May 14, 2014 / 9:01 AM / in 3 years

UPDATE 1-Norway cuts 2014 growth forecast, lifts inflation

3 Min Read

* 2014 mainland growth view cut to 1.9 pct from 2.5 pct

* Core inflation forecast lifted to 2.5 pct from 2.0 pct

* To spend $320 million more of oil money (Adds detail, analyst)

OSLO, May 14 (Reuters) - Norway cut its 2014 growth forecast on Wednesday and said it would spend more of its oil revenues to guide the economy through a rough patch, exacerbated by slowing oil investments and weak consumption.

The finance ministry cut its forecast for 2014 growth on the mainland - excluding the offshore oil sector - to 1.9 percent from the 2.5 percent it predicted in November, and said it saw growth picking up to just 2.2 percent in 2015.

Norway was western Europe's fastest growing economy in 2012 but has struggled over the past year, first with weak consumption and falling housing prices, then with big cuts in oil investment plans.

Global oil firms are lowering investment spending to save cash for dividends and Norway's oil sector, which accounts for a fifth of economic output, is especially vulnerable to cutbacks because of its high costs.

To counter some of the slowdown, the government said it would spend 1.9 billion crowns ($320 million) more of its oil revenues than predicted in November.

Although economic forecasts have been better than expected in recent months and housing prices started to rise again after a dip, some economists think the slowdown will persist.

"We do not think this is the beginning of a rebound as the main growth engine in the Norwegian economy, the activity in the petroleum sector, is levelling out and the sector's investments probably will decline somewhat in 2015," Nordea said in a note.

The finance ministry now sees unemployment at 3.7 percent this year, above a November forecast for 3.6 percent while core inflation, the key measure targeted by the central bank, is seen at 2.5 percent, in line with the bank's target and above a previous forecast for 2.0 percent.

The structural budget deficit is now seen at 2.8 percent of the $860 billion sovereign wealth fund, known as the oil fund, below a November forecast of 2.9 percent.

The government can spend up to 4 percent of the fund each year and even though spending has been rising in nominal terms, it has been declining as a percentage of the fund because of its rapid growth. (Reporting by Joachim Dagenborg; Editing by Balazs Koranyi, John Stonestreet)

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