Country Report Norway July 2008

Outlook for 2008-09

• The Economist Intelligence Unit's central forecast is that the "red-green" majority coalition of the Labour Party, the Socialist Left Party (SV) and the Centre Party will hold together, despite differences over key policy areas.
• There is a risk that the SV and Centre Party could leave the government ahead of the September 2009 election if they continue to perform poorly in opinion polls. Labour would then govern as a minority administration.
• Labour stands a reasonable prospect of remaining in government after the 2009 election, most likely in a minority administration, although the chances of a centre-right government have improved since last year.
• Over the next two years public spending on local government, health, education, research and environmental projects will increase as the government channels an increasing amount of oil wealth into the economy.
• With core inflation increasing, there remains a possibility that Norges Bank (the central bank) will opt for one final increase in official interest rates before the peak of the current tightening cycle is reached.
• Norway's economic upswing will moderate in 2008-09. Consumer spending will weaken as a result of higher inflation, higher interest rates and a cooling housing market. High oil prices will continue to support investment spending.

Monthly review

• The minister of petroleum and energy and leader of the Centre Party, Aslaug Haga, resigned in June, following a period of unfavourable press coverage.
• After a period of strikes in the public sector, the Labour Party has dropped to an all-time low in the opinion polls.
• Norges Bank's latest financial stability report states that loan losses remain at a low level. However, the increased risks facing the banking sector are highlighted by a "stress test" modelling the impact of severe economic shock.
• In mid-June Norges Bank raised its main intervention rate (the sight deposit rate) by 25 basis points to 5.75%, the second such increase so far this year.
• As a result of high oil prices, total nominal investment in the oil and gas sector is expected to reach a record high in 2008.
• The current-account surplus rose to 18.5% of GDP in the first quarter of 2008. Goods exports grew by 16.3% year on year, driven by export earnings from crude oil and natural gas.
• The services surplus widened in the first quarter of 2008, while deficits on the income and transfers balances narrowed.