Norway: Parting further from peers

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 Banks 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 on even 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 overall GDP 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 2013forecasts unchanged at 3.1% for mainland GDP and 2.6% in overall GDP. Recent indicators would suggest even stronger growth in 2012, but were 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 Banks 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 eurozone 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).

FRIDAY 15 JUNE 2012

Stein Bruun
SEB Norway +47 21 00 85 34

Erica Blomgren
SEB Trading Strategy +47 22 82 72 77

Norges Banks network sees solid growth

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 6 mth ahead (RHS) 10 11 12 4 3 2 1 0 -1 -2

Key data Percentage change

2010 2011 2012 2013 GDP Mainland GDP Unemployment* Inflation Core inflation Government balance** 0.7 1.9 3.6 2.5 1.4 11.3 1.4 2.4 3.3 1.2 0.9 13.8 2.8 3.0 3.2 1.1 1.4 13.6 2.6 3.1 3.2 1.9 1.9

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

Source: Norges Bank, Statistics Norway

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 isnt 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
9.0 7.5 6.0 4.5 3.0 1.5 0.0 -1.5 -3.0 03 04 05 06 Norwegian real GDP 07 08 09 10 GDP mainland Norway 11 12 9.0 7.5 6.0 4.5 3.0 1.5 0.0 -1.5 -3.0 2.5 0.0 -2.5 -5.0 03 04 05 06 07 Private consumption (LHS) Exports non-oil goods (RHS) 10 0 -10 -20 08 09 10 11 12 Private non-oil investment (RHS)
Source: Statistics Norway

Solid consumption, exports surprised in Q1

Year-on-year percentage change
10.0 7.5 5.0 40 30 20

Source: Statistics Norway

Retail sales have gathered speed

Percentage change, 3-month average
16 12 8 4 0 -4 -8 03 04 05 06 07 08 09 10 Real retail sales excl. autos, year-on-year (LHS) From 3 mth. earleir (RHS) 11 12 4 3 2 1 0 -1 -2

Strong investment boom in petroleum sector

NOK bn.
200 180 160 140 120 100 80 60 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

200 180 160 140 120 100 80 60 40

Source: Statistics Norway

Manufacturing production continues to lag

Percentage change, 3-month average
24 16 8 0 -8 -16 03 04 05 06 07 08 09 10 11 Manufacturing production, % change year-on-year (LHS) From 3 months earlier (RHS) 12 6 4 2 0 -2 -4 37.5 30.0 22.5 15.0 7.5 0.0 -7.5 -15.0 -22.5 -30.0

upbeat survey-based indicators

Net balance (sentiment) and index (PMI)
75 70 65 60 55 50 45 40 35 30 03 04 05 06 07 08 09 10 11 12 Manufacturing sentiment (LHS) PMI manufacturing (RHS) PMI new orders (RHS) Source: Ecowin, Statistics Norway

Source: Statistics Norway

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 in 2012 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 oneyear 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
5 4 3 2 1 0 -1 -2 03 04 05 06 07 08 09 Employment, % change year-on-year (LHS) Unemployment, % of labour force (RHS) 10 11 12 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 8 7 6 5 4 3 2 1 0 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Wage growth, % change year-on-year (LHS) LFS unemployment rate, reversed (RHS)
SEB forecast

Wage growth holding up in 2012

0 1 2 3 4 5 6 7 8

Source: Statistics Norway

Source: Statistics Norway, SEB

CPI inflation remains very benign

Year-on-year percentage change
7 6 5 4 3 2 1 0 -1 -2 02 03 04 05 06 07 08 09 10 11 12 Consumer prices CPI excl. taxes and energy
Source: Statistics Norway

Trend in domestic inflation only slightly higher

Year-on-year percentage change
7 6 5 4 3 2 1 0 -1 -2 6.0 4.5 3.0 1.5 0.0 -1.5 -3.0 -4.5 02 03 04 05 06 07 08 09 Core CPI domestic goods and services Core CPI imported consumer goods 10 11 12 6.0 4.5 3.0 1.5 0.0 -1.5 -3.0 -4.5

Source: Statistics Norway

Core inflation lower excl. airfares

Year-on-year percentage change
4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2007 2008 2009 2010 2011 2012 CPI excl. taxes and energy Core CPI excl. airfares
Source: Statistics Norway, SEB

Increase in home prices easing marginally

Percentage change
4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 30 25 20 15 10 5 0 -5 -10 -15 03 04 05 06 07 08 09 Existing home prices, year-on-year (LHS) From 6 mth. earlier, annualised (RHS) 10 11 12 30 25 20 15 10 5 0 -5 -10 -15

Source: Statistics Norway

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 Banks 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 more than 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. Markets 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 longer
Per cent
8 7 6 5 4 3 2 1 0 02 03 04 05 06 07 Norges Bank deposit rate Optimal rate path, MPR 3/11 08 09 10 11 12 13 14 Optimal rate path, MPR 1/12
Source: Norges Bank, SEB

Tight spread vs. Germany didnt hold for long

Weekly average
9 8 7 6 5 4 3 2 1 0 01 02 03 04 05 06 07 08 09 NOK 10-year government bond yield, % (LHS) Spread vs. Bunds, basis points (RHS) 10 11
Source: Reuters, SEB

8 7 6 5 4 3 2 1 0

200

150

100

50

NOK indexes mowing sideways

Weekly average
116 112 108 104 100 96 92 88 84 2005 2006 2007 2008 NOK trade-weighted (LHS) 2009 2010 2011 2012 NOK import-weighted (RHR)
Source: Reuters, SEB

Spread versus Bunds has drifted higher

Weekly average
112 108 104 100 96 92 88 84 80 8 7 6 5 4 3 2 1 0 03 04 05 06 07 08 09 10 NOK 10-year government bond yield, % (LHS) Spread vs. Bunds, basis points (RHS) 11 12 175 150 125 100 75 50 25 0

Source: Reuters, SEB

Market pricing, Norges Bank March path, SEB forecast 3.25 2.75 2.25 1.75 1.25
0 25 20 15 10 5

Credit growth has levelled out

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 Domestic credit to households Credit to non-financial companies

0.75 04.12 11.12 06.13 01.14 08.14 Market pricing Norges Bank Main SEB forecast Norges Bank Low

-5

Source: Statistics Norway