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Norway: Firmer momentum, lower inflation

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 Banks regional network where output expectations suggested a reacceleration in the first half of the year. Soft private consumption in late 2012 amid slower income growth suggested spending was indeed moderating, but the recent revival has put any concerns to rest: our forecast for full-year consumption growth of 3.2% is on track. Residential investment will be strong, 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 rise sharply: here, the 12-month aggregate to February was the highest since late 2007. As housing completions starts catching up with demand after years of under-supply, home prices are likely to see a downward correction. Aggregate growth forecasts are broadly unchanged from Februarys Nordic Outlook: GDP should 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 in manufacturing 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, and core CPI is seen well below the 2.5% target for at least 3 years. The optimal rate path was revised down accordingly (in excess of 70bps by Q4/14), implying an unchanged 1.50% deposit rate until next summer, but including a 50/50 chance for a 25bps cut in May. Since then, signs of softer-than-expected wage growth and below-forecast core inflation have fuelled expectations that a rate cut is looming next month. Were not convinced.

FRIDAY 12 APRIL 2013

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
8 6 4 2 0 -2 -4 03 04 05 06 07 08 09 Mainland GDP (LHS) Regional network output indicator (RHS) Output expectations (RHS) 10 11 12 13 4 3 2 1 0 -1 -2

Key data Percentage change

2011 2012 2013 2014 GDP Mainland GDP Unemployment* Inflation Core inflation Government balance** 1.2 2.5 3.3 1.2 0.9 14.2 3.2 3.5 3.2 0.8 1.2 13.9 2.3 2.9 3.4 1.5 1.1 12.0 2.4 2.9 3.4 1.6 1.6

* Per cent of labour force, ** General government, per cent of GDP, forecast 2012-13 MoF (October 2012) Source: SEB

Source: Norges Bank, Statistics Norway

Economic Insights

DEMAND AND PRODUCTION Private consumption slowed in late 2012 as households goods consumption stalled for two quarters while spending abroad continued to grow briskly and consumption of services showed a near-trend gain. Although growth in real disposable 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 of the year was fully 1.6% level last Q4 (despite a weather-related drop in spending on electricity), private consumption should have showed a solid revival in Q1 even if March showed a rather sharp payback. In fact, spending on goods is running 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 has been the pattern in recent years, the leading investment goods sector is enjoying strong investment growth in the petroleum sector (another record-high in 2013). However, petroleum production in the first two months of Q1 was well 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
16 12 8 4 0 -4 -8 05 06 07 08 09 10 11 Real retail sales excl. autos, year-on-year (LHS) From 3 mth. earlier (RHS) 12 4 3 2 1 0 -1 -2
10.0 7.5 5.0 2.5 0.0 -2.5 -5.0 03 04 05 06 07 08 09 10 11 Consumption of goods, % change year-on-year (LHS) Consumer confidence, net balance (RHS) 12

as suggested by improving confidence


3-month average, index
48 40 32 24 16 8 0 -8 -16

Source: Statistics Norway

Source: Statistics Norway, FNH

Firmer momentum in manufacturing


Percentage change, 3-month average
24 16 8 0 -8 -16 05 06 07 08 09 10 11 12 Manufacturing production, % change year-on-year (LHS) From 3 months earlier (RHS) 6 4 2 0 -2 -4

Investment goods sector remains in the lead


3-month average. Index 2005=100
180 170 160 150 140 130 120 110 100 90 80 05 06 07 08 09 10 11 12 Investment goods Intermediate goods Consumer goods
Source: Statistics Norway

180 170 160 150 140 130 120 110 100 90 80

Source: Statistics Norway

Housing starts in a strong trend


No in 1.000
40 36 32 28 24 20 16 05 06 07 08 09 10 11 Approved housing starts in 1.000, 12 mth. aggregate Housing completions in 1.000, 12 mth. aggregate 12 40 36 32 28 24 20 16

Record-high Investment in petroleum sector


NOK bn
220 190 160 130 100 70 40 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 Actual and planned investment oil/gas extraction and pipelines
Source: Statistics Norway

220 190 160 130 100 70 40

Source: Statistics Norway

Economic Insights

LABOUR MARKET AND INFLATION According to the Labour Force survey, the labour market has softened quite a bit: the unemployment rate is up 0.5%-point since last Q3 to 3.6% (highest since late 2010) and employment 0.4% lower in December-February than in the previous three months. While reflecting slower growth in the broader economy in late 2012, the most recent report from Norges Banks regional network showed still-positive employment expectations among employers. At the same time, registered unemployment, which in the past has been leading and is less volatile than LFS, has inched 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 and taxes measure, the lowest since last April. Declining prices for imported goods reflects weak impulses from abroad and 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 other things, incorporating moderating wage growth (at least in 2013). Core CPI is thus expected to average 1.1 in 2013 and increase only slowly to 1.6% next year (previously 1.9%).
LFS surveys shows an abrupt turn, but
3-month average
5 4 3 2 1 0 -1 -2 05 06 07 08 09 10 Employment, % change year-on-year (LHS) LFS unemployment rate, 3 mth. average 11 12
Source: Statistics Norway

registered unemployment only inching up


No on 1.000
6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 135 120 105 90 75 60 45 03 04 05 06 07 08 09 10 LFS unemployment, 3 mth. average Reg. unemployed and employment schemes 11 12 135 120 105 90 75 60 45

