Last month Sigbjørn Johnsen confirmed the widespread public opinion that he is Europe’s luckiest finance minister. “There is no doubt that Norway is in a fortunate situation,” he said, while presenting yet another surplus budget for the country. “We have huge natural resources, but that is only half the story. The other [part] is that our fiscal policy framework is building trust and stability.”
Norway’s economic position continues to be vastly different from most European nations. After experiencing a shallow recession immediately after the financial crises of 2008 and 2009, the country bounced back quickly, mostly on the back of high oil prices. Despite the many challenges of the global economic climate, the Norwegian economy continues to perform extremely well, and the Norwegian Finance Minister attributed it to a combination of low interest rates, high income growth and high oil prices.
Early this month, Norway was declared the world’s most prosperous nation in the annual Legatum Prosperity Index.
The mixed economy of the prosperous capitalist welfare state is a combination of free market activity and heavy state ownership in key sectors such as petroleum (Statoil and Aker Solutions), hydroelectric energy production (Statkraft), aluminium production (Norsk Hydro), banking (DnB NOR), and telecommunications (Telenor). Through these industry giants, the government controls approximately 30 per cent of the stock values at the Oslo Stock Exchange.
Norway is the world’s second-largest gas exporter and seventh-largest oil exporter, making it the world’s largest producer of oil and natural gas outside the Middle East on a per capita basis. The state’s income from natural resources includes a significant contribution from petroleum production and the substantial and carefully managed income related to this sector. Last year, 28 per cent of state revenues were generated from the petroleum industry. In anticipation of the eventual decline in oil and gas production, the country saves this petroleum revenue in the world’s largest sovereign wealth fund —valued at more than $660 billion (about Dh2.2 trillion) — and uses returns to help finance public expenses. The fund returned 4.7 per cent last quarter as global stock markets rose.
Norway is a major shipping nation and has the world’s sixth-largest merchant fleet, with 1,412 Norwegian-owned merchant vessels.
According to the Labour Force Survey conducted by Statistics Norway, 30 per cent of the labour force is employed by the government, while 22 per cent is on welfare and 13 per cent is disabled and cannot work. And these are the highest proportions in the world. Unemployment is currently pegged at 3 per cent, and income growth is above 4 per cent. The hourly productivity levels as well as average hourly wages in Norway are also among the highest in the world. The democratic values of Norwegian society ensure that the wage difference between the lowest and highest paid workers in most companies is much smaller than in comparable Western economies.
This is also evident in Norway’s low Gini coefficient — the commonly used measure of inequality. It had the lowest coefficient in the world for two consecutive years.
However, the economic slowdown in Europe, high wage costs, increasing housing prices, and the strong krone exchange rate have also increased pressure on industries facing international competition.
According to Statistics Norway, the money market rate has now dropped to almost 2 per cent, where it is expected to stay in 2013.
However, the base rate is expected to gradually increase from next summer, and the money market rate will increase to 4.3 per cent at the end of 2015, when interest on loans is expected to cross 5 per cent.
The low interest rates, high growth in household income, and the large increase in population led to a 23 per cent increase in housing prices in the second quarter of this year, when compared to the pre-financial crisis era. Statistics Norway says the prospect of a long period with low interest rates and high income growth means that housing prices are likely to continue growing at around the same pace. “Housing investments will also continue to rise, but the increase will be curbed at a later stage in the business cycle as a result of higher interest rates and increased building costs,” it said in a report released in September.
Rapid wage growth is another key challenge. Norwegian industry wages are currently more than 50 per cent higher than their European trading partners. Statistics Norway explains that high growth in real wages, employment and transfers led to a clear increase in households’ real incomes in 2012. “A substantial part of this income goes towards savings, which is expected to make up more than 9 per cent of disposable income. However, there is still room for clear growth in consumption this year. Average interest on loans is expected to be lower in 2013 than 2012, and this will contribute to growth in income and consumption. Higher interest rates will thereafter curb income growth.”
In this scenario, the Norwegian government has emphasised the need for fiscal constraint to support continued balanced development of the economy and to reduce pressure on exposed industries.
Norway’s 2013 budget implies a nearly neutral fiscal stance and expects a 380 billion Norwegian kroner (about Dh245 billion) fiscal surplus. “Total investments in the Norwegian economy are now about 550 billion kroner, including oil investments. We take that into account when we designed the budget. This is the background music for the neutral arrangement,”Johnsen explained.
Spending of oil revenues is expected to increase 7.8 per cent from 2012, to 125.3 billion kroner, out of total expenditure of 1.065 trillion kroner. As an aside, this is still 26.4 billion kroner below the self-imposed spending limit of 4 per cent of the country’s sovereign wealth fund.
“If the European market tightens further, it would also affect the Norwegian economy,” Johnsen added, noting that this might force Norway to try harder to limit income growth.
The Organisation for Economic Cooperation and Development (OECD) reiterates that Norway will continue to benefit from its well-managed petroleum wealth and sound macroeconomic policies.
Its May economic forecast predicts that the country’s economy will continue its robust expansion through 2013. “Private consumption and investment will rise appreciably, supported by fiscal and monetary policy. Exports will benefit from their concentration on relatively strong economies in Europe and Asia. Higher activity and commodity prices are likely to lift consumer price inflation from its current low level.” However, it cautions that imbalances in asset markets, particularly high house prices and household debt, need to be addressed with macro-prudential tools and through consumer protection legislation.
Despite that note of caution, continued energy exports coupled with a healthy economy and accumulated wealth reiterate the fact that not only is the Norwegian Finance Minister among the luckiest in Europe but also that Norway will continue to be one of the richest countries in the world.