The current economic conditions govern the growth and living standards of individuals in any given country, which are heavily influenced by the country's resource endowment, social variables, and economic stability. The Norwegian economy, like the economies of other countries throughout the world, is primarily affected by unemployment, inflation, economic depression, economic growth, and price level volatility. Additional elements influencing the Norwegian aggregate economy include national income, growth rate, GDP, business possibilities, and other factors influencing national development. It is anticipated that the Norwegian economy will grow gradually until 2018 due to better global prospects, rebound in non-petroleum investment and increased private consumption. As of July 2016, Norway had an unemployment rate of 5.0 percent, although the country's econometric models suggest that the rate will decline to 4.20 percent in late 2017 followed to an increase to about 4.7 percent by 2020 because the country will potentially revive its investment in petroleum sector.
Norway had the highest inflation rates in 2016 where the consumer prices increased by 4.4 percent. However, the inflation as of March 2017 was 2.4 percent although the market anticipated a 2.6 percent inflation rate. According to "Trading Economics global macro models", this was the lowest rate of inflation the country had experienced since 2015. The average rate of inflation in Norway between 1950 and 2017 stands at 4.66 percent. The country experienced the highest inflation rate of 18.90 in 1951 due to global economic depression that hit all countries by then, while its all-time lowest inflation rate is -1.80 percent, which the country recorded in January 2004. The current rate of inflation (2.4 percent) will potentially edge down because the exchange rate depreciation is set to slow, while the economic slack is projected to increase.
Table 1: Norway Inflation Rate Inflation Rate (2016 - 2017).
Position of the Norwegian Economy in the Business Cycle (use data).300
The Norwegian economy is gradually recovering from the sluggish growth it experienced in 2016 that was characterized with peak unemployment rates, weak currencies, high rates of inflation, and significant depreciation of exchange rates. In Norway, the output of businesses and other industrial activities is determined by industrial production and output. A substantial portion of the country's income comes from the extraction industry and its related services, manufacturing industry, and electricity or energy industry. The extraction industry comprises of the extraction of crude petroleum, as well extraction of natural gas and accounts to 38 and 29 percent of the total output respectively. On the hand the manufacturing industry accounts to an aggregate of 23 percent of which food and beverages, machinery installation and repair, electronics and computer equipment and fabricated metals accounts to between 2 to 3 percent each. However, the energy segment, which includes electricity, steam and gas accounts to 5 percent of the economy.
Since 1991, the average industrial production in Norway is 0.33 percent, which is far below the recommended production for a country with good economy. The country had an industrial production of 15.40 percent in 1994 which was the highest in the country's history, while lowest production of -13.10 percent was recorded in August 2010. In the first quarter of the 2017 FY, findings from the business confidence surveys conducted by independent analysts indicate that the country's business confidence has increased to about 20.10 and has more potential for further increase. Additionally, exports have increased by about 20 percent annually following the recovery of oil prices in early February as well as a rebound in industrial investment and production.
Table 2: Norway Business and Industrial Production Position
Norway Business Last Previous Highest Lowest
Business Confidence 0.00 -5.00 20.10 -22.90
Manufacturing PMI 54.70 53.00 64.80 34.70
Industrial Production (%) 1.20 1.30 15.40 -13.10
Manufacturing Production -1.40 -0.80 8.90 -10.40
Capacity Utilization (%) 76.80 77.50 85.50 76.20
New Orders (Index Points) 106.70 102.50 172.00 39.70
Change in Inventories (NOK) Million 38054.00 32918.00 58918.00 3266.00
Competitiveness Index (Points) 5.44 5.41 5.44 5.14
Competitiveness Rank 11.00 11.00 17.00 11.00
Ease of Doing Business 6.00 8.00 10.00 6.00
The main macroeconomic problems affecting the economy of Norway
The main macroeconomic problems affecting economies of most around the world are related to inflation, unemployment, economic growth, and price levels. For Norway major macroeconomic issues are weakening of the krone relative to euro and dollar, falling prices of oil, deteriorating petroleum industry and shortening of working hours. The impacts of these macroeconomic problems on Norway's economy are far-reaching. Besides causing a decline in the country's economic growth, the problems contribute to the reduction in the country's GDP by about 7.5% The working hours per day have gradually reduced from 7.5 hours to 6.0 hours, which analysts believe will slow down economic growth by about 18% as well as decrease private consumption per capita by about one third by 2050. As a common rule of the economy, reducing working hours requires the government to increase tax rates so that it can fund its existing public welfare systems without a breach of the current fiscal rules. Accordingly, the tax rate imposed on household income is likely to increase by 12 percent by the year 2060 due to reduced working hours (Aaberge, Wennemo, Bjorklund, Pedersen & Smith, 2000).
