News story | Date: 13/03/2020
The fundamentals of the Norwegian economy are strong, with a dynamic business sector, a well-functioning labour market and resilient banks. A robust economic policy framework provides flexibility, and strong public finances make the government well positioned to support the economy when needed. Furthermore, over the last years the Norwegian economy has become much less dependent on the oil and gas industry than before the drop in oil-prices in 2014.
The Government has today announced immediate measures to avoid unnecessary layoffs and bankruptcies in viable companies from the economic shock of COVID-19, and will in the coming weeks and months monitor the situation closely and act appropriately to respond to the situation as it evolves.
The Norwegian economy is in a strong position
Unemployment is under 4 percent of the labour force and employment is high. Profitability in the corporate sector has been good in recent years, and economic growth has been above trend. The banking sector is sound and the payment system is well-functioning and efficient.
- Mechanisms in the labour market are designed to help in situations with abrupt changes in demand and production. Workers are secured daily unemployment benefits if they are temporarily laid off. This makes companies able to quickly reduce their costs, while at the same time continuing the employment relationship.
- The welfare system provides income security if people become unemployed or sick, and makes sure that everyone has access to health care services.
- A well-functioning banking system and sound regulations ensure that companies and households have access to credit. The Norwegian banks are profitable and resilient, and have a stronger capital base than most European peers. At yearend 2019, Norwegian banks had on average a CET1 capital adequacy ratio of 17.9 percent, while the average leverage ratio was 8 percent. Current mortgage and consumer credit regulations provide banks with flexibility to defer principal repayments of borrowers in the case of illness, temporary layoffs or unemployment.
- The economy and the oil companies are less vulnerable to a lower oil price than just a few years ago. In 2018, only 5 percent of employment was associated to the petroleum sector. The oil companies are now better positioned to handle a low oil price than when the oil price dropped in 2014. The sector has taken substantial cost reductions and efficiency measures, which have lowered the break-even prices for developments on the Norwegian continental shelf.
A robust economic policy framework provides flexibility to respond to economic uncertainty
Norway has ample room for manoeuvre in economic policy.
- The Norwegian sovereign wealth fund (Government Pension Fund Global – GPFG) provides a sizeable fiscal buffer. The Norwegian petroleum wealth has been transformed from natural resource wealth into financial wealth. The GPFG is now around three times the size of Norway’s mainland economy (non-oil economy). The sovereign wealth fund is designed for the long term, but in a way that makes it possible to draw on when required.
- A fiscal policy rule governs how much can be transferred from the fund to the fiscal budget. The rule is prudent, but flexible. The fund and the fiscal rule thus enables the government to provide fiscal stimulus when needed.
- The central bank (Norges Bank) monitors the functioning of the payment system and acts as lender of last resort. At an extraordinary meeting on 12 March, Norges Bank decided to reduce the policy rate by 0.50 percentage point to 1.00 percent. In order to ensure that the policy rate passes through to money market rates, Norges Bank also decided to offer extraordinary three-month F-loans to banks for as long as deemed necessary. The F-loans will be fully allotted. Based on advice from Norges Bank, the Ministry of Finance has today decided to reduce the countercyclical capital buffer for banks from 2.5 to 1 percent.
The authorities are acting appropriately to respond to the situation
It is now necessary to provide measures to mitigate the economic effects of the outbreak of COVID-19. The government is working on measures in three phases. In all three phases, measures should be targeted, effective and reversible.
In phase1, the government has prioritized immediate measures to avoid unnecessary layoffs and bankruptcies in viable companies that face an abrupt fall in income. To that end, the government has today announced the following measures:
- Measures in the health care system to handle the acute crisis. This include securing necessary equipment and personnel.
- Reduce the number of days that employers are obliged to pay salary to workers at temporary lay-offs, from 15 to 2 days. This will be a temporary measure to improve companies’ liquidity and help avoid massive lay-offs.
- Remove the three waiting days between the period when employers have to provide salary to workers in temporary layoffs and the period when the workers are entitled to daily unemployment benefits. This will reduce the loss of income for workers.
- Change corporate tax regulations so that companies that are lossmaking can re-allocate their loss towards previous years’ taxed surplus.
- Change the tax regulations so that owners of lossmaking companies can postpone payments of wealth tax. This will reduce the need for firms to provide dividends to owners to cover the wealth tax.
- Suspend the tax on air passengers for flights in the period from 1 January 2020 until 31 October 2020.
- Suspend payments of aviation charges until 31 June 2020.
- Strengthen support for skills upgrade and in-house training for companies affected by the virus outbreak, through increased grants to the counties.
- Increase allocation to municipalities that will have large excess expenses due to the virus outbreak.
- Make sure that pension rights are not affected negatively for retired health personnel that returns to service in connection with the corona outbreak.
In phase 2, during the coming weeks and months, the government will work on further targeted measures towards sectors and businesses affected by the virus outbreak. The government is prepared to respond quickly with new measures.
Phase 3: If the virus outbreak causes a more extensive economic impact bringing the economy into a more severe downturn, the government will consider broader measures to sustain economic activity.
The government will continue to monitor the situation closely and consider additional measures continuously.