Norway is ready to add stimulus should growth cool further for western Europe’s largest oil exporter as it battles slumping European demand.
“To be faithful now, in a more turbulent situation, the framework of economic policy is vital, I would say, for the Norwegian economy going forward,” Finance Minister Sigbjoern Johnsen said in a June 12 interview in Oslo. “We are vigilant in Norway. We will also try to adapt policy measures should there be any signs of increased challenges to the Norwegian economy, especially coming from the situation in Europe.”
Norway’s $480 billion economy, which emerged as haven as Europe struggled with excessive debt, is starting to feel the pain as the euro-area’s economy contracts for a second year. Unemployment in Norway has risen to the highest since May 2010 as companies grapple with a surging krone and manufacturing labor costs that are almost 70 percent higher than the average in the European Union.
The government last month unveiled its most expansionary budget since the height of the banking crisis in 2009, boosting spending by 19 percent ahead of an election in September. Prime Minister Jens Stoltenberg trails the opposition in the polls, suggesting his Labor Party-led coalition will be ousted after eight years. He faces a Conservative Party-led opposition, which has promised tax cuts and even more spending.
The krone gained 0.33 percent to 7.6536 per euro as of 11:01 a.m. in Oslo.
The government is trying to revive the job market in its battle to retain power. Exporters such as Norsk Hydro ASA (NHY) also have to adjust to a 20 percent gain in the krone since the end of 2008. The krone emerged as a haven currency from the euro area’s turmoil.
“There has been a slight rise in unemployment in Norway, not much,” Johnsen said. “We have seen some businesses hitting trouble in the European market. Of course, with the euro market still shrinking in many areas, that will have an impact on a country that has around 70 percent of all its trade to Europe.”
The nation has mostly withstood the fallout from Europe after funneling its oil revenue into a $730 billion sovereign wealth fund, the world’s biggest. Survey unemployment was 3.7 percent in March. While that’s still far below the record 12.2 percent rate in the 17-nation euro area, it’s the highest in Norway since May 2010.
Norges Bank has kept its benchmark deposit rate unchanged at 1.5 percent since March to prevent policy from deviating too far from measures elsewhere. The krone strengthened to a record Feb. 13 on a trade-weighted basis, closing at 84.30. It’s up 3 percent from last year’s low.
A strong krone has helped keep inflation below the central bank’s 2.5 percent target since mid-2009. Headline consumer prices rose 2 percent in May and underlying inflation was 1.4 percent.
The mainland economy, which excludes income from oil and shipping industries, will grow 2.4 percent this year and 3 percent next year, down from 3.5 percent in 2012, Statistics Norway forecast on May 30. Mainland exports are estimated to be unchanged in 2013 after rising 2.6 percent last year.
The 62-year-old Johnsen reiterated his commitment to a fiscal rule of limiting oil spending to at most 4 percent of the wealth fund and urged caution to the opposition ahead of September’s election to avoid overheating the economy.
On a visit to Norway last month, the International Monetary Fund warned that excessive spending is imperiling the economy as record oil investments push up labor costs and harm competitiveness. Western Europe’s largest crude producer has struggled to stop property prices and credit growth accelerating from all-time highs as record-low global rates drag down borrowing costs in Europe’s second-richest nation per capita.
“In 10 years’ time, it’s important that we have strengthened mainland Norway in order to protect production capacity and the tax base,” Johnsen said. “We have challenges when it comes to competition in and it’s very important that we address this today. Production must also rise and it’s not written in the stars that Norway forever should have a very positive balance with the surrounding countries.”
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