In late 2023, macroeconomic analysts pointed to a noticeable slowdown in Norway's non-oil GDP growth, driven by a cooling European construction sector and a stabilization of global energy markets. Commodity prices, particularly for North Sea Brent crude and natural gas, retreated from their previous geopolitical peaks. Economists projected Norway's overall GDP growth to moderate to just 0.9% in 2024.
Amidst these shifting energy dynamics, the Norwegian Krone (NOK) experienced a persistent downward trend, depreciating from around 10.2 NOK per Euro (EUR) to nearly 11.8 NOK per Euro. Norwegian households purchasing foreign goods or holidaying in Mediterranean Europe faced significantly higher costs, while local manufacturing businesses lamented the rising price of imported machinery and components.
Conversely, a weaker krone provided some relief to traditional, non-oil export sectors. Seafood exporters and domestic tourism operators reported a surge in foreign demand, as Norwegian salmon and scenic fjords became substantially cheaper for European and American visitors.
Market observers attribute this decline to several clear factors. First, global currency speculators actively liquidated Krone-denominated assets in response to falling energy prices, anticipating a narrowing of Norway's trade surplus. Second, a shrinking interest rate differential played a major role; the European Central Bank (ECB) raised its main refinancing rate far more aggressively than Norges Bank raised its policy rate. Finally, structural worries over Norway's long-term competitiveness and labor productivity outside the oil sector further cooled foreign direct investment.
The volatility of the currency has renewed debate over the benefits of Norway's free-floating exchange rate regime. Proponents of a float argue that it acts as an essential macroeconomic shock absorber, shielding the domestic economy from external trade shocks. Opponents, however, point to the inflation risk imported through more expensive consumer goods and capital machinery, urging closer consideration of foreign exchange intervention or a managed pegging strategy during periods of high volatility.
Extract C argues that 'the Norwegian krone has weakened against the Euro and other major currencies'.
Explain what is meant by 'the Norwegian krone has weakened against the Euro and other major currencies' and analyse two determinants of such a weakening.
310 exam-style questions on AQA A Level Economics 2.6 The international economy (A-level only), covering 2.6.1 Globalisation, 2.6.2 Trade, 2.6.3 The balance of payments, 2.6.4 Exchange rate systems, and 2.6.5 Economic growth and development. Each one has a worked solution and a mark scheme showing where the marks go.