5/31/2017 ECONOMIC PROFILE OF NORWAY Submitted to Dr. Ahmed Tazmeen Department of Economics North South University Prepared & Submitted by Fatema Zohara ID: 161-2861-085 MPPG 6th Batch North South University Master in Public Policy and Governance (MPPG) user
Table of Contents Introduction Page 03 Historical Overview Page 03 Recent Economic Outlook: Page 05 a) Broad Money Page 05 b) Consumer Price Inflation (CPI) Page 05 c) Domestic Demand and GDP Page 05 d) Unemployment Rate Page 06 e) Credit and Debt Growth Page 06 f) Export Growth Page 06 Economic Forecast Page 06 Conclusion Page 06 Appendix: Table 1 Economic Indicators of Norway Page 07 Figure 1 GDP Per Capita Page 08 Figure 2 Government Pension Fund Global (GPFG) Page 08 Figure 3 Oil and Gas Production Page 08 Figure 4 Oil and Gas Export Page 08 Figure 5 CPI Growth and Inflation Page 09 Figure 6 Credit and Debt Trends Page 09 Figure 7 Labor Market and Unemployment Page 09 Figure 8 Export Volume Page 09 References Page 10 2 P a g e
Economic Profile of Norway Introduction: Economic condition of any country refers to the status of a country's financial position at a specific period of time. A country's economic conditions are defined and influenced by numerous macroeconomic and microeconomic factors, including monetary and fiscal policy, the state of the global economy, unemployment levels, productivity, levels of current account and budget surpluses or deficits, GDP growth rate, exchange rate, inflation rate and many others. The state of the economy is always changing because of these changeable factors. That is why every country is very much concerned about the economic changes that directly impact on the demand and supply sides of the market as well as the whole economy. One of the developed welfare states of the world, Norway, is focused on limited government expenditure, selective social services and private provision. Norway is comprised of the western and northern part of the Scandinavian Peninsula. The country also has common land borders with Russia, Finland and Sweden. Compared to other European states, the country contains a very high standards of living moved towards general coverage of the costs of hospital care and more inclusive social protection policies with egalitarian social values. The Norwegian government also took effective measures for removing the obstacles of women s career development. The country is blessed by a mixed wealth of natural resourced. Norway's modern manufacturing and welfare system mainly rely on a financial reserve produced by exploitation of natural resources, particularly North Sea oil. Historical Overview: Norway possesses a mixed and diversified industrial economy comprised of market liberalization and low trade barriers. Since its independence, the country was totally dependent on agriculture, fishing and timber. The self-owning farmers were the main drivers of Norwegian agriculture. Fishing was a significant supplement with crop-growing and the raising of livestock on small farms. But the industrial revolution put a different economic wave as the country moved to expansionary economy by starting export including petroleum exploration and production, fisheries and hydro-electric power. As a result, traditional heavy manufacturing and agriculture suffered much for the globalization effect compared to oil-related industries and service providers. The GDP of Norway was declining and it has lost some competitive edges in the past 3 P a g e
10-15 years (Figure 1) compared to other European economy due to various factors; such as - increase in unit-labor-cost resulted from a decline in labor-productivity, fluctuations in the price of oil as well as exchange rates, huge tax burden, etc. As a result, the country s trend of productivity growth has been in contraction, which needs to be focused on. In the year 1991, the economy expanded as the stock of M2 got a notable increase for the ending of saving schemes with tax credit. In the next year 1992, the country maintained floating exchange rate instead of fixed exchange rate by introducing market liberalization. The monetary aggregates of the country include the broad monetary aggregate M3 from the year 2014. Norwegian oil and gas sector has boosted up its economy by creating a large employment sector for its citizens as well as that of European Economic Area (EEA) (Figure 3 and 7). The export income from oils and gas sector encompassed its contribution over employment income to the country s GDP. From the year 1981-1990 the average income from the export of oil and gas increased to 45 percent (Figure 4). But during 1971 to 1995, the export income from these sectors contributed to total revenue and GDP only less than 7 percent and 4 percent respectively. Notably, the public sector is the largest contributor in the world