SEB report: Norwegian 2012 growth forecast revised up

7/31/2019 SEB report: Norwegian 2012 growth forecast revised up

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Norway: Parting further from peersFRIDAY

15 JUNE 2012

Momentum in the Norwegian economy was surprisingly strong at the start of the year as

mainland GDP – excl. oil/gas and shipping – expanded by an above-trend 1.1% on the

quarter in Q1 to be up a very solid 4.1% year-on-year. Moreover, the recent report from

Norges Bank’s regional network (a summary of anecdotal evidence resembling the Beige

Book ) suggests that activity will continue to run at a solid clip in the near term.

Private consumption looks set to be on a firmer trajectory than previously expected oneven stronger growth in real disposable income, and is the main reason why we the

forecast for mainland GDP growth is revised up from 2.7% to 3.0% and for overallGDP from 2.4% to 2.8%. Surging investment in the petroleum sector should add

approx. 1%-point to overall GDP growth in 2012. However, we keep the 2013-forecasts unchanged at 3.1% for mainland GDP and 2.6% in overall GDP.

Recent indicators would suggest even stronger growth in 2012, but we’re not going “all

in”. First, some of the boost in early 2012 should prove transitory (e.g. surging electricity

production on the supply side). Second, growth in private consumption in Q1 is in for a

downward revision to a change of methodology. Third, soft in imports in Q1 is unlikely to

last considering solid domestic demand. Finally, and importantly, downside risks are

emanating from heightened uncertainty to the near-term outlook in the euro-zone, both

directly (exports) and indirectly (animal spirits and thus consumption and investment).

Stronger-than-expected growth and wage inflation is unlikely to make much of an

impact on Norges Bank’s monetary policy meeting June 20. Previously, we expected that

the bank was about to rethink its strategy and lift its optimal rate path from next year on.

However, Norges Bank should remain dovish, focusing on downside risks to the

global outlook in general and potential repercussion from ongoing stress in the euro-

zone in particular. Moreover, Norwegian inflation is still too low while forward interest

rates abroad are lower than the bank has assumed (which feed s into its policy rate

equation although the NOK index is slightly weaker than projected).

Stein BruunSEB Norway+47 21 00 85 34

Erica BlomgrenSEB Trading Strategy

+47 22 82 72 77

Norges Bank’s network sees solid growthYear-on-year percentage change, index

-4

-2

0

2

4

6

8

03 04 05 06 07 08 09 10 11 12

-2

-1

0

1

2

3

4

Mainland GDP (LHS)Regional network output indicator (RHS)Output expectat ions 6 mth ahead (RHS)

Source: Nor es Bank, Stat istics Norwa

Key dataPercentage change

2010 2011 2012 2013

GDP 0.7 1.4 2.8 2.6

Mainland GDP 1.9 2.4 3.0 3.1

Unemployment* 3.6 3.3 3.2 3.2

Inflation 2.5 1.2 1.1 1.9

Core inflation 1.4 0.9 1.4 1.9

Government balance** 11.3 13.8 13.6

* Per cent of labour force, ** General government, per cent of GDP,forecast 2012 MoF (May 2011)

Source: SEB



Economic Insights

DEMAND AND PRODUCTION

Growth in mainland GDP (excl. oil/gas and shipping) was surprisingly strong in Q1, rising 1.1% on the quarter to be

up a well above-trend 4.1% year-on-year. The acceleration was lifted by private consumption rising a solid 1.3%

from last Q4, and a surprisingly strong 3.8% gain in exports of non-oil goods (reversing almost all the slump in late

2011) and declining imports of such goods. However, overall non-oil investment declined 2.7% on the quarter: note,

though, that business investment and public ones as well tends to be very choppy on a quarter-to-quarter basis.Meanwhile, overall GDP expanded an even stronger 1.4% from Q4/11 – and 4.1% year-on-year as well – on strong

investment growth in the petroleum sector and a revival in aggregated oil and gas exports.

Retail sales have gathered pace since year-end which isn’t surprising as fundamentals remain very solid: households’

real disposable income was thus up a strong 6.0% year-on-year in Q1. Momentum in retail sales should slow going

forward. However, Q2 started strongly with the April level of consumption of goods (a broader gauge) 1.7% above

the Q1 average, though “inflated” by a suspicious jump in spending on electricity which should correct downwards.

