Norwegian economy set for 2.3% growth in 2025, S&P affirms AAA rating

Investing.com -- S&P Global Ratings has reaffirmed Norway’s ’AAA/A-1+’ long- and short-term ratings, maintaining a stable outlook. The rating agency’s decision, announced on March 7, 2025, reflects the strength of Norway’s financial reserves and its ability to handle potential economic disruptions without significant impact on its credit metrics.

S&P predicts Norway’s economy will grow by 2.3% in 2025, driven by a broad-based recovery. However, the risk of rising trade tensions between the European Union and the United States could potentially impact this growth outlook. Despite the upcoming parliamentary elections in September, no major policy changes are anticipated due to Norway’s history of political stability and economic continuity.

Norway’s public finances continue to be among the strongest globally, supported by the Government Pension Fund Global (GPFG). This fund provides a robust fiscal buffer and ensures long-term sustainability. Norway’s GDP per capita is projected to be nearly $87,000 in 2025, one of the highest among all rated sovereigns.

The country’s economy is set to accelerate in 2025, with real GDP growth projected to increase to 2.3% from 1.9% in 2024, fueled by higher consumption and investment activity. Despite the collapse of Norway’s governing coalition in January 2025, the Labor Party will remain the sole party in a minority government until the September 2025 elections, as snap elections are not permitted in Norway.

The labor market in Norway has weakened over the past year, with the unemployment rate rising to 4.2% in 2024 from 3.6% in 2023. This increase is attributed to labor force expansion due to an influx of Ukrainian refugees and temporary foreign workers, coupled with sectoral weaknesses, particularly in construction. The unemployment rate is projected to rise slightly to about 4.4% in 2025.

Norway’s real GDP growth is expected to average 1.6% annually between 2026 and 2028. However, the country’s heavy reliance on oil and gas, which account for 40% of exports, remains a significant challenge. While new field output will sustain short-term growth, reliance on fossil fuels may hinder diversification and delay investments in alternative sectors.

Despite high interest rates over the past year, house prices in Norway rose by a seasonally adjusted 4.9% in 2024. The potential for lower interest rates could further support housing demand, reinforcing continued price appreciation. However, financial vulnerabilities persist, particularly due to the high proportion of household debt with variable interest rates.

Norway’s fiscal position remains robust, supported by its holdings in the GPFG. The non-structural oil deficit is set to increase to 7.8% of GDP in 2025 from 6.7% in 2024 and will be funded by transfers from the GPFG. Household debt remains elevated at 86.6% of GDP but has decreased in recent years.

The GPFG, which is exclusively invested overseas, ensures that Norway maintains an exceptionally strong net external asset position. It is projected to exceed 500% of current account payments on average in 2025-2028. In 2024, the GPFG posted a 13% return, increasing its market value to approximately $1.78 trillion, driven by robust equity performance and sustained inflows from the oil and gas sector.

Headline inflation in Norway has steadily decreased over the past year, declining to 2.3% as of Jan. 31, 2025. This is down from 4.5% in January 2024 due to easing price pressures from items such as imported products, services, and energy. S&P expects inflation to continue its decline and project it to average 2.2% in 2025 as price pressures continue to ease.

The Norwegian banking sector remains resilient, supported by a conservative risk appetite, strong capital buffers, and effective risk management, despite rising competition. In 2024, the sector performed well, with higher interest rates boosting net profits, leading to a record-high return on equity of about 15%.

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