Have oil, and recession

May 20, 2009
Despite Oil Reserves, Norway Slips Into Recession
By MATTHEW SALTMARSH

PARIS — The slowdown in global economic activity has tipped Norway into recession, despite the country’s deep oil reserves and strong budget position.

Gross domestic product for Norway, excluding petroleum-related activity, contracted by 1 percent during the first quarter from the previous period, when it declined by 0.8 percent, Statistics Norway, the country’s data agency, said Tuesday.

It represented the first technical recession — two consecutive quarters of contracting activity — since early 1993. The economy had expanded last year by 2.6 percent and by 6.1 percent in 2007.

Including oil-related activity, the contraction during the first quarter of 2009 was a more moderate 0.4 percent.

Norway has largely homogeneous population of 4.6 million; its economy is small but very open.

During the first quarter, exports fell almost 5 percent from the fourth quarter and imports were down nearly 6 percent. Household consumption declined 0.2 percent, falling for a fourth consecutive quarter, led by a slump in purchases of cars.

Lower production of basic metals and wood and wood products made a strong contribution to the decrease in the overall growth rate, the agency said. Services were also weaker, dragged down by ebbing wholesale and retail activity.

Continued investments in the energy industry have cushioned the impact of the global recession in Norway, which is not a European Union member. The state profits from oil and gas both through taxes imposed on production from its offshore fields and from direct investment in petroleum projects.

But aspects of the global financial crisis are starting to be felt in Norway. Tighter access to loans and higher costs of credit are stalling business investments.

Interest rate increases in 2007 and 2008, amid a significant build-up of personal debt, led to a dampening of household consumption and residential investments, said Kyrre Aamdal, an analyst at DnB NOR, a financial services firm in Oslo.

The central bank, Norges Bank, has since cut its benchmark interest rate to 1.5 percent from a five-and-a-half-year high of 5.75 percent in October, and signaled the rate may fall as low as 1 percent in the second half of this year. Its next decision on rates is due June 17.

The relatively high levels of personal indebtedness make the economy particularly responsive to rate moves, Mr. Aamdal said. That and an expansive fiscal policy should produce an economic bounce next year, with growth of about 1.5 percent, he added.

Last week, the government said it would spend more of its oil wealth this year to help stimulate the economy and create jobs.

The three-party majority coalition government said in a revised 2009 budget presentation that it would increase central government spending of oil revenue by 9.5 billion kroner, or $1.48 billion, to about 130 billion kroner, roughly 15 percent of total government expenditures for 2009.

Overall, the real underlying growth in government expenditure is now expected to be 6.75 percent in 2009, up from the 3.25 percent projection in the original 2009 National Budget.

The government still enjoys a healthy budget surplus and its ledger is entirely free of debt.

It projects a surplus of 237.4 billion kroner to be put aside in its sovereign wealth fund for foreign investment, called the Government Pension Fund Global, which is currently worth more than 2 trillion kroner.

Although Norwegian unemployment is increasing, it is expected by the government to remain comparatively low, at 3.75 percent this year and 4.75 percent in 2010, compared to 2.6 percent in 2008.

The decline in Norwegian growth is still moderate compared to the contractions being experienced among most of its European neighbors.

Last week, Eurostat, the E.U.’s statistical office said G.D.P. declined by 2.5 percent from the previous quarter in both the euro area and the broader E.U. during the first quarter of 2009. In Germany, the largest European economy, gross domestic product plunged 3.8 percent in the first three months of the year from the fourth quarter, when it fell 2.2 percent.