Source: Statistics Norway, NAV

Core inflation easing in early 2013


Year-on-year percentage change
7 6 5 4 3 2 1 0 -1 05 06 07 08 09 10 11 12 Consumer prices CPI excl. taxes and energy
Source: Statistics Norway

Domestic inflation flat, import prices down


Year-on-year percentage change
7 6 5 4 3 2 1 0 -1

6 5 4 3 2 1 0 -1 -2 05 06 07 08 09 10 11 12 Core CPI domestic goods and services Core CPI imported goods

6 5 4 3 2 1 0 -1 -2

Source: Statistics Norway, SEB

Home prices show signs of levelling out


25 20 15 10 5 0 -5 -10 03 04 05 06 07 08 09 10 11 Existing home prices, % change year-on-year (LHS) Existing home prices per sqm in NOK 1.000 (RHS) 12 34 31 28 25 22 19 16 13 7 6 5 4 3 2 1 0 -1 05

Domestic prices show a split


Year-on-year percentage change
7 6 5 4 3 2 1 0 -1 06 07 08 09 10 Rents 11 12 Core CPI services Core CPI domstically-produced goods

Source: Norw. Ass. of Real Estate Agents

Source: Statistics Norway, SEB

Economic Insights

MONETARY POLICY AND FINANCIAL CONDITIONS Norges Bank lowered its inflation forecast markedly in the March MPR, expecting core CPI to remain well below the 2.5% medium-term target over the forecast horizon, ending at 2.1% in Q4/16. Accordingly, the optimal rate path was slashed, and much more than expected, implying the 1.50% key deposit rate on hold to next summer and effectively putting off three hikes up until end-2014. By end-2015, the path suggests a 2.75% level. The rate path included a 50/50 chance for a 25bps cut at the meeting May 8. Since then, the presumably trendsetting negotiation in manufacturing saw pay-hikes for blue-collar workers slowing from 4.1% to 3.4% in 2013, suggesting overall wage growth below Norges Banks 4.0% forecast, and March saw core CPI below the banks trajectory. Combined, these developments have fuelled expectations for a rate cut. Were not convinced. For starters, the 50/50 for a cut in May implied by the rate path was more of a hedge for Norges Bank to act should the NOK continue to strengthen: it hasnt on the import-weighted index (which actually is on the weak side of the forecast). Second, the absence of a cut in March amid the much lower inflation forecast hints of an acceptance of inflation staying low for longer and that the required robustness of monetary policy gained the upper had. That said, Norges Bank has been so unpredictable in the past that it might as well cut again.
Norges Bank revising down rate path sharply
Per cent
7 6 5 4 3 2 1 0 04 05 06 07 08 09 Norges Bank deposit rate Optimal rate path, MPR 3/12 10 11 12 13 14 15 Optimal rate path, MPR 1/13
Source: Norges Bank, SEB

on a lower inflation forecast


Percentage point
0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8 Q1 Q2 Q3 13 13 13 Prices and costs Growth abroad Q4 13 0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 14 14 14 14 15 15 15 15 Lending margins Capacity utilisation Net change MPR 1/13
Source: Norges Bank

7 6 5 4 3 2 1 0

NOK somewhat weaker recently


Weekly average
10.5 10.0 9.5 9.0 8.5 8.0 7.5 7.0 6.5 6.0 06 07 08 09 10 EUR/NOK (LHS) USD/NOK (RHS) 11 12
Source: Reuters, SEB

I44 index marginally weaker than forecast


Weekly average
9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 107 103 99 95 91 87 83 07 08 09 10 NOK import-weighted NOK assumption MPR 3/12 11 12 13 14 15 NOK assumption MPR 1/13
Source: Norges Bank, SEB

107 104 101 98 95 92 89 86 83

Tighter but still above-average spread vs Bunds


Weekly average
7 6 5 4 3 2 1 0 06 07 08 09 10 11 12
Source: Reuters, SEB

Credit growth marginally slower


Year-on-year percentage change
25 20 15 10 5 0 -5 03 04 05 06 07 08 09 10 11 12 Domestic credit growth Credit to households Credit to non-financial companies 25 20 15 10 5 0 -5

150 125 100 75 50 25 0 NOK 10-year government bond yield, % (LHS) Spread vs. Bunds, basis points (RHS)

Source: Statistics Norway

Economic Insights

For more in-depth analysis and comments, please follow the links
Norwegian Fixed Income: Norwegian Fixed Income: Norwegian Fixed Income: Norwegian Fixed Income: Norwegian Fixed Income: Norwegian Fixed Income: Norwegian Fixed Income: Norwegian Fixed Income: Norwegian Fixed Income: Norwegian Fixed Income: Norwegian Fixed Income: Soft core inflation will fuel expectations for a rate cut Wage growth should moderate in 2013 Manufacturing firmer but oil/gas to weigh on GDP Private consumption on a firmer footing in Q1 Norges Bank a mystery of inconsistency Norges Bank: The return of the dove Norges Bank very dovish, slashing its rate path NOR: Core CPI inflation eased slightly in February NOR: Norges Banks regional networks report NOR: Still-solid growth in oil investment sector NOR: Diverging labour market indicators remain a puzzle Apr 10, 2013 Apr 8, 2013 Apr 8, 2013 Apr 4, 2013 Mar 19, 2013 Mar 14, 2013 Mar 14, 2013 Mar 11, 2013 Mar 8, 2013 Mar 6, 2013 Mar 1, 2013