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SEB report: Firmer momentum, lower inflation in Norway

SEB report: Firmer momentum, lower inflation in Norway

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Published by SEB Group
Recent economic indicators on the demand- and supply-side of the equation suggest improving momentum in mainland GDP (excl. oil/gas and shipping) in the first quarter. Signs of firmer growth fit with the March report from Norges Bank's regional network where output expectations suggested a reacceleration in the first half of the year. SEB’s economists’ aggregate growth forecasts are broadly unchanged from February's Nordic Outlook. GDP should be up 2.3-2.4 per cent in 2013-14 and mainland GDP 2.9 per cent in each year.
Recent economic indicators on the demand- and supply-side of the equation suggest improving momentum in mainland GDP (excl. oil/gas and shipping) in the first quarter. Signs of firmer growth fit with the March report from Norges Bank's regional network where output expectations suggested a reacceleration in the first half of the year. SEB’s economists’ aggregate growth forecasts are broadly unchanged from February's Nordic Outlook. GDP should be up 2.3-2.4 per cent in 2013-14 and mainland GDP 2.9 per cent in each year.

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Categories:Business/Law
Published by: SEB Group on Apr 12, 2013
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07/10/2013

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Norway: Firmer momentum, lower inflation
FRIDAY
12 APRIL 2013
 
Recent economic indicators on the demand- and supply-side of the equation suggest
improving momentum in mainland GDP
(excl. oil/gas and shipping) in the first quarter.Signs of firmer growth fit with the March report from Norges Bank’s regional networkwhere output expectations suggested a reacceleration in the first half of the year.
 
Soft private consumption in late 2012 amid slower income growth suggested spendingwas indeed moderating, but the recent revival has put any concerns to rest: our forecastfor full-year consumption growth of 3.2% is on track. Residential investment will bestrong, and investment in the petroleum sector is set for another record high this year.
 
On the supply side, markedly lower oil and gas extraction in early 2013 dented GDP in Q1.However, manufacturing production has firmed and housing starts continue to risesharply: here, the 12-month aggregate to February was the highest since late 2007. Ashousing completions starts catching up with demand after years of under-supply, homeprices are likely to see a downward correction.
 
Aggregate growth forecasts are broadly unchanged from February’s
Nordic Outlook 
:
GDPshould be up 2.3-2.4% in 2013-14 and mainland GDP 2.9% in each year
.
 
We lower our sight on
inflation
in part due to the continued surprisingly benign trend.Moreover, cost inflation is not as strong as expected. The trend-setting negotiation inmanufacturing saw wage growth for blue-collar workers moderating from 4.1% to 3.4%in 2013. Pay hikes for white-collar workers and in the public sector might be a bit higher,but
overall wage growth is likely to be 3.6-3.7%
(previously expected at 4.0%).
 
The March
Monetary Policy Report 
saw
Norges Bank
cutting its inflation forecast, andcore CPI is seen well below the 2.5% target for at least 3 ½ years. The optimal rate pathwas revised down accordingly (in excess of 70bps by Q4/14), implying an unchanged1.50% deposit rate until next summer, but including a 50/50 chance for a 25bps cut inMay. Since then, signs of softer-than-expected wage growth and below-forecast coreinflation have fuelled expectations that a rate cut is looming next month. We’re notconvinced.
Stein Bruun
SEB Norway+47 21 00 85 34
Erica Blomgren
SEB Trading Strategy+47 22 82 72 77
Norges Bank’ network sees a firmer first half 
 Year-on-year percentage change, index
-4-2024680304050607080910111213-2-101234Mainland GDP (LHS)Regional network output indicator (RHS)Output expectations (RHS)
Source: Nor
 
es Bank, Statistics Norwa
Key data
Percentage change
2011 2012 2013 2014
GDP 1.2 3.2 2.3 2.4Mainland GDP 2.5 3.5 2.9 2.9Unemployment
*
3.3 3.2 3.4 3.4Inflation 1.2 0.8 1.5 1.6Core inflation 0.9 1.2 1.1 1.6Government balance** 14.2 13.9 12.0
* Per cent of labour force, ** General government, per cent of GDP,forecast 2012-13 MoF (October 2012)Source: SEB
 
 
Economic Insights
DEMAND AND PRODUCTION
 
Private consumption slowed in late 2012 as households’ goods consumption stalled for two quarters while spendingabroad continued to grow briskly and consumption of services showed a near-trend gain. Although growth in realdisposable income has eased, the extent of weakness in consumption was puzzling amid rising confidence.
 