Being a capitalist country with most enterprise owned by the state, Norway has always been in the middle position in the European ranking in terms of income per head. However, the recent drastic decline in oil prices to less than $40 per barrel has drove the country back to the economic recession it experienced in 2008. In early 2016, the "director of the Norwegian Petroleum Directorate", Bente Nyland acknowledged that the country's petroleum industry was in crisis. This was evident when Statoil, the country's national oil company reported lower profit earnings on the sale of oil and plunged share prices. In addition to reducing profitability of oil country and growth of the country's aggregate economy, the drastic drop in oil prices affected currency exchange rates where the krone lost up 0.8% of its initial value to against the European euro, while the crude dropped by approximately 2.8%. Also, the sharp drop in oil prices from $115 a barrel to in 2014 $29.75 a barrel in January 2016 causing the krone to fluctuate and loss up to 30% its value against the Dollar within the two years. Moreover, the constantly falling oil prices necessitated many oil companies to take precedence of short-term revenue and profit earnings over long term value creation (Ramey & Sheng, 2016).
As a strategic measure to remain operational, oil companies have laid off more than 10% of their employees and it is anticipated that the layoff may increase to 20% in the next two years causing a loss of more than 30,000 jobs (Choudhry, Marelli & Signorelli, 2012). Unlike other OECD countries that employ 19 percent of their workforce in the public sector, Norway employs over 33 percent of the employees in its public sector, which leads to a state of over-ripe welfare. Most employees in Norway especially in the public sectors have three-day weekends to rest and work for only 37 hours per week, which undermines the work ethics in country with economic growth to their forefront (Economics, 2014). The other macroeconomic problem affecting Norway's economy is increased government spending on non-income generating activities. For instance, while Norway's average OECD is 2.2 percent, the country spends of its GDP on early retirement and incapacity benefits, which curtails profitable investment ultimately retards the growth of economy.
A critical overview of the fiscal policy stance of the government of Norway
Although more than one-fifth of Norway's economic output depend petroleum (oil and gas) industry, the recent decline in oil prices had less effects on the mainland GDP. The country's economic growth and performance remained unaffected with the GDP of the mainland or non-oil sector growing steadily but gradually at about 3 percent, inflation remained below the target 2.5 percent and unemployment remained stable at 3.5 percent. The gradual economic growth Norway experienced in 2016 regardless of the plummeted oil prices may be attributed to the Norwegian government implemented in response to the situation to adjust its tax rates as well as spending levels and monitor the behavior of the country's economy. Norway has instituted a set of fiscal policies to streamline the expenditure of income obtained from the oil sector and keep the country's economy immune from the Dutch influence (Huidrom, Kose & Ohnsorge, 2016). Nonetheless, the recent decline in oil prices coerced the Norwegian government to amend the country's fiscal policies and make wise investment of the increasing share or income from the mainland economy.
The aggregate fiscal stance of Norway's economy has increasingly grown stronger due to revitalized investment in non-oil industries and non-reliance on revenues from oil export. In 2012, the country had a gross surplus of approximately 14 percent of the total GDP, while the GPFG value rose significantly to 173% of the mainland GDP in the same year. While other OECD countries obtain and spend most of their revenues and national income from their natural resource endowments, Norway has fiscal policies that prevented excess spending of the revenues generated from the sale and importation of oil, thus avoiding the Dutch diseases. The policies have also helped the country to avoid circumstances of surplus demand in its economy caused by crowding out of productive industries and depreciation of exchange rates. One of the fiscal policies the government adopted was the implementation of the Government Pension Fund in 2006 (initially called the Petroleum Fund). A separate unit and other investors in the Norway's central bank contribute and invest to the fund that supports financing of most operations especially during economic recession. Like in other economies, authorities in Norway usually utilize flexibility in their fiscal policies to prevent overexploitation of their domestic industries by reducing the degree of fiscal transfer from their aggregate economic income (Howarth & Quaglia, 2013).
Although the current fiscal policies adopted by the government of Norway promotes effective management of the country's economy, various challenges are still inherent in the country's economy. For instance, real house prices in Norway rose by over 6% between 2010 and 2012 when the global financial crisis was at the peak, which increased costs of living, albeit the prices recovered shortly after the recession. This implies that unlike other OECD countries, Norway has clear fiscal policies that monitors the country's economy to identify and proactively adjust unfavorable conditions such as inflation, overspending and the overheating real house sector. The current policies are useful in helping Norway avoid overdependence on income from the petroleum sector, but rely on income from non-oil investment and activities instead (Céspedes & Velasco, 2014). Accordingly, the mainland economy continued to strengthen gradually despite the fluctuations in oil prices. However, there is need for further reconsideration of the fiscal rules due to the increasing non-oil deficits and the incongruity between the courses of fiscal financing suggest by the fiscal policies and the timing of long term fiscal requirements.
