Scandinavia’s Richest Economy Stumbles as Euro Area Rebounds

Norway, western Europe’s biggest oil and gas producer and home to a $760 billion wealth fund, is struggling to spur demand just as the rest of Europe surfaces from half a decade of economic pain.

According to DNB ASA, the country’s biggest bank, Norway will be the only European nation of the 15 it tracks whose economic growth won’t accelerate next year. The biggest drag comes from consumers, who have hesitated to spend as house price gains peter out and private debt mounts.

Norway, once a haven from Europe’s debt turmoil, is failing to keep pace with recoveries in other developed markets. The $480 billion economy grew just 0.2 percent in the second quarter, less than a third the pace forecast in a Bloomberg survey. The news drove the krone down as much as 1.5 percent against the euro, with the losses continuing through yesterday.

“Growth in 2013 could be below trend,” Finance Minister Sigbjoern Johnsen said yesterday in an interview in Oslo. “It’s too early to fix a figure.”

Signs of an economic slowdown come as the Labor-led government of Prime Minister Jens Stoltenberg trails in the polls against an opposition that’s promised tax cuts. Both sides

have made pledges that draw on the nation’s sovereign wealth fund, the world’s biggest. Norwegians vote on Sept. 9.

Growth Enabling

The Conservative-led opposition, which includes the Progress Party, would get 97 seats in parliament, versus 70 for the government, according to an Aug. 19 poll by TNS Gallup.

The debate has hinged on how best to spend the nation’s oil wealth and whether to keep a fiscal rule that limits government spending to 4 percent of the oil fund. The Conservatives favor the rule, which was drawn up by Labor, while the Progress Party is advocating domestic asset purchases.

“To improve the economic growth of Norway we need to turn the fiscal expenditure toward growth-enabling investments,” Jan Tore Sanner, finance spokesman for the Conservatives Party, said yesterday in an e-mailed response to questions. The Conservatives “will prioritize education, research, infrastructure and tax relief,” he said.

Growth, excluding offshore income, will slow to 2 percent this year from 3.4 percent in 2012, DNB estimates. The growth rate won’t pick up until 2016, when it will reach 2.1 percent, according to the bank. Sweden, Germany and the U.S. will all grow faster than Norway in 2014, DNB predicts.

2004 Low

The Norwegian krone dropped 0.9 percent against Sweden’s krona today to its lowest since March 2004. Norway’s currency has lost more than 8 percent against its Swedish counterpart this year. It’s down 9.5 percent against the euro in the period.

Still, Stoltenberg yesterday indicated the government would limit spending of oil money next year. He said in an interview with Dagens Naeringsliv that spending will be 50 billion kroner ($8.2 billion) below the 4 percent fiscal policy rule next year and on level with this year.

“Slower economic growth will lead to higher unemployment and to slower wage growth,” DNB economists Kjersti Haugland and Kyrre Aamdal said in a report this week. “Housing prices have shown a weaker tendency recently.”

The property market is stagnating as the central bank estimates household debt burdens will reach a record 200 percent of disposable incomes this year. Banks such as DNB have also raised mortgage rates to cope with stricter capital standards.

Conservative leader Erna Solberg earlier this month said the country should remove the lending limits for its mortgage industry to further support the housing market.

House Prices

While central bank rates have stayed on hold since March 2011, higher mortgage rates this year are cooling the housing market. House prices slid a seasonally adjusted 1.2 percent in July, trimming the annual increase to 3.9 percent from 8.5 percent at the start of the year, according to data from the Norwegian Real Estate Agents Association.

DNB said in its report that it foresees a 2.5 percent decline in home price in 2015 to 2016.

“A larger decline in prices will be prevented in part by a stagnation in housing construction over the same period,” Haugland and Aamdal said.

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