Norway: Subtle signs of firmer momentum

Theres no mistaking the slower growth rate in the Norwegian economy since 2012, but momentum regained some lost speed last Q4 as sequential growth in mainland GDP i.e. excluding oil/gas and shipping was the best in more than a year. The just-released report from Norges Banks regional network suggests stable though continued below-trend growth in early 2014 and a slight acceleration ahead. The outlook continues to be marked by strong crosscurrents. First, investment growth in oil and gas extraction is downshifting markedly from 18% in 2013 to 4% in 2014 on our forecast, and will thus lend only modest demand impulses to the rest of the economy. While not deflating the effect, one shouldnt over-emphasise it either: according to calculations by Statistics Norway of the direct and indirect effects, approx. one tenth of aggregate growth in mainland GDP from 2002 to 2012 can be attributed to oil sector investment. On another negative note, we expect weaker residential investment this year and next. At the same time, non-petroleum exports should gain speed. Foreign orders have thus rebounded strongly according to the manufacturing Business Tendency Survey, spurred by accelerating activity at main exports markets and improved competitiveness due to the sharp NOK depreciation since early 2013. In addition, growth in private consumption should pick up somewhat in 2014 (though still trailing the pace in 2010-12). Meanwhile, declining existing home prices from last spring to late autumn fuelled fears of an imminent steep plunge, and was seen as a - if not the major downside risk to the economic outlook. However, demand shows surprising resilience, and sustained turnover has helped stabilising prices in recent months. Its too early to sound all clear, but our forecast for a 34% decline in prices on average in 2014 might prove too pessimistic.

THURSDAY 20 MARCH 2014

Stein Bruun SEB Norway +47 21 00 85 34 Erica Blomgren SEB Trading Strategy +47 22 82 72 77

The full-year forecast for growth in mainland GDP is nudged lower to 2.1% for 2014 due
to back-revisions leaving less of a carry-over effect from 2013 and slightly softer-thanexpected private consumption in Q1, and to 2.4% for 2015.

Recent developments suggest few forecast revisions in Norges Banks MPR due March 27, and the bank should repeat its intention to keep rates on hold in 2014. We expect the rate hike cycle to start in spring 2015, somewhat earlier than indicated by the banks rate path.
Markedly stronger orders should fuel non-oil exports
Year-on-year percentage change, index

15 12 9 6 3 0 -3 -6 -9 -12 05 06 07 08 09 10 11 12 13 Exports of non-oil goods, volume (LHS) Manufacturing survey actual export orders, 2Q earlier (RHS)

Key data Percentage change

64 58 52 46 40 34 28

2012 2013 2014 2015 GDP Mainland GDP Unemployment* Inflation Core inflation
* Per cent of labour force Source: Statistics Norway, SEB

2.9 3.4 3.2 0.8 1.2

0.6 2.0 3.5 2.1 1.6

2.0 2.1 3.7 1.9 2.1

1.9 2.4 3.7 2.0 2.1

Source: Statistics Norway

Economic Insights

DEMAND AND PRODUCTION Growth momentum has been rather soft over the past year, and the evidence from Norges Banks regional network, covering the supply-side of the equation, suggests more of the same in the near term although aggregate output expectations are slightly firmer. Suppliers to petroleum sector continue to see moderation in tandem with slower investment growth, while other manufacturers and service providers expect firmer activity in the near term. One exception is retail sales which only have managed to stabilise recently. Note, though, that growth in spending on services and abroad, which together makes up slightly more than half of overall consumption, is healthy enough. Consumer confidence has continued to slip, but the level is consistent with only slightly below-trend growth in spending and thus a pick-up. The outlook for households real disposable income suggests as much. The recent oil sector investment survey, based on projections from operators at the Norwegian continental shelf, was reassuring as the 2014-level is put at a new record high. Nonetheless, annual growth will slow sharply and is bound the affect production of investment goods which has been surging in recent years. However, manufacturers have on aggregate lifted their production expectations due to very solid gains in export orders during H2/13 which was the strongest in 6-7 years as measured by the manufacturing Business Tendency Survey.
Norges Bank network sees a slight acceleration
Year-on-year percentage change, index

Momentum in retail sales still soft in early 2014

Percentage change

8 6 4 2 0 -2 -4 05 11 12 06 07 08 09 10 Mainland GDP (LHS) Regional network output indicator (RHS) 13 14

4 3 2 1 0 -1 -2

12 8 4 0 -4 -8 05 06 07 08 09 10 11 12 Real retail sales excl. autos, year-on-year (LHS) 3 mth. average from 3 mth. earlier (RHS) 13

3 2 1 0 -1 -2

Source: Norges Bank, Statistics Norway

Source: Statistics Norway

Short-term trend in manufacturing likely to turn up

Percentage change

as suggested by firmer expectations

Year-on-year percentage change, index

20 16 12 8 4 0 -4 -8 -12 05 06 07 10 11 12 08 09 Manufacturing production, year-on-year (LHS) 3 mth. average from 3 mth. earlier (RHS) 13

