Tue, Oct 6, 2009
By Kristin Halvorsen, Minister of Finance, Norway
No country integrated into the global economy is left unaffected by the financial crisis. Norway is therefore no exception. However, compared to many countries, I would say Norway has managed relatively well. In the fourth quarter of 2008 and the first quarter of 2009 we did experience negative GDP growth, but growth picked up slightly again in the second quarter. Unemployment has risen far less than in most other countries, and the unemployment rate is currently just above 3%. The turmoil in the international financial markets did spread quickly to Norway, but Norwegian banks are solid and have so far incurred only moderate losses.
Looking forward, growth is expected to increase further and gradually maintain this trend in the course of 2010. Unemployment will continue to rise, but probably peak well below 4%.
The foundation for this development lies in a sound policy framework and a prudent and long term oriented economic policy over several years. The large revenues from our petroleum resources in the North Sea have not been a sleeping pillow leading to lower productivity and growth. Another challenge is to transform this fluctuating revenue stream into welfare gains for both current and future generations. To meet this challenge, we put aside the revenues from the petroleum sector in a resource fund, named the Pension Fund – Global. This Fund is invested in financial assets abroad, and we only spend the expected real return from the Fund over the annual budgets. This framework contributes to stabilizing the Norwegian economy. It also ensures that future generations take part in the petroleum wealth.
The Norwegian authorities have, as have the authorities in most countries, introduced a range of measures to dampen the effects of the global recession:
- Norges Bank has reduced the key policy rate by 4.5 percentage points, to 1.25%, since October 2008. Since most Norwegian mortgages have floating interest rates, these moves have a large and immediate impact on household demand.
- The Government has adopted the most ambitious fiscal policy measures in more than 30 years. The use of petroleum revenues, as measured by the structural, non-oil budget deficit, is estimated to be NOK 130 billion. This is equivalent to a demand impulse of 3% of GDP for Mainland Norway, which is also strong when compared with other countries.
- Furthermore, extensive measures to stabilise the financial markets have been established, both by the Government and Norges Bank. These arrangements improve Norwegian banks’ access to liquidity and long-term funding, and they strengthen individual banks and improve their ability to uphold lending activity to households and businesses.
Norway experienced a severe banking crisis in the early 1990s, which I believe is still vividly remembered by regulators and by many bankers. As share capital was written down (even as far down as zero) before the government recapitalised the banks involved, the banking sector learned the true cost of imprudent risk taking and insufficient credit evaluations. Also legislators and supervisory authorities learned valuable lessons from the crisis, especially with respect to crisis management and the necessity of adequate capital requirements. The crisis in the early 90s made us better prepared to meet the challenges of the current crises.
The fact that the petroleum market has remained rather stable during the last 12 months, despite the downturn of the world economy, has of course been an important contribution in stabilizing the mainland economy. High activity on the Norwegian continental shelf leads to significant demands of both capital and intermediate goods from manufacturers on the mainland. Petroleum investments are expected to remain high next year. Moreover, the production of consumer goods relative to total output is small compared to countries like Sweden and Germany, which have been much harder hit by the drop in global demand than Norway. Whilst manufacturing production in the euro area was down more than 20% in the first four months of 2009 compared to the same period in 2008, the decline in Norway was a mere 6%.
Norway’s relatively large public sector also helps to stabilise the economy in turbulent times. The public sector employs one third of the labour force in Norway. These jobs are not directly threatened by the crisis. The fact that pensions, health care and education are provided by the government, ensures that the supply of these services is protected from the market turmoil.
So, is the crisis over? I am afraid we can’t be sure of that. Risks remain high, both regarding the financial markets and economic development. The comprehensive measures from the authorities worldwide have, however, significantly reduced the risk of getting into a negative spiral where the financial markets have a negative impact on economic development and vice versa. The Norwegian Government put the emphasis on contributing with our experiences in order to work out a sound framework for the financial markets internationally, so that they can underpin a prosperous and sustainable development for the world economy in the years to come.