The Norwegian Central Bank’s recent decision to hold interest rates steady, rather than cutting them, as many European economists believe is necessary given the challenges Norway’s economy is currently facing, took the market by surprise.

Norway, a country that had escaped the worst of the European financial crisis and has experienced several years of stellar growth, has started to feel the impacts of lower oil prices, and though the effects of that, combined with a serious devaluation of the Norwegian krone – one of the worst performing currencies last year – are as yet muted, some economists believe they could take a greater toll on the economy going forward.

Some reports have even speculated about the impending end of Norway’s Golden Age, and whether the strong economy that is the result of Norway’s oil wealth could be in for a more serious downturn going forward. Growth forecasts for the Norwegian economy have already been revised downward amid concerns about high levels of household indebtedness and potential asset price bubbles. Here’s how the outlook currently stands:

Oil GDP Fall Exacerbated by Price Drop

Since the beginning of the millennium, Norway’s oil boom led to a marked shift toward an economy based on oil. Resources were steadily moved from other parts of the economy into the oil sector, said Joachim Bernhardsen, an economist at Nordea in Oslo, and today, oil is the nation’s dominant industry.

The decline in oil prices, which many believe will drop even further this year, has serious implications for Norway, given the importance of oil. However, “the 15% decline we expect in oil investments was expected before the price of oil fell,” Bernhardsen said. “It has much to do with not finding new fields to invest in and the vacuum that creates, so I would say that in the short-term, the drop in oil prices won’t have such a significant impact.”

In the longer-term, though, the low price of oil could pose a bigger threat. Oil accounts for about 10% to 15% of Norway’s GDP, said Jack Allen, economist covering Norway at Capital Economics in London. In volume terms, it is true that GDP from the oil sector has actually been falling for over a decade as a lack of new North Sea discoveries, he said, and oil production has dropped by over a third from 3.4 million barrels per day to below 2 million barrels a day. Also, oil companies have been forced to tap increasingly hard-to-reach reserves, thereby increasing their costs, and oil exports have also fallen. Although profits are still high, they are falling, and as oil prices also fall, Norway’s energy sector is becoming less attractive to investors, Allen said.

Strong Manufacturing Sector a Part of Structural Change

As Norway has become an Oil Economy, “we have pushed out a lot of our competitive industry and the high wage growth we have had here has resulted in a high cost of production,” Bernhardsen said. “Now, this shift in oil investment and a fall in oil prices pushes closer the event we knew would happen: A structural change in the Norwegian economy a shift back to more traditional industries.” Industries that were important to Norway in the past include fisheries and metals, but it’s important to note that the oil boom has also given rise to a strong manufacturing sector, Bernhardsen said.

“Instead of oil pushing out the manufacturing industry, we are now producing for the oil sector and we have a lot of important, oil-related manufacturing exports,” he said. “Of course, these will suffer somewhat as a result of the local and global downturn but some of this manufacturing can certainly live on and continue to do well given the technical competence and if you compare Norwegian manufacturing to manufacturing of our trading partners, we are strong because we have learned to manufacture for the oil industry.”

Good Policy Planning, Strong Forex Reserves

Norway, like other governments in the region, is known for prudent and careful policy and planning and that is something that the country can certainly bank on at this stage.

Norway stands in stark contrast to the U.K., for instance, which also has oil wealth, but unlike Norway, did not build a sovereign wealth fund for oil revenues, Allen said. “The fact that Norway has a huge stash of foreign exchange reserves is one reason to think that this will not be a disaster,” he said. “The government has a huge buffer of funds that it can use if it needs to, but we’re not expecting that.”

The high wage rate in Norway makes the country less competitive, particularly at this time, but there is a consensus “that we need to adapt to a new level if we don’t want to lose out to our trading partners,” Bernhardsen said. “On both sides of the labor market here, there’s an understanding that we need a period of moderate wage growth, otherwise we will just make things worse for ourselves.” Norway also benefits from a very low unemployment rate, which will prove beneficial as unemployment rises going forward.