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SEB report: Activity running at a solid clip in Norway

SEB report: Activity running at a solid clip in Norway

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Published by SEB Group
SEB’s economists in new report raise their forecast for Norway’s mainland GDP growth to 2.6 per cent in 2012 from 2.3 per cent previously. Activity indicators for the first couple of months of the year suggest that overall activity has started on a stronger-than-expected footing. The solid impression fits with what respondents reported in the most recent report from Norges Bank's regional network. The economists keep their 2013 mainland GDP forecast unchanged at 2.9 per cent, but notes there’s upside potential.
SEB’s economists in new report raise their forecast for Norway’s mainland GDP growth to 2.6 per cent in 2012 from 2.3 per cent previously. Activity indicators for the first couple of months of the year suggest that overall activity has started on a stronger-than-expected footing. The solid impression fits with what respondents reported in the most recent report from Norges Bank's regional network. The economists keep their 2013 mainland GDP forecast unchanged at 2.9 per cent, but notes there’s upside potential.

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Published by: SEB Group on Apr 03, 2012
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04/03/2012

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Norway: Activity running at a solid clip
MONDAY
2 APRIL 2012
 
Activity indicators for the first couple of months of the year suggest that
overall activityhas started the year on a stronger-than-expected footing
. The solid impression fitswith what respondents reported in the most recent report from Norges Bank’s regionalnetwork: output “increased fairly rapidly” in winter while expectations ahead was forsome moderation (as they tend to be), consistent with growth in mainland GDP – i.e.excluding oil/gas and shipping – at near 3% year-on-year rate in the first half of 2012.
 
Relative to February’s
Nordic Outlook 
, we lift the
forecast for growth in mainland GDP
 
in 2012 to 2.6%
from 2.3% while leaving the forecast for 2013 unchanged at 2.9% fornow. Overall GDP is seen rising at a somewhat slower 2.1% rate in 2012 whichnonetheless implies stronger growth than in 2011. We see
upside risks
to the forecasts.
 
The run-up to the wage negotiations has seen the usual rhetoric of putting a lid on wagegrowth to stem deteriorating competitiveness in export industries. The trend-settingnegotiation for manufacturing blue-collar workers has broken down with the officialmediator stepping in. Pay increases might be slower than in 2011: according to mediareports, labour unions will trade it for a common paternal leave in the private sector to bepaid for by government. Actual wage inflation in manufacturing is likely to be strongerthan agreed in the central negotiations due to wage drift (local pay), reflecting tightlabour markets. Moreover, wage growth in the dominant public sector might not slow asmuch. In all, we expect
overall wage growth to ease from 4.2% in 2011 to 3.9% in2012
, yielding a solid increase when adjusted for inflation.
 
Norges Bank once again surprised by cutting the key deposit rate 25bps to 1.50% at itsmid-March monetary policy meeting, citing still-lingering concern for global growth andlower inflation due to NOK appreciation. The bank lowered its optimal rate path quitemarkedly, putting any rate hike off to Q3/13. We think a hike will come next spring at thelatest with the end-2013 level at 2.50% or 50bps higher than the rate path suggests.
Stein Bruun, +47 21088534, and Erica Blomgren, +47 2282 7277, SEB Norway
GrowthInflationLabour-market
Growth is seen holding near trend
Mainland GDP and Norges Bank’s regional network
-4-20246803040506070809101112-2-101234Mainland GDP, %change year-on-year (LHS)Regional network output indicator, index (RHS)Output expectations 6 mth ahead, index (RHS)
Source: Nores Bank, Statistics Norwa
Key data
Percentage change
2010 2011 2012 2013
GDP 0.7 1.6 2.1 2.4Mainland GDP 1.9 2.6 2.6 2.9Unemployment
*
3.6 3.3 3.3 3.2Inflation 2.5 1.2 1.5 1.9Core inflation 1.4 0.9 1.5 1.9Government balance** 10.8 13.6 11.5
* Per cent of labour force, ** General government, per cent of GDP,forecast 2012 MoF (Oct. 2011)Source: SEB
 
 
Economic Insights
DEMAND AND PRODUCTION
 
Momentum in private consumption starts resembling the turn in consumer confidence and firmness suggested byfundamentals. Real retail sales recovered solidly in January and February, and the indicator measuring consumptionof goods were on average for the two months fully 2.1% above the level in Q4. Even if March should see a markedpayback and Q2 be softer, consumption growth should accelerate from 2.2% in 2012 to a solid 3.0% for all of 2012.
 
