Norway's Economic Star Begins to Lose Its Shine

Gonzalo Azumendi | Age Fotostock | Getty Images

A boiler towers over a fjord on Norway's south coast from a 116-year-old pulp mill, the largest employer in the town of Tofte.

The 300 jobs may be gone by September, the deadline set by the loss-making plant's Swedish owner to find a buyer or close, victim of high wage costs, the strong Norwegian currency and the debt crisis that has hurt its local European markets.

Norway, the world's seventh largest oil exporter, is the envy of western Europe, beating everyone with 3.4 percent growth last year and filling its coffers from oil while others were pulled under by debt.

Healthy growth is expected to continue this year but the troubles of the Tofte mill highlight some problems that have emerged in the economy just as the campaign for the September election, which has focussed on other issues, gets underway.

"The European crisis just seems to be never ending," said Jostein Sjaavaag, a union representative who has worked at the plant for 25 years.

"There is still a good market out there, but it's in Asia, far away, with much higher shipping costs and cheaper buyers."

The plant is innovative and supplies an industry with healthy 4-5 percent annual growth.

(Read More: How Norway Could Become a Victim of Its Own Success)

But the strong Norwegian crown has hurt its competitiveness, its traditional European markets have imploded, and the oil sector's boom is driving up wage costs.

If the Tofte workers lose their jobs, they will join the growing ranks of Norway's unemployed. The number of jobless risen to an eight-year high of nearly 100,000, although its 3.5 percent rate is much lower than Sweden's 8.2 percent.

Just a year ago the government was worried the unemployment was too low, the housing market was overheating and it cut spending to cool the economy down.

The central bank, which had been promising rate hikes to cool the economy, last week delayed its first hike until the end of next year and said there was now a 50 percent chance its next move would be a cut.

The housing market has stagnated and bankruptcies rose by 31.9 percent in May from a year earlier. Mainland exports to Europe are down 2 percent in the first five months and manufacturing exports have fallen 13 percent.

Wage costs, up more than 60 percent since 2000, about six times more than in Germany or Sweden are adding to the pain while banking regulations, among the toughest on the continent, are also holding back lending.

"We have a bankruptcy rate (in the retail sector) like we have never seen before," said Vibeke Hammer Madsen, the head of Norway's Retail Association, which represents 16,500 businesses.

Oil, Consumer Risk

The latest consumer confidence data showed that households are still comfortable about their finances but they are starting to worry about the outlook for the economy.

"When consumers' belief in the 'Norwegian exceptionalism' -- that Norway will be an eternal exception in the world -- ends or gets doubted, it will turn the housing market around," Harald Magnus Andreassen, a chief economist at Swedbank First Securities said.

"I think there is a significant risk that housing prices will fall the next 2-5 years."

(Read More: Norway's Housing Boom Could Lead to Spain-Style Bust)

Oil prices are also becoming a big risk as Norway's vast petroleum sector, which accounts for almost a quarter of the economy and half of exports.

Although oil investments are at a record high, oil prices have fallen to $100 a barrel from last year's $112 average and a sustained fall to around $80 levels seen as recently as 2010, would jeopardize many projects, economists say.

Statoil has already delayed a $15.5 billion Arctic investment because of costs and said it was reviewing several projects.

No Crisis

The economy is still expected to grow a respectable 2.5 percent this year, rising to 2.75 percent in 2014, according to the central bank. Governor Oeystein Olsen has been trying to calm nerves, even as the bank chopped back forecasts.

"I wouldn't say people should be worried, I would say they should just enjoy life," Olsen said.

(Read More: US Oil and Gas Boom Takes Many by Surprise)

Nevertheless, there have been calls from unions for the government to start preparing for a more serious slowdown.

"We are not in crisis... we are not there yet but it is time to start planning and getting ready," said Stein Reegaard, the chief economist of LO, Norway's biggest trade union group. "From 3-4 percent growth we slowed to 2-3 percent. We'll be worried when it goes below."

Labour Prime Minister Jens Stoltenberg, who is running for reelection in September, has acknowledged that the economy is showing "alarming" signs and that his government would be prepared to act if necessary.

The government is not short of money and has plenty of room to move. It runs a budget surplus worth 11 percent of GDP thanks to the world's highest oil tax, and sits on a wealth fund worth $720 billion, or about $144,000 per man, woman and child.

Polls show the opposition Conservatives with a big lead over Stoltenberg but campaigning is only just getting underway.

So far the economy has not been a major election issue but the concern about housing and the rise in unemployment could put it on the agenda.

The Conservatives, led by Erna Solberg, promise to help the economy by cutting taxes, reducing the size of government and easing regulation but they are clearly not promising a spending spree to boost growth.

Stoltenberg has suffered in the polls because critics say he has neglected social issues such as health and social services but he is respected on the economy so some commentators say he could get a lift if the economy comes into focus.