The economy is in the fourth year of a long cyclical upturn that has brought down unemployment, without so far rekindling underlying inflation. This reflects in large part the effects of globalisation, which have been more beneficial than in most other OECD countries. Norway has been supplying energy at prices driven up globally by the needs of buoyant emerging economies like China and India, and it has been increasingly importing low-cost consumer goods in return. The resulting terms of trade gains have been large both by international and historical standards.

The development of the petroleum industry and public spending made possible by oil revenues contributed strongly to the rapid growth in the Norwegian economy in the last three decades. But well-functioning institutions seem at least as important to Norway’s performance. Liberalisation of a regulated economy, appropriate specialisation, traditional openness to trade, early adoption and diffusion of high technology despite apparently low innovation, and a good macroeconomic stabilisation framework may also explain this success. Norway’s supply structure has now made it a chief beneficiary of globalisation. Rapidly emerging countries like China are supplying Norway with low-cost consumer goods while raising world prices for Norway’s oil and commodity based products. Moreover, competitive forces in Norway have been strengthened by rising inflows of foreign goods, capital and workers.

Norway has a robust macroeconomic policy framework to manage the potentially destabilising impact of its oil wealth. Nonetheless, emerging macroeconomic imbalances due to the unusually large terms of trade shock may require flexibility in adaption of policy rules. The current strong growth in the real economy and the positive output gap must be seen against the back-drop of sustained low core inflation, reflecting monetary policy trade-offs inherent in the flexible inflation targeting regime. Still, monetary policy is faced with a difficult trade-off, as bringing inflation quickly up towards the inflation target may conflict with stable developments in production and employment.

Prudent management of national resource abundance has been the hallmark of Norwegian public governance and a cornerstone of Norway’s economic success. Norway has rationally decided to exploit finite natural resources in the long term interests of all its citizens and descendants. The more oil money that can be saved now, or else used to improve the foundations for growth, the more easily can fiscal solvency and high growth be secured as the population ages and the pension system matures. Notwithstanding the illusion of a relaxed long run budget constraint, enhanced by the oil price windfall, expansive spending programmes must be resisted and budget room used for pension pre-funding.

In many respects, the Norwegian labour market is in fine form: unemployment is low; participation rates, notably of old-aged workers and women, are above OECD averages; and the labour force is rising. Yet, the labour market faces challenges. Private sector employment has grown modestly over the past 15 years, hours worked per employee are the lowest among OECD countries and the expected retirement age is 7½ years less than the formal age of retirement. Above all, Norway faces one of the highest shares of persons on disability and sickness absence benefits among OECD countries. Tightening eligibility criteria and reducing the generosity of sickness absence and temporary disability schemes seems necessary. For instance, reducing the number of days lost due to sickness absence to the EU average level would boost hours worked in Norway by 3%.

R&D intensity and other standard innovation measures are low in Norway. This presents something of a puzzle. On the one hand, productivity growth has been high, and on the other, Norway has developed a solid institutional framework for innovation support. The main problem seems to lie on the side of firms, who have done very well by adapting existing technologies to boost their productive efficiency, apparently seeing little need to produce innovations of their own on account of high risks and costs. Indeed, industrial structure is characterised by relatively large shares of small firms and low tech industries. The same patterns are reflected in education output, with a dwindling supply of math, science and technology (MST) degrees.