Norway’s major industries are oil and gas, but the country is also one of the leaders in exporting seafood and products from energy-intensive industries. Blessed with natural resources, the country’s ocean-based industries make up almost 70 % of its exports and 40 % of total value creation.
Some Norwegian companies are also using new technology to create environment-friendly, sustainable solutions and emerging as world leaders in their respective niches. These solutions include oil production on the sea floor, shipping in Arctic waters, and the sustainable management of copious fish stocks. But all’s not well as there are certain problems in the country’s economy that need to be addressed effectively.
One sizable problem is the slowing down of the Norwegian oil age. With the demand for oil and gas anticipated to reduce, it has become vital for the country to develop new industries to ensure its new generations’ future is secure. At the same time, Norway needs to plan to compensate for its loss in oil revenues and build a sustainable society.
Though Norway has fared well compared to many of its counterparts in restricting the impact of COVID‑19 and bounced back, it still has to battle multiple challenges. These include a population that’s aging continually, sustaining positive outcomes amid post‑pandemic adjustments in the economy, lower labour force participation, and tackling climate change on an urgent basis.
According to the prediction of experts, Norway’s mainland GDP growth will reduce to 0.7% in 2023, but recover in 2024 to reach 1.3%. Private consumption and investment will take a hit due to broad-based escalation in prices. As energy prices are stabilised, a reduction in headline inflation is predicted to occur, which will help domestic demand to recover. However, underlying price pressures will continue to exist.
Due to a softening economy, there will be a rise in the unemployment rate. But as the labour market will stay tight, wages will come under pressure.
Let’s delve a bit deeper to take note of the top five trends and predictions in the Norwegian economy.
1. Diversification of the Economy
As part of its Climate Action Plan for 2021-2030, Norway is shifting from power production driven by fossil fuels and nuclear energy to renewable energy to achieve its goal of reducing emissions to 55% by 2030. This is a big ask for the world’s 13th-biggest oil-producing nation.
The government aims to increase the taxation level for non-ETS greenhouse gas emissions step-by-step, reaching NOK 2000 per tonne CO2 equivalent in 2030. To support this goal, vehicle taxes have been designed in such a way that choosing emission-free vehicles will be advantageous. By 2025, the country also plans to phase out the sales of all new fossil-fuel vehicles.
What does this mean for the country’s economy? It indicates a shift in Norway’s economy from major industries (oil and gas) to sustainable, climate-friendly options like offshore wind energy and hydroelectric energy. To diversify the economy, financial support has been channelled for the development of new technologies and initiatives to encourage innovation and research.
The Norwegian government is still in the process of creating a licensing framework for offshore wind, with the goal of completing the first major offshore wind project before 2030. The government also extends its support to international collaborations and several R&D-related activities for the development of blue and green hydrogen.
All these could help diversify the Norwegian economy and diminish its dependence on fossil fuels in the long run while setting up industries that will be future-ready with their supply of green energy.
2. Finding Solutions to Long-Standing Fiscal Challenges
Norway’s long-term fiscal challenges are one of its major economy problems. While the country’s public spending is high, its wealth-fund growth is slower, one reason being the lower returns. This will put a cap on the amount that could be spent on new initiatives.
As the expenditure on healthcare and pensions go up, owing to the ageing Norwegian population, it will counterbalance the narrowing of fiscal space. As a result, cost-efficiency gains in public spending are required as is robust productivity in public services, including spending review follow-ups. An increased focus should also be put on cost-benefit analysis, which should be used more to leverage its advantages.
3. Enhancing Labour Force Participation
For long, Norway has been at the forefront of reducing gender pay gaps. But toward the beginning of 2022, an OECD news report mentioned the decrease in Norway’s labour-force participation from the third-highest in the OECD in 2000 to the 13th highest in 2022. The contributing factors were attributed, in part, to pension and disability compensation systems, and generous sick leaves, which unintentionally eroded the labour supply.
In 2023, it’s expected that steps will be taken to ensure Norway’s sick leave and disability schemes help its employees return to work and connect life expectancy and retirement schemes to boost the rate of employment among aged workers.
To achieve and maintain high levels of employment, labour force participation must increase. Since these are keys to the nation’s socio‑economic model, experts anticipate steps being taken by the government in this direction. Even businesses, they predict, will chip in because to remain competitive in today’s cut-throat business landscape, they can’t do without higher productivity growth.
4. Using the Government Pension Fund Global Judiciously
In 1990, Norway used the revenues from oil and production to create the Government Pension Fund Global. It’s one of the largest funds in the world that owns almost 1.3% of all the world’s listed companies (in 2021). Withdrawals from this fund are guided by a fiscal rule (since 2001) and emphasis is put on reducing economic fluctuations to contribute to low unemployment and optimal capacity utilisation.
To facilitate good financial return and risk diversification, this fund only invests sustainably abroad and its investment decisions are made by taking into consideration environmental and social issues.
At the end of 2021, the market value of this fund was NOK 12.34 trillion (EUR 1.23 trillion). Annually, the Norwegian government can spend just a small part of this fund (equivalent to the anticipated real return), but it still makes up around 20% of the government’s budget.
In 2019, the Parliament decided for the fund to dissociate from from companies only focused on gas and oil production to decrease the risk associated with fluctuating oil prices for the Norwegian economy. In 2023, it will continue to do the same, albeit with a bit more urgency, by using the fund’s wealth for sustainable, environment-friendly initiatives to bolster the economy.
5. The Housing Market is Slated to be a Bit More Expensive
After the interest rates bottomed out during the pandemic, it’s predicted that they will rise by around 2 percentage points over the next two years. This will trigger a decline in the purchasing power in the housing market despite rising household incomes. This could cause a small dip in housing prices.
At the other end of the spectrum are the skyrocketing construction costs and developers holding back projects, which could push housing prices up. As the Norwegian real estate market has experienced earlier, lower purchasing power doesn’t necessarily cause a fall in housing prices as long as the economy is strong, unemployment rates are lower, and there’s job security.
It’s just that this year, new home buyers in Norway may have to spend a slightly larger amount of their income to cover their home loan’s principal and interest payments.
The Norwegian economy will need to adapt fast as it moves away from oil and gas to renewable energy sources and addresses climate change. Diversifying the economy, finding solutions to long-term fiscal challenges, and strengthening the labour market with increased labour participation are important steps to take.
Additionally, emphasis on the judicious use of the Government Pension Fund Global and ensuring job security for employees to support the Norwegian real estate are ways that will ultimately help the economy to continue to grow.
What else will you add to the list above?