Preventing a new crisis

18 March 2016 14:34

Preventing a new crisis

"The institutions we have built up in Norway since the 1980s are preventing a new crisis," says Øystein Thøgersen

Oil prices have fallen by 70 percent since summer 2014 to a level we have not seen for 12 years. Many people think oil prices will never return to their former levels, but will remain relatively low for the foreseeable future.

Is the Norwegian economy going to take a nosedive? we ask Øystein Thøgersen, professor of economics at Norwegian School of Economics (NHH).

Robust institutions

"We are seeing a significant impact of the low oil prices on the Norwegian economy, with a decline in investments and employment. At the same time, we are also seeing the importance of having a number of robust institutions, now that the price of our main product has plummeted," says Thøgersen

The sum total of a floating exchange rate, a wage settlement adapted to the current situation, the fiscal rule and the Oil Fund means that we will not end up in the same situation as in the 1980s.

The fiscal rule and the Oil Fund in particular are important now. Without these two institutions, we would really be facing a crisis, he says.

Current oil revenues

"Other countries that have a lot of oil and gas tend to spend much of the current oil revenues directly via the state budget. This means they must make major cuts when the oil price falls. To take an extreme example, if we were in the same situation as Russia in terms of lack of fund institutions, we would be having to make cuts of between NOK 50 and 100 billion in the state budget now," says Thøgersen.

This would have been very difficult politically, adds the economist.

Instead, Norway can maintain its current budget level, and even spend more for a while, if necessary.

Regional impact

Thøgersen is fascinated by how regionally limited the impact of the drop in the oil price has been so far. Stavanger and Sandnes have been particularly hard hit, while the rest of the country has yet to feel the impact.

"It is remarkable how weak the repercussions elsewhere in the country have been. This is because of the economic shock absorbers, which are helping soften the blow. The low oil price combined with low interest rates have resulted in an unusually weak Norwegian krone – so weak in fact that it actually makes a real difference to the competitiveness of Norwegian industry," he said.

Was Norway not such an oil-dependent nation after all? It most certainly was – demand from the oil sector to the mainland economy has pulled salaries up across the board. This has resulted in elements of the Dutch disease, such as a large service sector and oil-inflated wage growth in sheltered sectors.

The export industry

The export sectors have had a harder time, and many have switched to serving the profitable oil sector instead. In this way, the export industry has become more exposed to fluctuations in the oil industry. Thus far, however, the impact has been regional.

"Consequences will probably start to be felt more in the mainland economy with the passing of time, but at present it is striking that the effects have not spread more," says Thøgersen.

In several areas, the current situation resembles the situation in the 1980s. Oil prices had fallen sharply, households had borrowed heavily, and house prices were high. But there are also many differences. Back in the '80s, we raised the interest rates, and fiscal policy was tightened, in response to the recession. The general expectation is that things will go much better this time, because Norway has a more robust economic policy with a good division of roles.

"In the 1980s we tended to spend the oil revenues as they came in, and therefore had to tighten the budget as the country headed into a recession. This reinforced the downturn. In addition, monetary policy was primarily aimed at stabilising the exchange rate and did not take economic fluctuations into account. This resulted in Norges Bank raising interest rates at a time of considerable weakness in the economy," Thøgersen explains.

Important to surprise

The monetary policy at the time, with its frequent devaluations, lacked anchoring with key players such as the Norwegian Confederation of Trade Unions (LO) and the Confederation of Norwegian Enterprise (NHO). The element of surprise was considered important, both in monetary policy and fiscal policy, making it difficult to form reasonable assumptions about wage growth and purchasing power.

Finally, inflation was high and variable even before the crisis, which is never a good starting point.

"The lesson we learned was that our economic policy was not robust in the face of uncertainty in the oil price."

Continued positive growth

After the crisis, we implemented reforms and slowly but surely built up institutions to safeguard against this uncertainty. For example, we realised that not having an anchored monetary policy was an exceptionally bad idea, says Thøgersen.

Since then Norway has introduced the fiscal rule and established the Oil Fund. Today, interest rates are record low and will probably not be raised any time soon. The banks are more robust, and fiscal policy will not be tightened.

"The expectations going forwards suggest lower, but still positive, growth. This is not bad for an oil-based economy facing such a major fall in prices," concludes Thøgersen.


The NHH economist thinks the oil sector will remain a very important part of the Norwegian economy and that oil prices will rise slightly again as investments are shelved and supply diminishes.

But the golden era of Norway as an oil nation is behind us now, in his opinion. For this reason, it is important that we restructure the economy.

How good we are at restructuring will manifest itself in the unemployment figures. All else being equal, the NHH professor believes that unemployment will remain stable at a slightly higher level than we are used to as a result of a permanent restructuring.

Wage negotiations

Once again, Thøgersen credits well-functioning institutions, this time the central wage negotiations, for the positive development.

"The last two years' wage settlements have worked incredibly well, with prompt downwards adjustments as soon as the oil price started falling. It was actually quite impressive. This acts as a buffer for the impact on the labour market and unemployment," Thøgersen explains.

Going forwards, it will be tempting to offer targeted assistance, especially to regions that are struggling. Thøgersen hopes this will be done in a way that does not undermine the restructuring of the economy, but rather promotes new growth.

This may be somewhat demanding politically, as it is crucial not to be too "soft", he says.

"In this process there will be winners and losers, some companies will disappear, and some people will have to lose their jobs. That is simply the way it is. When the economy is changing, we must support the new, rather than trying to preserve the old," says Thøgersen.

This article was written by Bendik Støren and was first published in NHH Bulletin nr. 1 2016.

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