Mainland GDP is projected to grow by 1.8% in 2025 and 2.0% in 2026, increasingly driven by private sector activity. Higher household disposable income and lower debt servicing costs will push up private consumption. Non-oil investment will recover while interest rates decrease. Petroleum activity will gradually weaken. Inflation has fallen sharply since early 2024 but is now set to decline more slowly, held up by the recent exchange rate depreciation and cost pressures.

The central bank is projected to start cutting the policy rate in early 2025 but to keep a restrictive stance over the projection period as inflation will remain above the 2% target. Fiscal policy is set to be expansionary in 2025 but needs to turn restrictive, while making space for priority spending needs. Policies to reduce skills mismatch would help fill job vacancies more easily, alleviating wage pressures, and boost productivity growth. As the cost of reducing carbon emissions in Norway is very high, the green transition should be accelerated by prioritising lower-cost policies.

Mainland GDP growth has strengthened somewhat since early 2024, owing in part to government expenditure. Petroleum activity, while volatile, has remained buoyant over the same period. High inflation and large debt servicing costs have weighed on household consumption. Due to high interest rates, housing investment has contracted since early 2023, while business investment growth excluding the offshore sector has remained weak. Headline inflation declined from 4.7% at the beginning of 2024 to 2.6% in October, driven by lower energy prices. Over the same period, core inflation declined from 5.3% to 2.7% as the strong impulse from import prices subsided. With inflation and interest rates having peaked, business confidence and industrial production have improved, and surveys point to higher household demand in the coming months.

The spring wage negotiation outcome points to a 5.2% increase in nominal wages in 2024, exceeding projected inflation for the first time in three years. Strong wage growth is expected to continue in the coming years, offset only partly by productivity growth. Since the pandemic, labour shortages have become acute. Though declining, the vacancy rate remains high. Services prices, in particular rents, continue to increase strongly. The recent currency depreciation will also push up inflation in the near term.

The fiscal policy stance will be expansionary in 2025, as the structural non-oil budget deficit will worsen by 0.6 percentage points to 11% of mainland GDP in 2025, according to government estimates. This reflects, among others, an increase in defence spending, which is to reach 2.2% of GDP in 2025. It also reflects an income tax cut targeted at low-income households. The broad energy support to households should have been wound down at the end of 2024 as scheduled, but was extended into 2025 in the new Budget. The rapid rise in the value of the government’s oil fund, which determines the threshold of the structural deficit, has considerably expanded fiscal space in recent years. However, transfers from the oil fund are expected to decline in the medium term, calling for fiscal prudence. The OECD projections assume some fiscal consolidation efforts in 2026. As inflationary pressure persists, the central bank is projected to start cutting the policy interest rate only in early 2025. The policy rate is assumed to come down to 3¼ per cent in 2026.

Mainland GDP growth will regain momentum. Real wage growth is now positive, which will drive up household consumption. Interest rate declines will sustain non-oil investment. Mainland exports will benefit from the recent currency depreciation. Global oil prices could rise substantially due to geopolitical conflicts, boosting Norway’s petroleum revenues. Debt service costs may rise fast if lending requirements are eased, which could lead to a deterioration in loan quality and threaten financial stability. In this respect, the temporary lending regulations introduced to mitigate the build-up of household sector vulnerabilities, which are currently set to expire by the end of 2024, should be extended into 2025.

Labour shortages are acute, particularly in high-tech sectors and health care. This is expected to continue as the digital and green transitions plus population ageing will further push up demand for qualified workers. The rising unemployment of low-skilled youth, many of whom end up in the disability benefit scheme, is of concern. The government should step up reforms to secondary and tertiary education and strengthen vocational education and training and adult learning. The Agreement for a More Inclusive Working Life 2019-24 seeks to prevent transitions to disability benefits via training, but could better reflect labour market needs. In addition, reducing sick-leave compensation and strengthening eligibility conditions would enhance work incentives, while contributing to fiscal consolidation.