Norway: Growth Outlook Cut on Oil Sector Worries

Mainland GDP growth to slow to 1.3 pct in 2015.

Norway will dip into its saved-up oil wealth more than expected this year as the energy sector shrinks and growth slows, but plans no major policy adjustment as the economy is seen rebounding next year, the government said.

Growth will take a hit as oil investment falls more than expected, the budget loses more than $10 billion in energy income and unemployment will hover around ten-year highs both this year and next, the government predicted in a mid-year budget update.

But he government said it would not provide further stimulus, arguing that the economy was going through an adjustment that was necessary to prepare AAA-rated Norway for life after oil.

"Competitive businesses must adapt to lower demand from the Norwegian petroleum sector," Finance Minister Siv Jensen said. "These adjustments are likely to happen earlier than previously anticipated due to the oil price decline."

GDP growth on the mainland, excluding the offshore oil sector, will slow to 1.3 percent this year from last year's 2.3 percent, short of the previous 2.0 percent projection, the government said. But growth will rebound to 2.0 percent next year, in part as oil prices rise, it added.

"The main fiscal policy stance is roughly unchanged and while economic forecasts are adjusted downward, the changes are all in line with the central bank's forecasts," Kyrre Aamdal, an economist at DNB Markets said.

The central bank earlier said it was likely to cut interest rates in June and economists said the budget update only reinforced those plans as no major policy changes were unveiled.

With taxes coming below forecasts, Norway will use 168.8 billion crowns ($22.4 billion) of its oil income in the budget, up from a previous plan for 163.7 billion crowns but the actual spending is well below the government's self-imposed cap.

Norway has saved up $890 billion in a rainy day wealth fund and the state can spend up to 4 percent each year. The actual spending will equal 2.6 percent of the fund this year, below a previous 3 percent estimate, but the fall is due to the rise in stocks and the weakening of the crown, not a cut in spending.

Unemployment, which hit a ten-year high earlier this year, is seen averaging 4.0 percent in 2015, above a previous forecast for 3.6 percent.

The price of oil, the budget's main source of income, is now seen averaging 480 crowns ($63.7) a barrel this year, below a previous forecast for 650 crowns but is forecast to rise to 529 crowns in 2016.

Reporting by Oslo Newsroom