China Slowdown Seen Worst for Norway as Oil Key to Growth

Norway’s reliance on oil means it faces a bigger risk than most other countries from a slowing expansion in China, according to Hilde Bjoernland, an economics professor at the BI Norwegian Business School.

“If China is in a bubble, that would be bad for everyone but even worse for the Norwegian economy because reduced demand from China would bring down oil prices,” Bjoernland said in an interview in Oslo this week.

Prime Minister Erna Solberg this week warned that Scandinavia’s richest nation may face a “hard landing” unless it’s able to wean its economy off a reliance on oil and bring down production costs. The country has used its oil wealth, which it has funneled into an $850 billion sovereign wealth fund, to shield itself from waves of recessions in Europe.

China, the world’s second-largest oil consumer, is speeding up construction projects and other measures to support economic growth after a slowdown in industrial output and investment raised risks of missing an expansion target for the year. The government this month left its 2014 growth goal unchanged from last year at 7.5 percent, after expansion of 7.7 percent in 2012 and 2013.

Data released this month showed fixed-asset investment in China expanded at the slowest January-February pace since 2001 and retail sales posted the weakest gains for that period since 2004. Industrial production rose 8.6 percent from a year earlier, compared with the 9.5 percent median estimate of economists.

Stocks Drop

China’s CSI 300 Index of stocks fell to the lowest level in five years yesterday, while Chinese stocks in Hong Kong entered a bear market after the yuan weakened and Goldman Sachs Group Inc. reduced its economic growth forecasts.

Bjoernland’s research shows that 40 percent of the increase in oil prices over the last 15 years is due to growth in emerging markets, especially Asia. A depreciation in the Norwegian krone spurred by a slowdown in China could provide some relief although it would be a “temporary fix,” she said.

“The main spill-overs from the oil sector to the mainland economy the last few years haven’t come through discoveries or productivity gains in oil and gas, but through higher oil prices,” she said. “That has made some of the economy less competitive.”

Record Debt

A rise in oil prices and oil activity together explain 35 percent of the growth in Norway’s mainland economy, according to a study by Bjoernland and Leif Anders Thorsrud, a Ph.D. student at the Norwegian Business School.

Statistics Norway last week cut growth forecasts in the mainland economy, which excludes oil and gas, through 2016 as oil investments fall and record consumer debt weighs on households. Norwegian wages that far exceed the European average are also holding back the economy. The average salary in Norway is 60 percent higher than the in the euro-area.

Norway’s central bank Governor Oeystein Olsen last month rejected industry warnings that oil at about $100 a barrel is too cheap to support growth even as Statoil ASA, the country’s biggest crude producer cut its planned investments by 8 percent, citing stagnant crude prices.

Brent crude, the North Sea benchmark, has slid about 12 percent to $106 a barrel from a high in 2011.

“There are substantial spill-overs from oil price fluctuation to how the government spends their resources,” Bjoernland said. “They are also vulnerable to oil price falls.”

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