Manufacturing production continues to lag well behind what various surveys suggest. The manufacturing PMI

continued to defy gravity from weakness abroad with very strong new orders index suggesting healthy momentum.

Growth well above trend in early 2012

Year-on-year percentage change

-3.0

-1.5

0.0

1.5

3.0

4.5

6.0

7.5

9.0

03 04 05 06 07 08 09 10 11 12

-3.0

-1.5

0.0

1.5

3.0

4.5

6.0

7.5

9.0

Norwegian real GDP GDP mainland NorwaySource: Stati stics Norway

Solid consumption, exports surprised in Q1Year-on-year percentage change

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

03 04 05 06 07 08 09 10 11 12

-20

-10

0

10

20

30

40

Private consumption (LHS) Private non-oi l investment (RHS)Export s non-oil goods (RHS)

Source: Stati stics Norway

Retail sales have gathered speed

Percentage change, 3-month average

-8

-4

0

4

8

12

16

03 04 05 06 07 08 09 10 11 12

-2

-1

0

1

2

3

4

Real retail sales excl. autos, year-on-year (LHS)From 3 mth. earlei r ( RHS)

Source: Stat istics Norway

Strong investment boom in petroleum sectorNOK bn.

40

60

80

100

120

140

160

180

200

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

40

60

80

100

120

140

160

180

200

Actual and planned investment oil/ gas extraction and pipeli nesSource: Stati stics Norway

Manufacturing production continues to lag …Percentage change, 3-month average

-16

-8

0

8

16

24

03 04 05 06 07 08 09 10 11 12

-4

-2

0

2

4

6

Manufactur ing product ion, %change year-on-year (LHS)From 3 months earl ier (RHS)

Source: Stat istics Norway

… upbeat survey-based indicatorsNet balance (sentiment) and index (PMI)

-30.0

-22.5

-15.0

-7.5

0.0

7.5

15.0

22.5

30.0

37.5

03 04 05 06 07 08 09 10 11 12

30

35

40

45

50

55

60

65

70

75

Manufacturing sentiment (LHS) PMI manufacturing (RHS)

PMI new orders (RHS)Source: Ecowin, Stati stics Norway

2



Economic Insights

LABOUR MARKET AND INFLATION

Healthy momentum in the broader economy continues to underpin labour markets. Employment was thus up a very

solid 2.2% year-on-year on average in February-April, lowering the LFS unemployment rate to 3.0%. Going forward,

we expect some recovery in the labour force and moderating employment growth to lift unemployment marginally.

The wage settlements in the dominant public sector confirm our earlier expectations that overall wage growth in2012 will be little changed from 4.2% rate in 2011. (Note that the timing of pay hikes in the main municipalities

sector already implies a 3% increase in 2013). Adding in solid employment and benign overall inflation, households’

real disposable income is likely to be up even more than the very strong 4.2% gain in 2011.

The year-on-year rate in core consumer prices (excl. taxes and energy) downshifted from 1.5% in March to a one-

year low of 0.7% in April only to lift to 1.4% in May. The choppiness reflects very volatile airfares which make up less

than 1% of the basket but exhibit very sharp twist and turns. Excluding this, underlying inflation eased to 1.0% in

May on our calculation, the slowest since December. Meanwhile, overall CPI inflation was still very low at 0,5% in

May, held in check by a further decline in electricity prices which have dented headline inflation 1.1%-point over the

past year, and lower gasoline prices. We stick to out forecast for gradually higher core inflation going forward.

Labour market remains very solid

3-month average

-2

-1

0

1

2

3

4

5

03 04 05 06 07 08 09 10 11 12

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

Employment, %change year -on-year (LHS)

Unemployment, %of l abour for ce (RHS)Source: Stati stics Norway

Wage growth holding up in 2012

0

1

2

3

4

5

6

7

8

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

0

1

2

3

4

5

6

7

8

Wage growth, %change year-on-year (LHS)LFSunemployment r ate, reversed (RHS)

