Outlook for the Norwegian economy
Oil and industry seem to be picking up, while tourism—especially from America—soars
John L. Rogne
Chief Economist, Innovation Norway
During the last two generations, Norway has become a dual economy—both an oil economy and an advanced manufacturing and service economy.
This transformation has been fueled by generous revenues from the growing oil activity. This also created new challenging markets and opportunities for Norwegian industry, combined with wide-ranging research activity in off-shore oil and gas extraction. Together with the increase in oil and gas production, Norway also switched over to become a leading oil and gas service provider.
Increased tax revenues opened room for lifting welfare services. This also transformed activity and working capacity toward more domestic-based activity, and the mechanism was an increase in public spending and an increased general wage level compared with neighboring countries.
It was the threat of a rapid downscaling of industry exposed to competition from abroad, and saving for future generations, that provided the reason for the introduction of the oil fund in 1990 (Government Pension Fund Global). Now it’s the largest sovereign wealth fund in the world, with some NOK 8.5 billion in assets.
The result of this transformation is that Norway is now in the top league, and ahead of its neighbors when it comes to GDP (Gross Domestic Product) per capita.
However, oil dependence makes the Norwegian economy vulnerable. When the oil price declined heavily in 2014, investment activity in the sector also declined heavily. The extensive oil and gas service industry faced a significant decline. Turnover declined by more than a fourth in 2016, some 13 percent in 2017, before it turned to a minor increase in 2018, and is still improving to an estimated 8 percent catch-up in 2019.
During the challenging years after 2014, this industry has made a significant diversification. From an almost entire focus on offshore vessels, the shipyards are now building other highly specialized ships, like cruise ships, fishing boats, research vessels etc. (and not off-shore vessels). At the same time, the investment demand from the oil and gas is, as mentioned, improving again.
Focus on environment and emissions has also intensified in the maritime industry. Yards are now getting orders in new areas, such as reconstruction of engine systems of elderly supply vessels and ferries. Diesel engines are replaced by newly developed electric and hybrid propulsion systems. A part of this is electronic control and operating equipment to optimize energy saving and emission reduction.
Growth and forecast
From around 1 percent output growth in Mainland GDP during 2016, the growth increased during 2017 to some 2.5 percent and has remained modest at that level since.
The growth has been supported by recent oil price increases through the associated pick-up in investment and income. Employment is still growing strongly. The unemployment rate continues to decline, and wage growth is expected to pick up further. An increase in electricity prices from the summer of 2018, due to low rainfall, reduced the important hydroelectric production, and has pushed up the consumer price index. Underlying inflation, however, remains low.
Housing construction activity has continued to contract, reflecting a cooling of the housing market. The resurgence in house prices appears to have ended. Prices are levelling off, but no sharp decline seem likely.
The trend decline in labor-force participation is bringing skills and labor supply to the fore. The 2019 budget proposals include measures to support labor-market participation, including by non-EEA immigrants, those with disabilities, and those affected by substance abuse. The continuing priority on strengthening the education system, including vocational education, is also welcome.
Organization for Economic Co-operation and Development (OECD) is expecting Mainland output growth to moderate over the next two years to some 2 percent in 2020. A factor behind this is tightening capacity constraints in the wider economy, including from declining working-age population growth. Nevertheless, falling unemployment rate and narrowing spare capacity will probably gradually increase consumer price inflation and wage growth.
The Americans are coming
With the title, “The Americans are coming,” an article published by Statistics Norway (Statistisk Sentralbyrå), studied the development of summer tourist traffic (May-August 2018), by looking at the overnight stays at hotels, etc. It was a summer record with 17.8 million overnight stays in 2018, the fifth year in a row with growth and up 2.1 percent from summer 2017.
The increase in American tourists has been particularly strong during the last summers, as the diagram below shows. New data for the entire 2018 show Americans as the top tourists to Norway. Several factors have probably stimulated this growth, such as successful marketing campaigns, more direct air routes, and stronger U.S. dollar against the Norwegian kroner. The last makes it less expensive for Americans to visit and stay in Norway.
John L. Rogne is Chief Economist for Innovation Norway in Oslo. He has a degree in social economics from the University of Oslo, and worked for Statistics Norway, the Confederation of Norwegian Enterprise (NHO), the Norwegian Trade Council, and after the merger with The Norwegian Industrial and Regional Development Fund (SND), Innovation Norway.
This article originally appeared in the March 8, 2019, issue of The Norwegian American. To subscribe, visit SUBSCRIBE or call us at (206) 784-4617.