Norway: growth pause should prove transitory

Momentum in the Norwegian economy has downshifted quite markedly since early 2013: sequential growth in mainland GDP excl. oil/gas and shipping was a lacklustre 0.2% in Q2 and the year-on-year rate slowed to 1.7%. The September report from Norges Banks regional network suggested continued well below-trend growth over summer. Domestic consumption of goods has been particularly weak and is in for a second sequential decline in Q3 (and more than in Q2). In addition, the housing market has cooled quite a bit, putting downside risks to residential investment going forward. Investment growth in the petroleum sector is downshifting, leaving smaller demand impulses to the rest of the economy next year. However, a gradual recovery at the main export markets in Europe and the marked depreciation of the NOK exchange rate in recent months should lift non-petroleum exports in 2014. According to Norges Banks regional network, the slowing on the supply side has centred on moderating activity among suppliers to the petroleum sector, construction and within retail trade. Manufacturing faces crosscurrents from moderating investment growth in the petroleum sector and what we expect to be positive demand impulses from abroad. Inflation has been choppy recently, posting a sharp upside surprise in summer but cooling more than expected in September: through the noise, the trend has shifted upwards. In all, we now see mainland GDP expanding 1.8% in 2013 and 2.4% in 2014, a downward revision of 0.3%-point from the August Nordic Outlook, first and foremost due to slower growth in private consumption which nonetheless should pick up somewhat in 2014. Overall GDP growth has been cut accordingly to 0.9% this year and 2.4% for 2014. The September Monetary Policy Report presented a more balances outlook for policy rates, and Norges Bank is likely to broadly stick to its current assessment at the two remaining meetings this year. While we still expect the 1.50% key rate to be lifted by mid2014, subsequent moves might be more cautious than expected as Norges Bank seems more eager to keep the NOK exchange rate on the weak side.

TUESDAY 22 OCTOBER 2013

Stein Bruun
SEB Norway +47 21 00 85 34

Erica Blomgren
SEB Trading Strategy +47 22 82 72 77

Norges Bank network sees below-trend growth

Year-on-year percentage change, index
8 6 4 2 0 -2 -4 03 04 05 06 07 08 09 10 11 Mainland GDP, % change year-on-year (LHS) Regional network output indicator, index (RHS) Output expectations 6 mth ahead, index (RHS) 12 13 4 3 2 1 0 -1 -2

Key data Percentage change

2012 2013 2014 2015 GDP Mainland GDP Unemployment* Inflation Core inflation Government balance** 3.1 3.4 3.2 0.8 1.2 14.4 0.9 1.8 3.5 2.2 1.6 11.5 2.4 2.4 3.5 2.1 2.1 10.2 2.1 2.6 3.7 2.3 2.3

* Per cent of labour force, ** General government, per cent of GDP, forecast 2013-14 MoF (October 2013) Source: SEB

Source: Norges Bank, Statistics Norway

Economic Insights

DEMAND AND PRODUCTION Domestic consumption of goods has been surprisingly soft so far in 2013. Following a surge at the start of the year, such only inched up in Q2 and is set to have showed a marked sequential decline in Q3. Part of the weakness owes to a weather-related plunge in spending on electricity, but the underlying trend remains sluggish as seen in retail sales. While spending on services and abroad should have held up (approx. half the total), overall private consumption was broadly unchanged on the quarter in Q2 and we have cut the forecast for 2013 from 3.0% to 2.5% and sliced the forecast for next year to 2.8%. The downshift in private consumption has been much sharper that what fundamentals would suggest. Growth in households real disposable income was thus a very solid 3.7% year-on-year and thus well ahead of the 2.2% gain in consumption. However, growth in real income was dented in Q3 by much higher inflation. Meanwhile, consumer confidence has eased only slightly on the quarterly survey. Momentum in manufacturing production excl. energy and mining has held up surprisingly well though showed signs of moderating in August. The red-hot investment goods sector is set to slow as growth in petroleum sector investment moderates markedly in 2014, but intermediate goods should be boosted by reviving foreign demand.

