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.