The drag on Norway's economy from lower oil prices is visible in Fitch Ratings' latest GDP growth forecasts, although the effect is partly offset by krone depreciation and more moderate wage rises.
We have reduced our forecasts for real mainland GDP (excluding petroleum production and shipping), which we now expect to grow to 1.5% this year and 2.2% next. This is down from 2.3% and 2.8% at the time of our most recent ratings review in October, reflecting the impact of lower oil prices on Norway's non-oil economy.
As lower prices cause oil investment to fall, so does demand for goods and services from non-oil suppliers. Downward pressure on wages will also spill over from the oil to the non-oil sector. This could dent private consumption, as could uncertainty about economic prospects in general, which may also affect business investment.
We now envisage a slight rise in unemployment to 4% this year and next from 3.4% in 2014 (still low compared with the average for 'AAA' sovereigns of 7.5%).
Oil production and exports will continue to support Norway's external position, but we forecast the current account surplus to fall from 8.5% of GDP in 2014 to 6.3% this year and 5.6% next.
But related developments are partly countering the negative effects. The Norwegian krone has depreciated by around 5.5% against the euro and around 20% against the dollar since oil prices started falling in September. The trade-weighted effective exchange rate has depreciated by around 7%. This will push up non-oil exports and push down unit labour costs relative to Norway's neighbours. Together with more moderate wage increases, this will improve competitiveness and provide some offsetting economic stimulus.
Norway's 'AAA' sovereign rating reflects its strong credit profile, including its resilience to lower oil prices. High commodity dependence is, on its own, a rating weakness. But the country's strong macroeconomic policy framework and business environment, and its recent record of economic stability are rating strengths. They have supported economic diversification of Norway's export base, unlike for some lower-rated sovereign oil exporters.
The sovereign balance sheet is in a strong position to respond to adverse shocks to the economy, as the country's oil revenues have accrued to its Sovereign Wealth Fund.
