In his annual speech on the economic perspectives for the new year, the Governor of the Norwegian Central Bank (Norges Bank), Øystein Olsen said the economic picture for Norway may be changing.
- We cannot assume that Norway's terms of trade will continue to improve. Investment in the petroleum sector is levelling off. Output growth in the mainland economy has slackened, Olsen said, and continued:
- When activity in the petroleum sector eventually declines, there will also be a need for economic restructuring in Norway. The business sector will have to seek new markets where competition may be intense. Restructuring may prove particularly demanding given Norway's high cost level.
Although restructuring will be a gradual process and may lie some years ahead, Norway may find that sustaining growth and keeping unemployment low in the coming years might become a challenge more on a par with that facing other economies today.
In order to prevent deflation and recession, the central banks of major advanced countries have implemented extraordinary measures to keep both short- and long-term interest rates low. The medicine has worked.
The key policy rate is also low in Norway. Our inflation target is slightly higher than that of other European countries. As a result, inflation and nominal interest rates in Norway will also be slightly higher. But prospects for a persistently low interest rate level internationally will inevitably also have consequences for Norway. The real interest rate in a small open economy such as ours cannot in the long run differ substantially from that of our closest trading partners. Given the prevailing long-term interest rates abroad, it will likely take a number of years for interest rates in Norway to move up towards a level that was previously considered to be normal.
We cannot expect the strong growth in national income we have seen in recent years to continue. Norway is not immune to shifting circumstances and external shocks. Steering the course through stormy weather will be testing, but we have an optimal starting point. The beneficial tailwinds have been put to good use and Norway is in a solid position to tackle challenges when the winds shift.
In his cocnlusion, Bank Governor Olsen said: - The Constitution is the foundation of modern Norway. This year's bicentenary of the Norwegian Constitution is an occasion to remember the importance of good institutions that have clearly defined roles. This is essential for stability and progress. Come what may.