The
tide has turned
, however, as both real retail sales and overall consumption of goods (incl. autos and electricity)showed a fourth consecutive gain in February. As the average level of goods consumption in the first two months ofthe year was fully 1.6% level last Q4 (despite a weather-related drop in spending on electricity), private consumptionshould have showed a solid revival in Q1 even if March showed a rather sharp payback. In fact, spending on goods isrunning ahead of the forecast which calls for full-year growth in overall private consumption of 3.2% in 2013.
 
Manufacturing production (i.e. excluding energy and mining) has reaccelerated after the decline last Q4. As hasbeen the pattern in recent years, the leading investment goods sector is enjoying strong investment growth in thepetroleum sector (another record-high in 2013). However, petroleum production in the first two months of Q1 waswell below the Q4 average as gas extraction slumped 11% from December to February on production problems,among others on the vast Troll-field (the largest gas field in Europe ex. Russia), but should recover in the near term.
Consumption has revived strongly…
Percentage change, 3-month average
-8-404812160506070809101112-2-101234Real retail sales excl. autos, year-on-year (LHS)From 3 mth. earlier (RHS)
Source: Statistics Norway
…as suggested by improving confidence
3-month average, index
-5.0-2.50.02.55.07.510.003040506070809101112-16-8081624324048Consumption of goods, % change year-on-year (LHS)Consumer confidence, net balance (RHS)
Source: Statistics Norway, FNH
 
Firmer momentum in manufacturing
Percentage change, 3-month average
-16-80816240506070809101112-4-20246Manufacturing production, % change year-on-year (LHS)From 3 months earlier (RHS)
Source: Statistics Norway
Investment goods sector remains in the lead
3-month average. Index 2005=100
809010011012013014015016017018005060708091011128090100110120130140150160170180Investment goodsIntermediate goodsConsumer goods
Source: Statistics Norway
 
Housing starts in a strong trend
No in 1.000
16202428323640050607080910111216202428323640Approved housing starts in 1.000, 12 mth. aggregateHousing completions in 1.000, 12 mth. aggregate
Source: Statistics Norway
Record-high Investment in petroleumsector 
NOK bn
40701001301601902209900010203040506070809101112134070100130160190220Actual and planned investment oil/gas extraction and pipelines
Source: Statistics Norway
 
2
 
 
 
Economic Insights
LABOUR MARKET AND INFLATION
 
According to the Labour Force survey, the
labour market has softened
quite a bit: the unemployment rate is up0.5%-point since last Q3 to 3.6% (highest since late 2010) and employment 0.4% lower in December-February thanin the previous three months. While reflecting slower growth in the broader economy in late 2012, the most recentreport from Norges Bank’s regional network showed still-positive employment expectations among employers. Atthe same time, registered unemployment, which in the past has been leading and is less volatile than LFS, hasinched up only slowly. Nonetheless, we now see the LFS unemployment rate averaging 3.4% in 2013 (3.2% in 2012).
 
Core
CPI remains subdued
as the year-on-year rate slowed from 1.1% to 0.9% in March on the ex. energy andtaxes measure, the lowest since last April. Declining prices for imported goods reflects weak impulses from abroadand previous NOK appreciation. Domestic inflation has eased on a slower trend for domestically produced goods,while prices for services are holding higher and rents show acceleration in sympathy with the tight housing market.
 
We have
reassessed the outlook for inflation
, acknowledging the surprisingly subdued trend and, among otherthings, incorporating moderating wage growth (at least in 2013). Core CPI is thus expected to average 1.1 in 2013and increase only slowly to 1.6% next year (previously 1.9%).
LFS surveys shows an abrupt turn, but …
3-month average
-2-101234505060708091011122.02.53.03.54.04.55.05.56.0Employment, % change year-on-year (LHS)LFS unemployment rate, 3 mth. average
Source: Statistics Norway
registered unemployment only inching up
No on 1.000
456075901051201350304050607080910111245607590105120135LFS unemployment, 3 mth. averageReg. unemployed and employment schemes
Source: Statistics Norway, NAV
 
Core inflation easing in early 2013
 Year-on-year percentage change
-1012345670506070809101112-101234567Consumer pricesCPI excl. taxes and energy
Source: Statistics Norway
Domestic inflation flat, import prices down
 Year-on-year percentage change
-2-101234560506070809101112-2-10123456Core CPI domestic goods and servicesCore CPI imported goods
Source: Statistics Norway, SEB
 
Home prices show signs of levelling out
 
-10-50510152025030405060708091011121316192225283134Existing home prices, % change year-on-year (LHS)Existing home prices per sqm in NOK 1.000 (RHS)
Source: Norw. Ass. of Real Estate Agents
Domestic prices show a split
 Year-on-year percentage change
-1012345670506070809101112-101234567Core CPI domstically-produced goodsRentsCore CPI services
Source: Statistics Norway, SEB
 
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