Norway has a mixed economy structure with government controlling the crucial sectors of the economy. The economy growth is majorly sustained by its natural resources. For a long time, the economy export had been supported by shipping. The key industries in the Norwegian economy are the petroleum and natural gas, food processing, textile, and shipping, among others. Norway’s currency is referred as the Norwegian Krone (NOK). Its current GDP stands at $499.98, and the GDP per capita is 53,293. The paper addresses the macroeconomic elements of the Norwegian economy, by looking into the present economic condition, as well as the future economic growth. The analysis data used in the paper are from the International Monetary Fund.
Norway despite adopting the inflation targets early enough has not successfully achieved its desired long-term inflation targets. The long term inflation target has been moving downward for instance; the expected target rates in the year 2014 was 2.4%, but the records indicated a value below the target that is, the rate of 2.0%. The rationale behind this downward drifting is the fact that the banks need to balance inflation and financial stability goals. The numerical inflation goals like the inflation targeting are vital in avoiding the short-term inflation expectations from interpreting into reduction of long-term expectations. Inflation targets of the flexible nature ease the likelihood conflict of the monetary policy objective and the financial stability. The central bank of the Norway need to maintain the inflation targets after the depressions by making a necessary choice. Such a measure at times is considered to be strict and would mean unstable output and employment. The strict inflation usually targeting has great risk to the financial stability (Dragvik & La Trobe University, 2001).
International Monetary Fund data suggest looming inflationary pressures for the Norwegian economy. The house prices and credit growth increases become strong for some time averaging at around 6% during the 2010-2012. The house prices grew beyond household with a greater increase in the business sector borrowing. The government did not respond quickly, leading to tightening in the labor markets that in turn caused growth in the employment. Labor shortages were experienced in some sector of the economy and a rise in the wage bill shift.
The fiscal policy proved useful in the stabilization of the Norwegian economy during the 2002-2003 downfalls. In the year 2007, the central government set a 4 percent rule to meet the deficiency of the Government Pension Fund Global. Budget review done at the mid of the 2007 recommended the use of the possible opportunities to cut out the deficit. The 2008 budget as well as for the following years targeted a less than 4 percent of the Government Pension Fund-Global in order to alleviate the deficit. The fiscal policies had been perceived to ease the likelihood increase on the real rate of exchange that on average is 0.53%. The 4 percent rule and the fiscal guidelines are instrumental in cutting spending giving the earning the economy a chance take advantage for the Norwegian petroleum wealth.
Balance of payment
According to the International Monetary Fund on World Economic Outlook Database, the balance of payment of Norway as at 2012 stands at $71.716 billion. The part of the balance of payment reflected here is the current account. The balance of payment is reflection of the world account in a country’s national account statistics. The net balance of payment of the country indicates the saving and spending behavior of its citizens. The extent that the savings of a country goes above or below the net capital creation represents the level of a country’s net investment or net borrowing in comparison with the rest of the world. The balance of payment of Norway shows a positive figure which translates to mean that a positive net saving. The implication here is that the Norwegian economy is performing better in the international trade. However, in the year 2013 the International Monetary Fund records suggested a decreasing trend in the balance of payment. The reason behind the weakened balance of payment is attributed to the reduced oil and gas exports. It is also because there is an increase in the present foreign transfers to abroad. Between the year 2012 and 2013, the balance of present foreign transfers and income reduced by NOK 24 billion. Moreover, portfolio domestic investment transactions were 39 percent while the foreign investment was 42 percent. The projections by the International Monetary Fund reveal Norway might face an unfavorable balance of trade in the future.
The International Monetary Fund data depicts that the Norway’s witnessed an increase in its Growth Domestic Product 1980 to 2013. The GDP is equivalent to the sum of expenditures for all the final products and services produce inside a nation in a particular period. The GDP per capita of the Norwegian economy grew quickly as from the year 2001 (Jensen, 2004). Records indicate that the Norwegian GDP per capita in terms of the US dollar double that of the US in 2008 (appendix 1). The rationale for the high GDP per capita is due to relatively small population of the Norway in comparison to that of the US.
Norwegian total government spending as per the International Monetary Fund report reached the highest of 51.6% in 1992 and lowest of 39.64% in 2008. The government spending depicts an increasing trend from 2008 onwards. The lowest government expenditure is as a result of the world financial meltdown in 2008 which was necessary to stabilize the Norwegian economy (Conway, 2006). The International Monetary Fund recommends that some elements that are important for governments pending reforms. One of these elements that are relevant for the Norwegian to adopt is creation of spending control institutions. The action will make sure that there is limitation spending that can curb inflation pressures. Decentralization of spending to sub-national governments should be engaged largely in the delivery of services in order to support in the growth of public sector and enhance efficiency in spending.
