Oslo: Norway faces a challenging global environment from a position of strength. Sound institutions and prudent management of petroleum wealth have delivered high living standards and substantial fiscal and external buffers. Notwithstanding geopolitical tensions and trade fragmentation, the Norwegian economy is resilient, with mainland growth expected to stay close to potential in 2026. However, heightened uncertainty, persistent above-target inflation, and elevated macrofinancial vulnerabilities leave little room for policy miscalibration. The immediate priority is to restore price stability without unduly weakening economic activity or financial stability. This requires keeping monetary policy restrictive, shifting fiscal policy to a neutral stance, and containing financial sector risks. Over the medium term, population aging, weak productivity growth, a tightening electricity balance, and maturing petroleum activity will weigh on growth and fiscal sustainability. Reforms to boost labor supply and productivity, including by harnessing artificial intelligence (AI), will be essential to strengthen resilience and secure prosperity in a rapidly changing world.
RECENT DEVELOPMENTS, OUTLOOK, AND RISKS
Economic activity has remained resilient despite heightened global uncertainty. Following growth of 1.7 percent in 2025, mainland real GDP showed renewed momentum through 2026H1 (rising 0.1 percent in Q1 and 0.3 percent in Q2). Real income gains, strong employment, and public spending supported activity, while more restrictive monetary conditions weighed on interest-sensitive sectors, particularly construction. Capacity utilization remains close to normal, while employment has remained strong and registered unemployment low at around 2 percent. Inflation has declined from its peak but remains above target, as strong wage growth and persistent services and rent inflation continue to generate domestic price pressures. Higher energy prices associated with the war in the Middle East have supported exports and fiscal revenues, but with petroleum production near capacity, spillovers to mainland activity have been limited, and second-round effects on inflation have been muted thus far, in part due to government support measures. The positive terms-of-trade shock has contributed to a strengthening of the krone.
Mainland growth in 2026 is expected to remain close to potential—at 1½ percent—with inflation declining to target only gradually. Real income gains and a still-strong labor market should continue to support household demand, but restrictive monetary conditions will weigh on interest-sensitive activity. Petroleum investment is also expected to level off, reducing an important source of recent domestic demand. Inflation is expected to remain around 3 percent by end-2026 as domestic cost pressures ease only slowly, before returning to target—2 percent—by end-2028, conditional on an appropriately restrictive monetary stance, moderating wage growth, easing import price pressures, and a broadly neutral fiscal stance.
Risks are tilted toward weaker growth and more persistent inflation. Intensified geopolitical tensions, energy price pressures, trade fragmentation, or tighter global financial conditions could weaken external demand, raise costs, and tighten domestic financing conditions. A global risk-off episode could lower the market value of the Government Pension Fund Global (GPFG) and may require fiscal adjustment, and, through higher risk premiums and broader market stress, tighten financial conditions. Domestically, persistent wage growth could slow disinflation. Higher interest rates could exacerbate vulnerabilities arising from elevated household debt and real estate, further weighing on growth. Possible cyber incidents pose a material tail risk given Norway’s highly digitalized economy and financial system. On the upside, faster AI-related productivity gains or a quicker-than-expected easing of geopolitical and trade pressures could lift potential growth and accelerate disinflation.
ECONOMIC POLICIES
Monetary Policy
Monetary policy should remain restrictive until inflation is durably on track to return to target. With inflation above target and domestic cost pressures elevated, a restrictive stance should be maintained until there is clear and broad-based evidence that underlying inflation is easing sustainably. Policy decisions should remain data dependent, and rates may need to stay higher for longer if inflation expectations become less anchored, wage growth and second-round energy price effects prove stronger than expected, or fiscal policy remains accommodative. Conversely, broad-based evidence of faster disinflation would allow for a less restrictive stance.
Amid heightened global uncertainty, clear communication will reinforce the effectiveness of Norway’s well-functioning monetary policy framework. Recent improvements in Norges Bank’s communications, including publication of policy deliberations, are welcome. Given the uncertain environment, communication should continue to emphasize the conditional nature of the projected rate path and identify key developments that could warrant a different response. Sharpening the discussion of policy trade-offs, including through systematic use of quantitative scenario analysis, would further strengthen transparency and help clarify the central bank’s reaction function. Norway’s monetary policy framework has served the country well; the ongoing review of monetary policy regulation should preserve the primacy of price stability and central bank operational independence.