Economic Insights

LABOUR MARKET AND INFLATION Labour market indicators have been mixed recently. In seasonally adjusted terms, registered unemployment has gained in every month but two so far in 2013, though the rate remains rather low at 2.7% in September. Meanwhile, the LFS unemployment rate increased to 3.6% on average in June-August which, however, was due to a jump in the labour force. In fact, after stalling in the second quarter, LFS employment somewhat surprisingly increased by an above-trend 0.8% in June-August from the previous three-month period to be up 1.6% year-on-year. Core inflation posted a massive upside surprise in summer by lifting from 1.4% on average in Q2 to 2.5% in August on the ex. taxes and energy measure (CPI-ATE). We always saw part of the lift as transitory though the downward correction to 1.7% in September proved steeper than expected. Through the noise, however, the underlying trend has shifted upwards, led by rents and domestically-produced goods. The depreciation of the NOK in recent months suggests upward pressure on prices for imported goods going into 2014. The housing market has cooled markedly. In September, existing home prices were at par with the January level and the year-ago rate slowed to 2.6%, a sharp slowing from average annual gains of 8% in 2010-12. Existing home sale has yet to show any similar cooling, but prices are pressured by rising supply (up 21% year-on-year).

Economic Insights

MONETARY POLICY AND FINANCIAL CONDITIONS Norges Banks September Monetary Policy Report presented a more balanced rate outlook: the rate path was lifted slightly and the bank now sees the first rate hike around next summer. We dont expect a change in policy at the October and December meetings. The banks growth forecasts have yet to be proven too cautious and inflation to remain close to target. Any change in a hawkish direction should thus come in the March MPR at the earliest. One might suspect that the low rate path reflects the banks intention to keep the NOK on the weak side. We expect the bank to become even more determined to prevent the currency from strengthening (by keeping rate spreads stable) as authorities have increased focus on non-oil exporters weak competitiveness. While a hike is still expected next summer, we now see a 25bps hike in September as most likely (previously June), while subsequent hikes should be very gradual. Our 2.00% and 2.75% forecasts for end 2014/2015 may prove too aggressive. The long-term potential for the NOK is still positive given its attractive valuation and its unique fiscal position. However, fundamentals are fading as a driver for the NOK and considering Norges Banks persistent unwillingness to do anything that might strengthen the NOK, we have trimmed our bullish long-term NOK view to forecast EUR/NOK at 7.70 by end-2014. In the short-term, the krone will remain volatile and highly sensitive to negative data.
Norges Bank nudged the rate path higher
Per cent
7 6 5 4 3 2 1 0 05 06 07 08 09 Norges Bank deposit rate Optimal rate path, MPR 2/13 10 11 12 13 14 15 Optimal rate path, MPR 3/13
Source: Norges Bank, SEB

Factors behind revisions to rate path in MPR 3/13

Percentage point
7 6 5 4 3 2 1 0 0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 13 14 14 14 14 15 15 15 15 16 16 16 16 Prices Interest rates abroad Exchange rate Lending margins, premiums Capacity utilisation Net change MPR 3/13 0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6

Source: Norges Bank

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: Norwegian Fixed Income: NOR: Fiscal budget with a marginal expansionary twist NOR: Core inflation shows a sharp downward correction Momentum in manufacturing production slowing NOR: Manufacturing PMI suggests healthy momentum NOR: Sluggish private consumption in Q3 Unemployment creeps higher, employment turns up Norges Bank with a more balance policy rate outlook NOR: Growth continuous to run at a soft below-trend pace NOR: Norway moves to the right NOR: Norges Bank to take notice of sharp lift in inflation NOR: Record-high oil investment, slower growth in 2014 NOR: Growth has slowed to well below trend Oct 14, 2013 Oct 10, 2013 Oct 7, 2013 Oct 1, 2013 Sep 30, 2013 Sep 27, 2013 Sep 19, 2013 Sep 13, 2013 Sep 10, 2013 Sep 10, 2013 Sep 5, 2013 Aug 20, 2013