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International Monetary Fund. European Dept.
This 2018 Article IV Consultation highlights that Norway is in the midst of a healthy recovery from the oil downturn, supported by positive trends in oil prices and a strengthening labor market. In addition, banks remain profitable and well capitalized. However, household debt continues to increase and house prices have resumed their rise, especially in the Oslo area, after a correction during 2017. Mainland growth is projected to increase from 2 percent in 2017 to 2.5 percent in each 2018 and 2019, underpinned by solid consumption, stronger business investment and an export recovery. Petroleum investment will also pick up. As a result, output will likely start to exceed potential in 2019.
International Monetary Fund. European Dept.
This Selected Issues paper describes wages and competitiveness in Norway. Norway may have to downwardly revise its expectations for wage growth if it is to avoid a significant loss of competitiveness and manage the transition to a less oil-dependent economy. Norway was able to afford very high wage growth in the past (notwithstanding the noted challenges in several sectors) thanks to good fortune in its terms of trade. Going forward, it would be prudent not to count on being fortunate twice: wage moderation would help build resilience in case of less favorable trends in international prices. It would also help facilitate the needed transition out of oil by supporting sectors that did not benefit from past terms of trade gains. Communication from the government can continue to help in managing public expectations. Fiscal policy plays a key role in promoting competitiveness and containing the spending effect of Dutch Disease. After a prolonged expansion of fiscal policy—partly enabled by large valuation gains of the sovereign wealth fund—it is now appropriate to gradually start tightening fiscal policy. The ongoing up-cycle provides an ideal setting to get started on structural consolidation, which will ultimately be needed to face to address aging pressures.
Iacovos Ioannou
Lithuania’s current credit cycle highlights the strong link between housing prices and credit. We explore this relationship in more detail by analyzing the main features of credit, housing price, and output cycles in Baltic and Nordic countries during1995-2017. We find a high degree of synchronization between Lithuania’s credit and housing price cycles. Panel regressions show a strong correlation between a credit upturn and housing price upturn. Moreover, panel VAR suggests that shocks in housing prices, credit, and output within and outside Lithuania strongly impact Lithuania’s credit.
International Monetary Fund. European Dept.
This Selected Issues paper analyzes Norway’s economy that has a maturing oil and gas industry. Norway’s half century of good fortune from its oil and gas wealth may have peaked. Oil and gas production will continue for many decades on current projections, but output and investment have flattened out, and the spillovers from the offshore oil and gas production to the mainland economy may have turned from positive to negative. Thus far, economic policy has needed to focus on managing the windfall, and Norway’s institutions have been a model for other countries. Going forward, the challenges are expected to become more complex.
International Monetary Fund. European Dept.
This Selected Issues paper examines implications of capital account liberalization in Iceland. Capital controls were critical in 2008 to avoid a more severe collapse of the Icelandic economy. Six years later, capital inflows have been liberalized, but most outflows remain restricted. Iceland has used the breathing room to reduce flow and stock vulnerabilities, strengthen institutions, and prepare for the lifting of capital controls. Simulations using the central bank’s Quarterly Macroeconomic Model (QMM) suggest that, compared with the 2008 crisis episode, the economy can better withstand the impact of an abrupt removal of capital controls. However, the outcome would be dependent on a number of factors, including resident depositor behavior.
International Monetary Fund. European Dept.
This Selected Issues Paper on Sweden focuses on macroprudential policies in Sweden. Sweden’s banking system meets most standard measures of financial soundness. However, with its large and wholesale-dependent banking sector, high and increasing household debt, and resurgent house price growth, additional measures are needed to contain mounting financial stability risks. On the supply side, this means continuing to strengthen capital and liquidity requirements. However, theoretical and empirical evidence points to a need to also limit credit demand, including through effective steps to increase the rate of mortgage amortization. Empirical evidence suggests that demand-side measures are effective in curbing household borrowing. There is less evidence on the simultaneous use of these tools—a scenario particularly relevant for Sweden. The model also suggests that higher policy rates will impact both mortgage supply and demand. The main findings are qualitatively unchanged across different sample periods and alternative sign restrictions—for example, about the contemporaneous correlation between the monetary policy shock and output and inflation.
International Monetary Fund. European Dept.
This 2014 Article IV Consultation highlights that Finland’s strong economic record has stalled. The economy has been in recession for three of the last five years, and unemployment is now more than 8 percent, with more people without work for longer. The shortfall in growth, coming at a time when peer economies saw GDP improve and unemployment fall, points to deeper structural problems. Exports suffered from the continued decline of the information and communications technology industry and falling demand for paper and pulp. The outlook is for a slow and fragile recovery, and weaker external demand could easily derail the upswing.
International Monetary Fund. European Dept.
This paper examines 2013 Cluster Consultation—a Nordic Regional IMF staff report. Denmark, Finland, Norway, and Sweden that form the Nordic region share a set of strong economic and social institutions and policies, with emphasis on education, high income equality, high employment, innovative and competitive business environment, etc. The IMF report suggests that strong national financial sector policies and regional cooperation would help mitigate common challenges and shared risks. Cooperative regional policies, such as introducing binding macroprudential minima and clear ex ante burden-sharing arrangements are expected to help limit the costs from any large bank failures.
International Monetary Fund. European Dept.
This Selected Issues paper elaborates findings and discussions of 2013 Cluster Consultation Nordic Regional report. The countries have close economic and financial ties and face some common challenges and shared risks, such as large banking sectors and high household debt. The economic performance of the four continental Nordic economies (Denmark, Finland, Norway, and Sweden—Nordic-4) ranks among the advanced economic development circle. It is analyzed that the large Nordic banking systems support relatively high levels of private sector debt. House price developments in the Nordic-4 pose a risk to broader macroeconomic stability in the context of strained household balance sheets.
International Monetary Fund. European Dept.
This 2013 Article IV Consultation highlights Sweden’s economic growth and policies. Sweden’s economy appears to be slowing together with its main Nordic and European trading partners. The IMF report discusses that there is a scope to improve the fiscal framework, by ensuring it remains sufficiently countercyclical. Given the importance of Swedish banks for the region, improving financial stability in Sweden would also contribute to financial stability across the Nordics, as would additional progress toward cross-border burden-sharing agreements. Structural reforms are also expected to add to resilience and growth.