Norway's 2013 budget as well as its fiscal outturn of 2012 are consistent with the fiscal rule enacted by the country's authority's, which requires the fiscal outturn not to exceed 4% of the aggregate CPFG capital. The fiscal policies alongside the Government Pension Fund recommends gradual reduction of the tax subsidies for real estate or housing investment in its move to regulate the economy. Also, the tax code in the country seems to favor non-owner occupied homes relative to the owner-occupied ones, although the government is set to increase the tax code for the former housing. Although the proposed amendment to the tax code appears smaller, it will substantially reduce the amount of incentives the government offers to housing investors.
A critical overview of the monetary policy stance of the central bank of Norway and the degree of independence
The Norwegian government had an efficient monetary policy in addition to the fiscal policy expansionary that supports and regulates investment and other economic activities in the country. The ministry of finance and other relevant authorities have maintained the monetary policy at 1.5% because the inflation rate is below the recommended budget of 2.5 percent. According to the company's financial analysts, the current money policy stance is appropriate to maintain the country's inflation rate below the target percentage and increase the economy's growth potential. However, the current financial policies should be tailored towards addressing the overheating real house markets and their related investment. Although the financial policies are accommodative of the country's economic activities, one of factors that need to be addressed is the interest, which are so low that they have fueled booing investment in housing. The Norwegian government should thus focus on using extra fiscal stimulus to support is economic activities and operations provided there is adequate slack in the economy rather than easing the financial policies further (Akram & Mumtaz, 2016).
In March 2012, the Norway's central back (Norges) set the monetary policy at 1.5 percent, which was a 25 points reduction in the existing policy. The bank's decision was necessitated by the rising downturn of the overseas economies and the strengthened krone that had maintained the country's inflation at the lowest rate. Provisions of the 2011 Article IV required the authorities to tighten the nation's monetary resources in the event the "macroprudental tightening" was non-existent. Additionally, the country's FSA tightened the guidelines for mortgage lending in 2011 and reduced the cap on LTV to 85% from the previous 90%. The Norwegian financial authorities are also increasingly seeking to tighten the nation's macroprudential regulations further in order to reduce the risks associated with the current regulations. The current financial regulations were implemented in December 2012 when the Ministry of finance sought to assess and adjust the macroprudentia guidelines trough the FSA in order to curb the risks associated with the booming real house investments and housing markets (Al-Eyd, 2013; Akram & Mumtaz, 2016).
The central bank of Norway also endorsed recommendations of the 2011 Article IV, which required authorities to reconsider their proposals for increasing the risk weights for mortgage on residential housing. Moreover, Norwegian government has always liaised with the central bank to implement more strict capital requirements with a common objective of bringing the country's financial systems under adequate containment. For instance, legislative authorities proposed new capital requirements for all the investment organizations and lending institutions in early 2013 in order to enforce the standards for Basel III (CRD IV). Nine percent of the new capital requirements took effect as from August 2013 and were subsequently increased (10% in 2014, 11% in mid-2015 and 12% in early) until all the provisions became effective (Howarth & Quaglia, 2013).
The monetary policy stance of Norges bank has remained unchanged at a rate of 1.5 percent since early 2012. Nonetheless, the bank projects a gradual increase in inflation rate towards the targeted 2.5% by the end of 2018 due to stabilized appreciation of the exchange rate, increased output from mainland economic activities and the rise in minimum wages. As the economic analysts and authorities claim, the country's current monetary policy is appropriate for potential economic growth in light of the rate of CPI inflation that has always remained below the target rate (Howarth & Quaglia, 2013).
Final thought on the current state of the economy and the advice for the central bank and the Government.
Although Norway's fiscal stimulus weakened significantly in early 2016 following a sharp drop in global oil prices, the economy will potentially gain momentum due to a rebound in mainland investment and rapid growth in global trade. Also, as economists project, the country's aggregate GDP is likely to rise by 1.4 percent by the end of the 2017 FY and grow further by 1.7% in 2018. The mainland GDP is also expected to increase by about 1.6 percent in 2017 and subsequently rise to 2.0 percent by late 2018 due to the proposed changes in the fiscal and monetary policies. Because an increase in mainland GDP is linked to increased non-oil drilling industrial activities, Norway's industrial production is set to expand by over 3.4 percent as of December 2017.
The Norwegian economy just like economies of other countries experiencing recession need reforms in order to strengthen the country's competition in the international markets, enhance the business environment. The reforms will also help the country to promote education and skills development and provide more employment opportunities to the citizens, which are the fundamental metrics for sustained inclusiveness and higher growth potential. Norway has adjusted its fiscal policies to help its economy recover from the 2016 recession that was associated with a drastic decline in oil prices. The recent adjustments include tax reductions especially in the corporate sectors, which is aimed at enhancing competitiveness. In addition to these strategic reforms, the Norwegian government should also consider supporting and improving public investment, promoting education and increasing expenditure in income-generating activities and investments.
References
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