as a percentage of the overall Gross Domestic Product (GDP). In 2012, 59 percent of GDP growth was accounted for the whole service sector comprised of public services, transport and communications, engineering, banking, insurance, retail and wholesale trade, etc. Gradually the export increased to 63 percent from the year 1995 to 2014 leading to a high expansion (Figure 4). As a total, oil and gas exports rise from a lowest of 8 percent in 1988 to a peak of 24 percent in 2008. Economic development is fundamental, but sometimes it cannot guarantee social protection. The economy of Norway was once one of the brightest economies of Europe. But, it started to fall in the late 2013. In the 2013 the economic growth fell to 1.0 percent (Table 1), which was the lowest since the financial crisis in the year 2009 and also in six years (Figure 1). The consumer confidence was affected also by this in its lowest in 24 years. Although Norway is the top gas and oil producer of Western Europe, but in mid 2014, the country s crude oil prices fall by 17 percent (Figure 3). Many oil related companies were closed and the unemployment rate was also the highest ever in last 10 years, 3.2 percent. The economy was at the bottom of its contraction and the situation also became worse as the central bank decreased interest rate, demanding the economy for expansion. Another risk was associated to this as the government continued to increase in property prices and at the same time mortgage lending. 4 P a g e
Moreover, the problem of handling with the Dutch disease was noticeable. The Norwegian government appreciated the exchange rate and at the same time crowding out of private sector to dominate the real economy. The country started to increase its share of the mainland economy by providing products and services. The steady growth to a large size of The Government Pension Fund Global (GPFG) also supported to handle that problem guided by a contraction of fiscal policy framework in the year 2014 (Table 1 and Figure 2). But in real, the country maintains a long trend of expansionary fiscal policy which has put the economy in risk. Recent Economic Outlook: i. Broad Money- The Broad money gradually increased from year 2014 to the date, in spite of facing economic contraction due to other factors. It indicates that the economy is in expansion from the past facing lower GDP growth (Table 1). ii. Consumer Price Inflation (CPI)- The measurement of inflation in Norway might be done by Consumer Price Inflation or CPI in short. The Norges Bank stated in their website (http://www.norges-bank.no) that the Norway Government has set an inflation target that the operational target of monetary policy is low and stable inflation, with annual consumer price inflation of approximately 2.5% over time. Moreover, the Focus Economic expert panelists said that, CPI came down 2.2% in April, 2017 from as high as 3.4% had been in April, 2016. Thus, it is seen that the government has been able to maintain the inflation rate as they expected. The Focus Economics (https://www.focus-economics.com) showed the inflation data of Norway (Table 1 and Figure 5). iii. Domestic Demand and GDP- Domestic demand is closely related to the GDP. The Focus Economics, a group of economists that forecasts about the economy of a country, states that the total GDP growth rate is 2.6% and the mainland GDP growth rate is 3.1%. It means that mainland economy is accelerated compared to the overall economy. Still domestic demand is sluggish due to slowed government consumption that is cut in defense budget. But the business confidence grew and fixed investment was 0.5% more than the previous quarter. The external sector s performance is encouraging and import increased 2.8% that means that domestic activity is gaining traction. The available data says that the GDP in Norway was worth 386.58 billion USD in 2015 with 1.6% annual change. The GDP per capita of Norway in 2016 was USD 71,094. In the order of 5 P a g e
GDP per capita comparing with other countries, Norway is well positioned and coming 6th out of 196 countries (Table 1). iv. Unemployment Rate- Norway s income level is higher than that of most other countries although the mainland economic downturn substantially increased the unemployment rate by contraction the labor market (Figure 7). The trend shows that the situation is becoming worse and the rate has slightly declined to 4.3 percent in the year 2017 (Table 1 and Figure 7). v. Credit and Debt Growth- The household debt are increasing where the growth of credit to household tends to declining over the last few years and also is expected to be stable in the coming years as the assets accumulated from bank mortgage are not fluctuating (Figure 6). To overcome this situation the Norwegian government took an expansionary fiscal policy