There was a time, not so long ago, when Swedes were the help and oil revenue poured into the nation’s wealth fund. Today, the neighbours are returning home and the flow of cash has been reversed to plug budget holes.
That’s what the oil crash wrought.
The black gold rush that helped transform Norway into the Nordic land of milk and honey is effectively over. But the good news is that, having survived its worst crude downturn in a generation, the Scandinavian economy is now far less dependent on selling commodities.
Norwegians must get used to the idea of “modest growth” rates because the “extraordinary driver” that was oil is gone, said Kjersti Haugland, chief economist at DNB ASA, Norway’s largest bank. Or, as Svenska Handelsbanken AB’s Marius Gonsholt Hov, put it: “Norway is now more similar to other countries.”
Reducing Norway’s oil dependency has been on the agenda of successive Norwegian governments and is being reaffirmed by Prime Minister Erna Solberg as she fights for a second mandate in parliamentary elections due on September 11.
Those efforts are now coming to fruition — Norway’s oil sector accounted for less than 12 per cent of gross domestic product last year, with the weaning clearly accelerated by the 2014-2016 oil crash that saw the local industry cut 50,000 jobs.
The drop in crude had a severe impact on the economy, as oil majors slashed investments and unemployment rose to its highest level in at least a decade. The central bank responded by cutting rates to a record low, while the government unleashed a massive fiscal stimulus, withdrawing from the country’s $960 billion wealth fund for the first time.
Much of the monetary and fiscal stimulus benefited the country’s housing sector, which at the start of last year overtook oil and gas as the biggest destination of investments.
That engine of growth, however, is about to dry up.
Property prices are plunging in Oslo after the government tightened lending standards to choke off speculative buying. As Europe begins to emerge from a protracted period of ultra-low interest rates — Norway’s central bank dropped its easing bias last month — and the property market cools, “you won’t get this kind of effect from the construction sector going forward,” Hov said.
That leaves Norway with “more traditional growth drivers,” such as private consumption and exports, said Haugland. And that in turn means Norwegians should no longer expect average “good ol’ days” growth rates of 2.5 per cent.
“The new normal will be lower,” perhaps peaking at 1.9 per cent, the DNB economist said.
That view is shared by the central bank. Back in March 2015 it was still predicting mainland growth rates of 2.5 per cent and 2.7 per cent for this year and the next. Its latest forecasts point to more ordinarily rates of 2.0 per cent and 1.9 per cent, respectively.
The shift is also reflected in the country’s labour costs, which are falling in line with Norway’s trading partners and could help the country in its transformation.
The moderation in wages also has its drawbacks and is partly to blame for the country’s reduced economic capacity. Kristin Halvorsen, a former finance minister, once quipped during the height of the oil boom that her biggest fear was that all the Swedes would leave.
Lured home by an economic boom, the Swedes are now almost gone. That means the Norwegians will have to serve themselves.