukraine and pandemic developments. Norway also faces significant long-term challenges related to the aging population, the transition away from oil, and climate change. In this context, Directors supported continued use of Norway’s ample buffers to respond to shocks, but emphasized that over time policies should be reoriented towards addressing long-term structural challenges and promoting green and inclusive growth.

Directors noted that the fiscal stance remains appropriately accommodative but a return to a neutral fiscal stance should be targeted over the medium term. They called for better targeting energy subsidies toward lower income households. Directors encouraged the authorities to proactively address the expected strain on public finances driven by demographic trends and the transition away from oil, and a few Directors saw merit in staff’s recommendation to adopt a medium-term expenditure framework guided by an operational rule. In parallel, reforms should aim at improving spending efficiency.

Directors noted that monetary policy should continue balancing overheating risks and financial stability considerations. They welcomed the Norges Bank’s decision to quickly increase interest rates to respond to rising inflation pressures and encouraged continued flexibility in decision making and clear public communication.

Directors noted that the financial sector remains on sound footing. While acknowledging the improvements made to the macroprudential policy framework, they saw merit in considering additional measures, especially to address the high and interest sensitive housing related debt. Directors encouraged easing restrictions on the supply of new housing, altering regulations to boost construction efficiency, and gradually phasing out of mortgage interest deductibility. Expanding the regulatory toolkit for mitigating commercial real estate vulnerabilities should also be considered.

Directors noted that structural reforms will need to be wide-ranging, with a focus on raising non-oil productivity and boosting and diversifying labor force participation. They encouraged promoting upskilling, changing the sickness and disability benefit system, and giving more opportunities to immigrants. While commending the authorities for the progress with digitalization, Directors noted that closing remaining gaps will help further improve productivity. They welcomed Norway’s commitment to an ambitious climate agenda and the efforts in helping to finance transition to renewable energy in developing countries.