There is no guarantee that Norway’s terms of trade will continue to improve, according to the governor of the Norwegian Central Bank, Øystein Olsen, who recently warned that investment in the petroleum sector is levelling off and output growth in the mainland economy has slackened.
“When activity in the petroleum sector eventually declines, there will also be a need for economic restructuring in Norway,” Olsen said last week in his annual speech on the country’s economic perspectives for the new year. “The business sector will have to seek new markets where competition may be intense.”
This is why restructuring may become necessary in the future, according to Olsen. “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,” he said, explaining that the central banks of other advanced economies have already implemented extraordinary measures to keep both short- and long-term interest rates low.
“The medicine has worked,” said Olsen. “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,” he added. “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.” Olsen also warned that the strong growth in Norway’s national income over the past couple of years should not be expected to continue. He explained that 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,” he said. “The beneficial tailwinds have been put to good use and Norway is in a solid position to tackle challenges when the winds shift.”