Analysts and top politicians remain optimistic about Norway’s economic prospects, but a leading US investment bank now warns there’s an 88 percent chance that the country will slide into recession. One local economist agrees, noting that Norway is vulnerable because of its high housing prices, high household debt and rising unemployment.
“If housing prices fall, it will very much deepen the downturn we have now,” Hilde C Bjørnland, professor of economics at the Norwegian Business School BI in Oslo, told newspaper Dagens Næringsliv (DN) on Tuesday.
Her remarks come after the large US investmant bank Goldman Sachs published a new and gloomy analysis of the Norwegian economy, which long has been fueled by the country’s oil and offshore industry but now is hurting from the deep dive in oil prices.
DN reported how Goldman Sachs is nowhere near as optimistic as Prime Minister Erna Solberg and Finance Minister Siv Jensen, who have claimed for months that Norway is not in any crisis. The New York-based investment bank thinks there’s a 50 percent chance Norway’s economic growth will turn negative and an 81- to 88 percent risk that will occur within one and two years respectively.
“High housing prices and a high degree of household debt makes us vulnerable if unemployment rises rapidly,” Bjørnland told DN, adding that the economic fallout will no longer be confined to the areas of Western Norway (mainly the counties of Agder, Rogaland and Hordaland) where there’s the biggest concentration of oil and offshore firms that have been cutting back and laying off workers.
Stock market dive
Warning lights were blinking again on Monday, after the Oslo Stock Exchange fell 4.4 percent on a resumed decline in the price of Norway’s North Sea crude oil. It’s now trading at around USD 33 per barrel, down 75 percent from a year-and-a-half ago. In its comparison to other western countries, Goldman Sachs noted that only Canada (also hit hard by the dive in oil prices) and Switzerland, with its strong currency and trading challenges, come out worse than Norway.
DN noted that Norway, after years of boasting a record strong economy and huge sovereign wealth fund, isn’t accustomed to being so poorly rated. It normally ranks as having among the lowest economic risks of all western countries, but Goldman Sachs’ chief economist Jan Hatzius and his team based their prognosis on a statistical model. Its parameters include recent economic growth, usage of production capacity, stock market developments, real estate prices and debt levels among other factors.
Most Norwegian economists, analysts and politicians have not predicted that the mainland economy (not directly tied to the oil and offshore industry) will shrink, but more like Bjørnland see the possibility. All growth estimates, she notes, have been adjusted downwards in the past few years.
Øystein Dørum, chief economist at Norway’s biggest bank, DNB, also thinks the risk has grown that the Norwegian economy can shrink. “After the oil price fall, it would be strange if Norway didn’t face a higher risk of recession (defined as two consecutive quarters of declining GNP),” Dørum told DN. He notes, though, that Norway is fortunate in that its government authorities can stimulate the economy by using more money in the state budget and lowering interest rates. Norway’s sovereign wealth fund known as the oil fund, where the authorities have stashed oil revenues for years, thus still provides a strong cushion to help ride out a bumpy economic road ahead.