Source: Stat isti cs Norway, SEB

SEB

forecast

CPI inflation remains very benign

Year-on-year percentage change

-2

-1

0

1

2

3

4

5

6

7

02 03 04 05 06 07 08 09 10 11 12

-2

-1

0

1

2

3

4

5

6

7

Consumer prices CPI excl. taxes and energy


Trend in domestic inflation only slightly higherYear-on-year percentage change

-4.5

-3.0

-1.5

0.0

1.5

3.0

4.5

6.0

02 03 04 05 06 07 08 09 10 11 12

-4.5

-3.0

-1.5

0.0

1.5

3.0

4.5

6.0

Core CPI domest ic goods and servicesCore CPI import ed consumer goods


Core inflation lower excl. airfaresYear-on-year percentage change

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2007 2008 2009 2010 2011 2012

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

CPI excl. taxes and energy Core CPI excl. airfares

Source: Stat isti cs Norway, SEB

Increase in home prices easing marginallyPercentage change

-15

-10

-5

0

5

10

15

20

25

30

03 04 05 06 07 08 09 10 11 12

-15

-10

-5

0

5

10

15

20

25

30

Existi ng home pri ces, year-on-year (LHS)From 6 mth. earli er, annualised (RHS)


3



Economic Insights

MONETARY POLICY AND FINANCIAL CONDITIONS

Following the 75bps rate cuts since last December, Norges Bank should keep the key deposit rate at 1.50% and

reiterate a dovish message at the monetary policy meeting June 20. Make no mistake, policy rates are too low

relative to domestic fundamentals even taking low inflation into account, in our view. Mainland GDP expanded 4.1%

in the year to Q1 and the recent report from Norges Bank’s network suggests continued above-trend growth in the

near term: the output gap is likely slightly positive. Unemployment is a low 3.0% as employment is growing morethan 2% year-on-year. Domestic core inflation (excl. taxes and energy) is approx. 2%, while wage growth should

exceed 4% in 2012, too. Finally, existing home prices continue to climb and domestic credit to households was up

6.8% year-on-year in April (though now at par with the solid gain in nominal disposable income in Q1). However,

Norges Bank should continue focusing on downside risks to the global outlook and a too-low overall inflation.

The Norwegian krone has outperformed all G10 currencies over the past week but remains vulnerable. Market’s rate

expectations are cautious and unchanged rates for the reminder of the year is discounted: nevertheless, risks are

still skewed toward a dovish surprise. In addition, with Norges Bank holding off from boosting FX purchases just yet,

there will be a “catch-up effect” in late Q3/Q4. Hence, we regard the 7.40-area to provide good buying opportunities

in EUR/NOK ahead of a markedly deteriorating flow outlook later this year, and forecast EUR/NOK 7.60 by end Q3.

Norges Bank sees rates staying lower for longerPer cent

0

1

2

3

4

5

6

7

8

02 03 04 05 06 07 08 09 10 11 12 13 14

0

1

2

3

4

5

6

7

8

Nor ges Bank deposi t rat e Opt i mal rat e pat h, MPR 1/ 12Optimal rat e path, MPR 3/ 11

Source: Nor ges Bank, SEB

Tight spread vs. Germany didn’t hold for long

Weekly average

0

1

2

3

4

5

6

7

8

9

01 02 03 04 05 06 07 08 09 10 11

0

50

100

150

200

NOK 10-year government bond yiel d, %(LHS)

Spread vs. Bunds, basis points (RHS)Source: Reuters, SEB

NOK indexes mowing sidewaysWeekly average

84

88

92

96

100

104

108

112

116

2005 2006 2007 2008 2009 2010 2011 201280

84

88

92

96

100

104

108

112

NOK trade-weighted (LHS) NOK import-weighted (RHR)Source: Reuters, SEB

Spread versus Bunds has drifted higherWeekly average

0

1

2

3

4

5

6

7

8

03 04 05 06 07 08 09 10 11 12

0

25

50

75

100

125

150

175

NOK 10-year government bond yiel d, %(LHS)

Spread vs. Bunds, basis point s (RHS)Source: Reuter s, SEB

Market pricing, Norges Bank March path, SEB forecast

0.75

1.25

1.75

2.25

2.75

3.25

04.12 11.12 06.13 01.14 08.14

Market pricing SEB forecastNorges Bank Main Norges Bank Low

Credit growth has levelled outYear-on-year percentage change

-5

0

5

10

15

20

25

03 04 05 06 07 08 09 10 11 12

-5

0

5

10

15

20

25

Domest ic cr edi t gr owt h Domest ic cr edi t to househol ds

Credit t o non-fi nancial companiesSource: Stati stics Norway

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SEB report: Norwegian 2012 growth forecast revised up

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