Fiscal Policy
Fiscal policy should shift toward a neutral stance to support disinflation. The 2026 Revised National Budget maintains an expansionary fiscal stance, with an estimated fiscal impulse of 0.9 percent of mainland trend GDP. The structural non-oil deficit continues to rise at 12.6 percent of trend mainland GDP, with GPFG withdrawals financing about a fourth of expenditures. With limited economic slack and inflation still above target, fiscal policy remains accommodative and, alongside the lagged effects of earlier support measures, continues to support domestic demand. Given current cyclical conditions, the 2027 budget should move to a neutral stance, to reduce the burden on monetary policy, and the likelihood that interest rates will need to be kept higher for longer. This can be operationalized by preserving room for priority spending through reprioritization and efficiency gains, offsetting new recurrent commitments and spending slippages, saving revenue overperformance or undershooting of spending, and better targeting broad-based support measures. Household electricity support, including Norgespris, should be reassessed. While these support schemes have shielded households from price volatility, they weaken price signals to conserve and invest in efficiency or new clean energy capacity, are regressive, and expose the budget to potentially large costs. Support should preserve price signals and be targeted to vulnerable households. Similarly, the broad-based fuel and CO2 tax suspensions should not be renewed or reintroduced.
The GPFG withdrawal guideline has supported the oil fund’s long-term sustainability, but compliance alone does not ensure that fiscal policy is cyclically appropriate or well-aligned with structural priorities. GPFG valuation gains should not be treated as durable fiscal space, given their volatility and current risks around global equity valuations. Relying on such gains risks embedding fresh recurrent spending, amplifying procyclicality, and forcing sharp adjustments if valuations reverse. In addition, compliance with the guideline by itself does not ensure that tax and spending choices support labor supply, efficient resource allocation, and productivity. A broader medium-term fiscal framework, incorporating multi-year expenditure paths and systematic spending reviews, would help contain procyclicality and spending drift and preserve room for spending pressures from aging, defense, welfare, infrastructure, and climate adaptation.
Tax reform should aim to make the system more coherent, predictable, and growth-friendly. Priorities include broadening the tax base, simplifying the tax system (including rationalizing VAT exemptions and preferential rates), increasing recurrent property taxation, and reducing distortions in capital taxation. A lower wealth tax, applied more neutrally across assets, should be paired with better-designed capital gains taxation to preserve revenue and progressivity. At the same time, corporate and personal income tax reforms should maintain competitiveness and strengthen incentives to work and invest. The Tax Commission Report provides a solid basis for a durable reform package along these lines.
Financial Sector Policies
The 2026 IMF Financial Sector Assessment Program (FSAP) finds the financial system robust, but with elevated systemic risks. Banks are profitable, liquid, and well capitalized, while credit growth is moderate and aggregate loan losses low. However, longstanding vulnerabilities from high household debt, real estate exposures, and covered bond interconnectedness persist. Household debt remains among the highest in the world, although recent strong income growth has improved debt-servicing capacity. Commercial real estate vulnerabilities are also elevated, and banks retain sizable exposure to the sector. Banks’ continued dependence on real estate-backed covered bond and wholesale funding, together with growing bank–nonbank linkages, including material exposures to foreign nonbank financial institutions, may amplify stress systemwide.
Current macroprudential settings should be maintained given these elevated structural vulnerabilities and emerging risks. The effects of the easing of mortgage lending limits in 2025 should be monitored closely, particularly in light of rising leverage among new borrowers and high-LTV lending. The Lending Regulation should be subject to regular analytical review and recalibrated if household vulnerabilities or risks in specific borrower segments intensify. Capital buffers should be preserved given risks to asset quality amid the higher rate environment; capital requirements should remain commensurate with structural vulnerabilities and emerging risks, even as European initiatives seek to simplify and harmonize macroprudential frameworks.
Financial oversight and crisis preparedness should keep pace with risks from rising interconnectedness. Priorities include strengthening risk analysis (with system-wide liquidity stress testing, the banks’ solvency to liquidity feedback channel, and contagion work); further strengthening monitoring of covered bond crossholdings and bank–NBFI linkages; and improving risk-based supervision supported by an operationally independent supervisor. The authorities should make resolution tools and the Resolution Fund fully operational, establish a credit register covering all household debt, and establish a dedicated financial sector cyber resilience strategy and a formal framework for responding to systemic cyber incidents.