The Norwegian economy is one of the free economies in the world. From the year 2000 to 2010 the exports and imports values were greater than 60 percent of countries GDP. Similarly, the exports values to the total foreign trade values range about 60 percent for 2000-10 periods. Despite the variation in the exportation of oil the distribution of government expenditure, consumption and investment have been increasing over the periods.
Consumption and Investment
In 2001/2002 period the Norwegian consumption in the private sector began to go up (Dragvik & La Trobe University, 2001). In fact, records indicate that the Norwegian private consumption went beyond that of the US in 2007. On the onset of the 2008 recession, the Norway acted promptly to reduce its private consumption. The action ensured low levels of unemployment that translated into the previous consumption pattern behavior. The main contributor of the Norwegian Gross Output is the production activities in the mainland. The next key output contributor being the international shipping (shipping industry). Oil became an important export when it was discovered to the extent that it overtook the shipping contribution to the Gross Output in 1979. The off-shore oil industry was estimated to reach about NOK 771 billion due to its quick expansion (appendix 2). The trade balance excess produced by shipping and off-shore oil over the period was a booster to the Norwegian economy.
Foreign Direct Investment
The Norwegian international investment position had been improving from the year 2000 through to 2010. Foreign direct investment increased significantly from $23 billion to $181 billion in that period. The other foreign investment that increased sharply along with the foreign direct investment included loans, positions of cash, bank deposits as well as credits of the commercial banks (Nerdrum, 2011). The foreign direct investment was majorly attracted by the oil and natural gas utilization. The foreign direct investment over the period of the 2000-2010 was averaged at 23.8% per annum. The Norwegian bond market was more open to the international trade and transparent, this explains why a lot of portfolio investments of the foreigners were mostly categorized in bond purchases both the private and public sectors.
The banks’ loan losses effects experience in the Norwegian economy resulted into a sizeable decline in public expenditure. Public investment and consumption declined by 6% in permanent terms. Demand decline resulted to decrease in the employment in the public sector. In a situation without the response of monetary the rate of unemployment rose by about 1.5% in the year 2000(Chu & Schwartz, 2000). Moreover, the changes in the level of unemployment lead to a reduction in the already rising prices of the housing sector. Thus, the decline experienced on the demand produced significant implications on both the total output and inflation. Downfalls on the macroeconomic side especially in the unemployment decrease the expansion of the disposable income as well as the wealth of the households.
Current account analysis
The Norwegian current account remains in excess due to the terms of trade that are favorable. The general current accounts excess increased to 19% of the mainland GDP in the year 2012, showing increased oil demand and lofty oil prices. On the other side, the prices of the non-oil trade balance declined a bit in 2012, a reflection of the dwindling external demand and latest rate of exchange appreciation. On the overall, non-oil exports market has declined in the last two decades, meaning their competitiveness became of concern. The current account balance of the Norway as per the IMF statistics shows an increasing trend between 2009 up to 2012. In 2009 and 2010 the data indicated an 11.9 percent of the GDP, in 2011; it was 13.5% and 14.5% in 2012. This data is a reasonable suggestion that the economy is performing well above the most of the nation in the world.
The Norwegian productivity of labor is regarded as relatively high. The domestic gross productivity per employed individual is rated at 46% that is above the world average in 2001. The employment growth rate in Norway measured at 0.41%. The employment growth rate almost matches the labor market growth rate. The data implies the economy can sustain its labor growth even in the foreseeable future. Due to the Norwegian largest budget surplus the country had no net debt in 2013 meaning that it is able to sustain itself financially. Norway lends funds to the developing countries in the world.
The Norwegian economy is a well managed economy with sound macroeconomic policies. The country enjoys high levels of welfare and social cohesion which are above the international standards. The Norwegian economy strength and good management made sure that the financial system is able and capable to handle the financial crisis well, despite the externally instigated risk. At the duration of the world economic disaster, flexible macroeconomic measures were put in place in order to maintain growth rate using the flexible inflation target and the well organized fiscal structures.
Chu, K., & Schwartz, G. (2000). Output Decline and Government Expenditures in European Transition Economies.
Conway, P. (2006). The International Monetary Fund in a Time of Crisis: A Review of Stanley Fischer's IMF Essays from a Time of Crisis: The International Financial System, Stabilization, and Development. Journal of Economic Literature.
Dragvik, O., & La Trobe University. (2001). The cyclical behavior of macroeconomic variables: The Norwegian experience.
Jensen, N. M. (2004). Crisis, Conditions, and Capital. The Effect of International Monetary Fund Agreements on Foreign Direct Investment Inflows. Journal of Conflict Resolution. Doi: 10.1177/0022002703262860
Nerdrum, L. (2011). The economics of human capital: A theoretical analysis illustrated empirically by Norwegian data. Oslo, Norway: Scandinavian University Press.