Norway’s export industry is buckling under the weight of the country’s wealth.
Prime Minister Erna Solberg says Scandinavia’s richest nation now needs to rein in budget spending to stop eroding trade competitiveness.
“As long as competitiveness is a problem for Norwegian businesses, it’s important not to use too much money over the budget,” she said yesterday in an interview after a press conference north of Oslo.
Backed by an $850 billion sovereign wealth fund, Norway is struggling to spur growth as wages that far exceed the European average hold back the economy. That’s killing jobs in a nation that has been accustomed to having one of Europe’s lowest unemployment rates. The proportion of people in the labor force without work will rise to 3.75 percent in 2015, Solberg’s government said yesterday. The rate was 3.5 percent in December, the latest survey from the Norwegian Labor Force shows.
Manufacturing wages in Western Europe’s biggest oil and gas producer are the highest among 33 countries surveyed by the U.S. Labor Department. At an average of about $64.15 an hour, Norwegian industrial workers earn 35 percent more than their counterparts in Germany and 80 percent more than the U.S.
Norway’s companies, including aluminum producer Norsk Hydro ASA, have blamed the strong krone, whose appreciation during Europe’s debt crisis added to the cost of the country’s exports. High costs are even driving smaller companies out of Norway as family-owned Stokke AS, which manufactures the popular Tripp Trapp highchair for children, last year agreed to be sold to a South Korean investment company.
The central bank has fought currency appreciation since 2011, when investors fleeing Europe’s debt crisis turned to AAA-rated Norway. The bank cut rates in 2011 and 2012, driving down the exchange rate in an effort to bring inflation to its 2.5 percent target.
In June last year, it again signaled readiness to cut rates. Then in December, the bank left its benchmark rate at 1.5 percent and pushed back tightening plans by a year to mid-2015.
Too large an increase in wages could affect interest rates, Norges Bank Governor Oeystein Olsen said in an interview in Oslo today.
“There is a relationship between the level of wage growth and what happens in the economy in the short to medium term,” he said. Olsen declined to comment on existing pay talks.
The krone’s depreciation since the end of 2012 helped cushion a slowdown in the economy last year. In 2013, the mainland economy, which excludes oil, gas and shipping revenue, expanded 2 percent, slowing from 3.4 percent in 2012.
Harald Magnus Andreassen, chief economist at Swedbank AB, said Norway’s manufacturing industry doesn’t need tax cuts.
“The fact on the ground is that manufacturing industries have no specific reason to complain about their performance,” he said by phone from Oslo today. “Norwegian exports, excluding oil and gas, have been developing pretty well compared to what we have seen in other countries.”
Next year’s budget “will probably see more oil money used,” Finance Minister Siv Jensen said in an interview on Norwegian broadcaster NRK yesterday.
Still, both the government and central bank have warned exporters not to rely on a weak exchange rate to help them boost competitiveness.
“It’s very difficult, six months before the budget will be proposed, to know how the currency” will perform, Solberg said. “It’s important for us now to be conservative in our view.”
Though the krone has weakened 11 percent against the euro in the last year, it is still 27 percent overvalued according to a purchasing power index by the Organization for Economic Cooperation and Development.
“It’s important that we shift spending more toward investing in growth-promoting tax cuts, infrastructure, research, education and so on,” Jensen told reporters yesterday. “There’s still a good outlook for the Norwegian economy, but ever since we took power we’ve identified challenges, namely the dark, more long-term cloud hanging over the economy.”