Norway: Rougher waters ahead

By Hansjörg Blöchliger, head of Norway and Iceland desk, Economics Department

Life remains good in Norway. GDP per capita is still among the highest in the OECD, boosted by high oil and gas revenues and supported by sound fiscal and macroeconomic management. Thanks to huge domestic energy sources, the country has weathered the energy crisis well, as shown in the latest OECD Economic Survey of Norway. Norway is also one of the most egalitarian countries and offers largely equal opportunities for both men and women.

The unemployment rate is low at around 4% albeit rising slowly, and labour participation is reverting to historical highs. Overall economic growth is expected to accelerate from 0.5% in 2023 to 1.2% in 2024 and 2.1% in 2025, while the mainland economy excluding the oil sector will grow a bit less.

Figure 1. Living standards are among the highest in the OECD

GDP per capita, thousand USD PPP

Source: OECD, National Accounts database.

The lead is shrinking

Yet everything does not run smoothly. Growth is subdued, while inflation is too high for comfort at close to 4%. It is receding gradually and expected to reach the central bank’s target of 2% only in a couple of years. Since December 2023, the key policy rate has remained at 4.5%. Imbalances in the labour market are rising. Notably, qualified labour in the technical professions and in health care is lacking. And at around 0.5% per year, productivity growth is among the lowest in the OECD – it would have been even lower without the boost from the oil sector. Because of low productivity growth, Norway’s lead over the richer half of the OECD countries has shrunk from around 42% to 27% over the past 15 years.

Figure 2. Inflation is falling but remains too high for comfort

Consumer price inflation and key policy interest rate

Note: Inflation refers to national CPI adjusted for tax changes and excluding energy products (ATE).
Source: Statistics Norway; Norges Bank.

With economic activity picking up again, monetary policy should remain sufficiently restrictive to bring inflation down over the medium term. Fiscal policy should work in the same direction as monetary policy and avoid any stimulus. The electricity support scheme for households should be phased out. High housing demand should be met by making city space denser and by allowing for more construction notably close to public transport hubs.

Structural reform could help raise productivity

The administrative and regulatory burden is high, especially for young firms, and business dynamism is relatively weak. The government should improve the general legal and administrative environment for businesses, and it should conduct regular evaluations of regulation, to foster startups and to help them become more productive.

Stronger and more relevant skills could also reinvigorate productivity growth and employment. Norway has a well-functioning work-based secondary vocational education and training (VET) system, but tertiary VET lacks scope to meet the demand for high-skilled workers. The government should strengthen tertiary VET by extending the current short cycles and/or opening university colleges to upper-secondary VET graduates.

Public spending should be contained and made more effective

Public spending as a share of GDP is the highest in the OECD, partly reflecting a generous welfare system as well as ambitious regional development objectives. Yet depleting oil resources and the fiscal consequences of ageing call for fiscal prudence and for upgrading the fiscal framework. To contain public spending, Norway should implement a medium-term budgeting framework and an expenditure rule, and it should broaden the remit of the fiscal council.

Sickness and disability as a share of GDP are by far the largest of the OECD, and the share of young people receiving disability benefits has almost doubled over the past ten years. The government should reduce the sick leave compensation rate towards the level of the other Nordic countries. It should also strengthen early intervention, especially for the young, to encourage them to return to work after sick leave.

Reference

OECD (2024), OECD Economic Surveys: Norway 2024, OECD Publishing, Paris, https://doi.org/10.1787/cb13475f-en