Norway was the fourth richest country in the world measured by GDP per capital (purchasing power parity based) in 2010. During the financial crisis in 2008/09, the Norwegian economy was hit less than most other European economies. The main reason for this is that the export sector is commodity based, with oil and gas the main products combined with high commodity prices. Norway is the seventh largest exporter of oil and the second largest exporter of gas in the world. High petroleum revenues and expansionary fiscal policy dampened the economic downturn during the global financial crisis.
The Norwegian economy is in a moderate recovery, with mainland GDP growing around trend in 2011, while the unemployment ratio has stabilised at low levels (3.25%) and both core and headline inflation are low (1.0-1.5% y/y). Very strong terms of trade, high oil investments, low real interest rates and fairly strong growth in real wages combined with an expansionary fiscal policy are among the key drivers behind the upswing.
In 2010, the petroleum sector accounted for 21% of GDP and around 26% of government income. Moreover, the petroleum sector accounts for 26% of fixed investment and 47% of total exports. Forecasts indicate that the production of petroleum will remain broadly unchanged until 2020, before declining steadily.
Monetary policy: Since 2001, the central bank’s (Norges Bank) operational target has been annual consumer price inflation of approximately 2.5% over time. In practice, we have seen the central bank focusing on forecast core inflation (e.g. CPI-ATE and CPIXE). However, Norges Bank operates a flexible inflation targeting regime, so that weight is given to both variability in inflation and output/employment. Inflation in Norway has been lower than the target of 2.5% for extended periods since 2001, owing to falling prices on imported consumer goods.
Low inflation has put downward pressure on key interest rates, which in turn has helped house prices and household debt grow rapidly. In fact, Norwegian households are among the world’s most indebted with a debt to income ratio of around 200%. House prices have increased almost uninterrupted since the severe Norwegian banking crisis ended in 1993.Moreover, most households have fully adjustable mortgage interest rates. Hence, the financial position of Norwegian households is very sensitive to movements in short-term interest rates.
Fiscal policy follows the fiscal rule (implemented in 2001), which is supposed to smooth the increase in use of oil revenues to a sustainable level. The rule states that the use of petroleum revenues, as measured by the “structural non-oil deficit”, should over time be in line with the expected real return on the Government Pension Fund Global (GPGF), estimated at 4%. The fiscal rule provides flexibility, so that fiscal policy can be more expansionary in downturns and vice versa.
The GPGF is one of the world’s largest sovereign funds. The market value is around NOK3,150bn (EUR408bn). The purpose of the fund is to support government saving to finance the pension expenditure of the National Insurance Scheme. The operational
management of GPGF fund is conducted by Norges Bank.
The Norwegian economy is in a moderate recovery, with mainland GDP growing around trend in 2011, while the unemployment ratio has stabilised at low levels (3.25%) and both core and headline inflation are low (1.0-1.5% y/y). Very strong terms of trade, high oil investments, low real interest rates and fairly strong growth in real wages combined with an expansionary fiscal policy are among the key drivers behind the upswing.
In 2010, the petroleum sector accounted for 21% of GDP and around 26% of government income. Moreover, the petroleum sector accounts for 26% of fixed investment and 47% of total exports. Forecasts indicate that the production of petroleum will remain broadly unchanged until 2020, before declining steadily.
Monetary policy: Since 2001, the central bank’s (Norges Bank) operational target has been annual consumer price inflation of approximately 2.5% over time. In practice, we have seen the central bank focusing on forecast core inflation (e.g. CPI-ATE and CPIXE). However, Norges Bank operates a flexible inflation targeting regime, so that weight is given to both variability in inflation and output/employment. Inflation in Norway has been lower than the target of 2.5% for extended periods since 2001, owing to falling prices on imported consumer goods.
Low inflation has put downward pressure on key interest rates, which in turn has helped house prices and household debt grow rapidly. In fact, Norwegian households are among the world’s most indebted with a debt to income ratio of around 200%. House prices have increased almost uninterrupted since the severe Norwegian banking crisis ended in 1993.Moreover, most households have fully adjustable mortgage interest rates. Hence, the financial position of Norwegian households is very sensitive to movements in short-term interest rates.
Fiscal policy follows the fiscal rule (implemented in 2001), which is supposed to smooth the increase in use of oil revenues to a sustainable level. The rule states that the use of petroleum revenues, as measured by the “structural non-oil deficit”, should over time be in line with the expected real return on the Government Pension Fund Global (GPGF), estimated at 4%. The fiscal rule provides flexibility, so that fiscal policy can be more expansionary in downturns and vice versa.
The GPGF is one of the world’s largest sovereign funds. The market value is around NOK3,150bn (EUR408bn). The purpose of the fund is to support government saving to finance the pension expenditure of the National Insurance Scheme. The operational
management of GPGF fund is conducted by Norges Bank.