The short-term trend in manufacturing production (excluding energy) has been choppy since mid-2011, apparentlymirroring a split between healthy domestic demand led by surging oil sector investment and exports feeling chillywinds from abroad. The 13-point jump in the PMI from December to a 4 ½-year high of 59.7 in March and an evenstronger rebound for the new orders index looks exaggerated but do suggests a more broad-based recovery.
 
Real residential investment jumped 22% in 2011 (adding one percentage point to growth in overall GDP), butfollowing the strong turn since 2009, housing starts have levelled out in late 2011/early 2012. However, surgingorders suggest a looming rebound. In fact, record-high population growth, with an extra boost from still-stronglabour migration, implies that housing starts should surpass the 32.000 average annual level in 2005-07 periodwhich marked the previous high.
Consumption has firmed in early 2012…
3-month average
-12-8-40481216030405060708091011-3-2-101234Consumption of goods, %change year-on-year (LHS)%change from 3 mth. earlier (RHS)
Source: Statistics Norway
as turn in confidence has suggested
 
-2.50.02.55.07.510.09899000102030405060708091011-1001020304050Private consumption, %change year-on-year (LHS)Consumer confidence, net balance (RHS)
Source: Ecowin, Statistics Norway
 
Choppy momentum in manufacturing, but …
3-month average
-16-80816240102030405060708091011-4-20246
Manufacturing production, %change year-on-year (LHS)From 3 months earlier (RHS)
Source: Statistics Norway
sharp recoveryin PMI suggests solid outlook
 
30354045505560657075040506070809101130354045505560657075PMI manufacturing (RHS)PMI new orders (RHS)
Source: Ecowin
 
The upturn in housing starts has levelled off..
 
-40-200204060800102030405060708091011152025303540Housing starts 3 mth. average, %change year-on-year (LHS)Housing starts in 1.000, 12 mth. aggregate (RHS)
Source: Statistics Norway
..but orders suggest much more in the pipeline
 
345678910119900010203040506070809101112020406080100120140160Housing starts in 1.000, quarterly average (LHS)Nominal orders new residential buildings, 2Q earlier (RHS)
Source: Statistics Norway
 
2
 
 
 
Economic Insights
LABOUR MARKET AND INFLATION
 
The labour market continues to exhibit strength, presumably reflecting ongoing solid momentum in the economy.Employment was thus up an above-trend 2.4% year-on-year on average in December-February (and 0.7% fromSeptember-November). The gain is even stronger than the very solid increase in the labour force, lowering the LFSunemployment rate to 3.2% in December-February. We expect a broadly unchanged rate trough the year.
 
Core consumer prices have yet to show any trend-change as the year-on-year rate on the CPI-ATE measure –excl.taxes and energy – was unchanged at 1.3% in February, only marginally above the average in H2/11. Norges Bankfor its part cut the inflation forecasts quite noticeably in the March MPR in part as a stronger NOK puts a lit onimport prices (which accounts for almost 30% of the core index). The bank sees core inflation only slightly higher inthe second half of 2012, rising slowly thereafter but holding below the 2.5% medium-term target in 2015.
 
Existing home price inflation measured in y-o-y terms has eased, but at 6.8% in March to record-high levels setsNorway apart from peers. Tighter equity requirements for mortgages (from 10% to 15%) might still have to be felt,but the fundamental supply/demand imbalance persists: while some 20.000 homes were completed in 2011, newhousehold formation surpassed 30.000 and the under-supply will thus put a floor under prices in the short term,
Employment growth continues to run strongly
3-month average
-2-101234501020304050607080910112.02.53.03.54.04.55.05.56.0Employment, %change year-on-year (LHS)Unemployment, %of labour force (RHS)
Source: Statistics Norway
Wage growth to moderate slightly in 2012
 
02468108789919395979901030507091101234567Wage growth, %change year-on-year (LHS)LFSunemployment rate, reversed (RHS)
Source: Statistics Norway
 
Core inflation shows no definite trend-change
Year-on-year percentage change
-2-10123456702030405060708091011-2-101234567Consumer pricesCPI excl. taxes and energy
Source: Statistics Norway
Imported goods are denting inflation
Year-on-year percentage change
-4.5-3.0-1.50.01.53.04.56.002030405060708091011-4.5-3.0-1.50.01.53.04.56.0Core CPI domestic goods and servicesCore CPI imported consumer goods
Source: Statistics Norway
 
Existing home prices continue to climb ..
 
-10-505101520250102030405060708091011101520253035Existing home prices, %change year-on-year (LHS)Existing home prices per sqm in NOK 1.000 (RHS)
Source: Norw. Ass. of Real Estate Agents
..as home completions lag household formation
Thousands
-20-100102030405002030405060708091011-20-1001020304050No of households, change y/yHousing completionsNet balance
Source: Norges Bank, Statistics Norway
 
3
 

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