by lowering interest rate as well as housing wealth. vi. Export Growth- Export growth has been highly affected by the fall of crude oil and natural gas prices. The trend shows that the export of total goods and services comprised of traditional goods has significantly increased compared the exports of crude oil and natural gas (Table 1 and Figure 8). Economic Forecast: Researchers and analysts along with Prime Minister Erna Solberg of Norway are expecting an expansion in the Norwegian economy in coming years. Behind the forecast various factors are working (Table 1); such as global economic rising, country s higher private consumption, counter-stroke in non-oil investment, expected inflation rate in spite of higher unemployment rate, exchange rate depreciation and weaker currency stance. Thus, Norway can gradually diversify from oil and gas output, although having a wealth fund of $800 billion and declining interest rates of Norges Bank. Conclusion: Norway a small and open economy is facing a hard time to recovery through a well combination of accommodative monetary policy as well expansionary fiscal policy. Gradually the oil price increased, exports comprised mainly with fossil oil grew almost 30 percent annually, housing boom has been fuelled in spite of sustained low interest rate, tax has been reduced including in-corporate taxation, additional public investment increased for the education and skill development and unemployment rate declined with a rapid declaration in inflation in late 2016. 6 P a g e
Also, global financial market movements have implications for the value of Norway s sovereign wealth fund in ensuring spending effectively. As European economy influences the country s economy in the field of non-oil exports, new investment attempts will partly offset the past decline in ongoing projects. Appendix: Table 1: Economic Indicators of Norway Year/ Indicator 2012 2013 2014 2015 2016 2017 (estimated) GDP (USD billion) 506 523 504 386 354 611 2018 (forecast) GDP (annual variation %) 1.6 1.0 2.2 1.2 1.1 1.9 2.1 Mainland GDP 1.8 2.3 1.3 1.3 1.6 2.2 (annual variation %) GDP Deflator (annual variation %) 2.1 2.5 0.5-0.9 2.7 2.4 GDP Per Capita (USD) 100,439 102,690 97,766 75,600 71,094 97,754 Inflation Rate 0.7 2.1 2.0 2.2 3.4 2.4 2.5 (CPI, annual variation %) Unemployment Rate 3.2 3.4 3.5 4.3 4.5 4.3 4.5 (annual variation %) Domestic Demand 3.5 2.0 1.6 0.7 1.9 2.1 2.8 (annual variation %) Total Consumption 3.5 3.7 4.6 4.8 4.4 4.0 4.2 (annual variation %) Investment (annual variation %) 7.6 6.3-0.7-3.8 1.3 1.6 2.1 Exports (G&S, annual variation %) 1.4-1.7 2.2 2.1 1.7 2.5 2.7 Imports (G&S, annual variation %) 3.2 4.9 1.5 3.3 1.4 3.1 3.4 GPFG (USD billion) - 210 256 267 271 - - Industrial Production 2.8-5.0 3.6 0.6 (annual variation %) Fiscal Balance (% of GDP) 13.8 10.8 8.8 6.4 Public Debt (% of GDP) 29.1 29.7 27.4 32.0 Money (annual variation %) 4.9 7.3 6.4 0.6 Policy Interest Rate (%) 1.50 1.50 1.25 0.75 Exchange Rate (vs EUR) 7.34 8.34 9.04 9.60 Trade Balance (USD billion) 73.1 66.2 55.3 27.6 7 P a g e
Figure 1: GDP per Capita Figure 2: Government Pension Fund Global (GPFG) Figure 3: Oil and Gas Production (Barrels of Oil equavalent) Figure 4: Oil and Gas Exports (Percent) 8 P a g e
Figure 5: CPI Growth and Inflation Figure 6: Credit and Debt Trends Figure 7: Labor Market and Unemployment Figure 8: Export Volume 9 P a g e
References: 1. Economy of Norway, Wikipedia; available at: https://en.wikipedia.org/wiki/economy_of_norway 2. Economic Condition, Investopedia; available at: http://www.investopedia.com/terms/e/economic-conditions.asp 3. General Economic Conditions, Boundless.com; available at: https://www.boundless.com/marketing/textbooks/boundless-marketing-textbook/themarketing-environment-3/external-factors-31/general-economic-conditions-163-4119/ 4. Focus Economics, Economic Forecast from the World s Leading Economists, Norway s Economic Outlook ; available at: http://www.focus-economics.com/countries/norway 5. OECD, Norway Economic Forecast Summary (November 2016) ; available at: http://www.oecd.org/economy/norway-economic-forecast-summary.htm 6. Norway Economy; available at: http://country.eiu.com/norway 7. Norway s Economy Loses its Shine ; available at: http://uk.reuters.com/article/uk-norwayeconomy-idukkcn0vp1lz 8. International Monetary Fund (IMF) Country Report, September 2015; available at: https://www.imf.org/external/pubs/ft/scr/2015/cr15250.pdf 9. The Norwegian Economy Key Facts ; available at: https://www.regjeringen.no/contentassets/455b1741a3814eb8823ce404fc0de3a0/norwegian_ economy_2013.pdf 10. OECD Economic Surveys Norway, January 2016 ; available at: http://www.oecd.org/eco/surveys/norway-2016-overview.pdf 11. Available at: www.tradingeconomics.com 12. Norges Bank Website; available at: http://www.norges-bank.no 10 P a g e