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ECON1020

Impact Report

1) The Macroeconomic Impacts of the Covid-19 Pandemic

a)  Norway, one of the largest European economies, was very significantly affected by the coronavirus pandemic, which began in 2020. Between 2019 and the 2020 a significant decline in the annual real GDP growth is observed from 0.75% to -0.72%, with a significant increase in 2021 to 3.92% (Figure 1). The annual inflation rate (represented by the annual  percentage increase in the consumer price) decreased from 2. 17% (2019) to 1.29% (2020), increasing to 3.48% (2021) (Figure 1). The unemployment rate of Norway (percentage of total labour force unemployed) continued to increase from 3.69% (2019) to 4.99% in 2021   (Figure 1). These effects were observed on the Norwegian economy during the covid pandemic because of the regulations enforced by the Norwegian government. The first coronavirus case was registered on 26th  February 2020, and within two weeks the government implemented emergency measures (Nikel, 2022). All educational establishments and most workplaces were closed (Nikel, 2022). These factors contributed  towards the significant decline in annual GDP growth from 2019 to 2020, while also increasing the cyclical unemployment observed.

b)  To assess the impacts of the pandemic on the Norwegian economy an AD-AS model has been used (Figure 2).

To address the coronavirus pandemic the Norwegian government enforced emergency   measures. From March 2020 all educational institutes, and most businesses were closed (Nikel, 2022). Strict border restrictions, mandatory 14-day quarantine period and social distancing rules were also implemented (Crisis24, 2020). Therefore, fewer migrant workers  entered the country, reduced the supply capacity particularly for the delivery and horticulture industries. While the significant closure in the hospitality industry further contributed to the    negative supply shock. This is represented in the AD-AS model (Figure 2) through the short run aggregate supply (SRAS) curve shifting to the left (SRAS0 to SRAS1). The significant closure in the businesses contributed to the decline in annual GDP growth rate observed.

During the pandemic the shortage of supply also resulted to a decrease in consumption. From 2019 to 2020 household expenditure in Norway decreased from 1494 billion to 1422 billion NOK (Statista, 2021). Additionally, decreased oil prices and travel restrictions also contributed to the decrease in net exports (Adomaitis, 2020). From 2019 to 2020 net exports decreased from $104,030 million to $82,749 million USD (World Integrated Trade Solution, 2020). These factors resulted in a negative demand shock, represented in the AD-AS model (Figure 2) through the aggregate demand (AD) curve shifting to the left (AD0 to AD1). The demand shock also had a negative impact on the GDP, contributing to the decline in the annual growth rate from 2. 17% (2019) to 1.29% (2020) (Figure 1). Additionally, the decrease in demand and financial hardship increased household propensity to save, decreasing the velocity of money and inflation (Macrotrends 2020). As inflation decreased from 2019 to 2020, the demand shock produced has been greater than the SRAS shock (Figure 2). This   has been represented in the AD-AS model with the AD curve shifting more to the left than the SRAS curve.

These factors also caused the unemployment rate to rise. The reduction in the AD and SRAS caused Norway to have a lower GDP than the long-term equilibrium, producing the associated increase in cyclical unemployment.

2) The Policy Responses

a)  To counter the pandemic the Norwegian government implemented expansionary fiscal policies. The government spent NOK 2.2 billion on the development of vaccines and NOK 225 million on Covid- 19 testing kits (Ministry of Foreign Affairs, 2020). There was also an increase in investment in the agriculture sector. Norway’s official development assistance to agriculture increasing to $184 million USD (2020) from $141 million USD in 2019 (Donor tracker, 2020). These policies were targeted at increasing government spending. An increase in economic relief was also provided to individuals who lost unemployment due to  Covid- 19. Initiatives such as the wage compensation scheme and reduced VAT rates (12% to 6%) were introduced, increasing transfer payments (International Monetary Fund (IMF), 2021). Additional fiscal policies introduced such as compensation schemes and increased loan frameworks provided support to businesses and industries (Ministry of Finance, 2020).

These policies are designed to increase consumer spending, increasing AD and therefore real GDP. While also ensuring that businesses remain operational, maintaining suitable    liquidity throughout the economy. Therefore, the fiscal policies implemented contributed to the increase in annual GDP growth from -0.72% (2020) to 3.92% (2021) (Figure 1). This is represented in the AD-AS model (Figure 3) with the AD curve shifting to the right (AD0 to AD1).

However, there are some limitations in the implementation of these policies. Even though there was an increase in transfer payments to encourage individuals to spend more, consumer spending in Norway decreased from $179.44 billion USD (2019) to $159.31 billion USD in 2020 (Macrotrends, 2020). This is due to factors such as lack of consumer confidence. During August 2020 the adjusted consumer confidence in Norway reached its lowest in four years (-6.6 points), as individuals were uncertain on how the market would react (Reuters, 2020). There is also a lag time associated with effects of these fiscal policies, as it takes time for the market to adjust to new changes (Gaffney, 2021). While during the pandemic the lag time is also associated with consumer awareness. As numerous changes  were implemented in a short period of time, consumers may need to consult experts. Regardless of these limitations the fiscal policies have had a positive effect on the Norwegian economy, increasing AD and GDP.

b) Norway also relied upon its expansionary monetary policies to counter the pandemic. From

2016 Norges Bank had been steadily increasing its cash rate. However, in 2020 the central bank reduced the cash rate from 1.5% to 0.0% (IMF, 2021). There was also a temporary    easing of mortgage regulations through establishing a swap facility of $30 billion USD between US Federal Reserve and Norges Bank (IMF, 2021). Additional monetary policies  included an expansion in the ability of the banks to borrow more in USD against collateral and increase provision of additional liquidity to banks through loans of differing maturities   (IMF, 2021).

These policies were implemented to increase liquidity in the interbank money market and   therefore provide commercial banks more flexibility, allowing them to lend more. Savings rates were also lowered, therefore reducing the opportunity cost for consumption incentivising investors, and consumers to borrow more. Therefore, an increase in the funds and investment opportunities results in the AD and real GDP increasing. Consequently, the  monetary policies also contributed to the increase in annual GDP growth from -0.72% (2020) to 3.92% (2021) (Figure 1). This is represented in the AD-AS model (Figure 3) with the AD curve shifting to the right (AD0 to AD1).

However, there are some limitations in the implementation of these policies. The effectiveness of reducing the cash rate was limited because it has historically been low (Norges Bank, 2022). Therefore, further decreasing the rate has had a restricted effect, as consumer confidence was also low during the pandemic (-6.6 points in August 2020). Additionally, the reduction in the cash rate also resulted in house prices increase nationally by approximately 9% over a year (Norges Bank, 2021). This sudden increase can be disastrous and potentially result in another financial crisis as it will affect consumers in numerous ways such as future interest rates.