5 4 3 2 1 0 -1 -2 -3

12 9 6 3 0 -3 -6 -9 -12 05 06 07 08 09 10 11 12 Manufacturing production, 3 mth. average (LHS) Production expectations, 2Q earlier (RHS) 13

66 62 58 54 50 46 42 38

Source: Statistics Norway

Source: Statistics Norway

Housing starts are heading lower

No in 1.000

Record high oil sector investment, more modest growth

NOK bn

37 34 31 28 25 22 19 16 04 05 06 07 08 09 10 11 12 13 Approved housing starts in 1.000, 12 mth. aggregate Housing completions, 12 mth aggregate

37 34 31 28 25 22 19 16

240 220 200 180 160 140 120 100 80 60 40

240 220 200 180 160 140 120 100 80 60 40 01 02 03 04 05 06 07 08 09 10 11 12 13 14 Actual and planned investment oil/gas extraction and pipelines

Source: Statistics Norway

Source: Statistics Norway

Economic Insights

LABOUR MARKET AND INFLATION Unemployment started trending higher in late-2012 in tandem with softer momentum in the broader economy. At the same time and somewhat surprising, employment growth as measured by the Labour Force Survey has reaccelerated since mid-2013. The fact that LFS unemployment has ticked up recently is thus due to an outsized gain in the labour force which is volatile and occasionally erratic. Meanwhile, registered unemployment the measure favoured by Norges Bank has stabilised in recent months. We still expect unemployment to show a marginal increase in 2014 on either measure with the LFS unemployment rate inching up from 3.5% to 3.7%. Core CPI inflation has shifted markedly higher since last spring with the year-on-year rate on the ex.-taxes and energy measure at 2.4% in January and February, the highest in four years except for a spike last August. The uptrend has been broad-based with prices for domestically-produced goods accelerating fast and prices for imported goods turning from being a constant drag to rising as NOK depreciation during 2013 has filtered though. While the currency effect on imported inflation has yet to be exhausted, core domestic inflation has levelled out in recent months as rents (a fifth of the core CPI basket) seem to have peaked. As such, core inflation should moderate going forward although the full-year forecast for core inflation is nudged up to 2.1% due to the high starting point.
Employment growth is holding up
3-month average

while unemployment measures diverge somewhat

No in 1.000

5 4 3 2 1 0 -1 -2 05 09 10 11 12 06 07 08 Employment, % change year-on-year (LHS) LFS unemployment rate (LHS) 13

5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0

130 115 100 85 70 55 40 05 06 11 12 13 07 08 09 10 LFS unemployment, 3 mth. average Registered unemployed and employment schemes

130 115 100 85 70 55 40

Source: Statistics Norway

Source: Statistics Norway

Core inflation has shifted upwards

Year-on-year percentage change

on higher domestic and imported inflation

Year-on-year percentage change

7 6 5 4 3 2 1 0 -1 06 07 08 09 Consumer prices 10 11 12 13 CPI excl. taxes and energy

7 6 5 4 3 2 1 0 -1

6 5 4 3 2 1 0 -1 -2

6 5 4 3 2 1 0 -1 -2 06 07 08 09 10 11 12 13 Core CPI domestic goods and services Core CPI imported goods
Source: Statistics Norway, SEB

Source: Statistics Norway

Goods prices have turned sharply, rents peaking

Year-on-year percentage change

Existing home prices shows subtle signs of stabilising

Percentage change

7 6 5 4 3 2 1 0 -1 06 07 08 09 Core CPI domestic goods 10 11 Rents 12

7 6 5 4 3 2 1 0 -1 13 Core CPI services

24 18 12 6 0 -6 -12 05 06 07 08 09 10 Existing home prices, year-on-year (LHS) 11

6.0 4.5 3.0 1.5 0.0 -1.5 -3.0 12 13 From 3 mth. earlier (RHS)
Source: Nef, Eiendomsverdi

Source: Statistics Norway, SEB

Economic Insights

MONETARY POLICY AND FINANCIAL CONDITIONS Economic developments so far this year have largely been consistent with Norges Banks expectations of stable and soft growth in mainland GDP for this year and indicators are in line with what the central bank sees in terms of momentum in H1 as well. If anything, the large uncertainty surrounding the banks forecasts at the time has been reduced. Hence, there is little suggesting any substantial forecast revisions in the upcoming March 27 MPR. The bank should thus stick to its message that the key rate will remain on hold until next summer. The December path implied one or two rate hikes in the course of 2015, and the new rate path should confirm this view. However, any possible revision beyond that is likely dovish as long-term interest rates abroad have declined since late 2013. We continue to expect the rate hike cycle to commence somewhat earlier than signalled by Norges Bank. Uncertainty regarding the housing market and growth will gradually recede in the course of the year and core inflation (although volatile) will remain close to the target. Consequently, the bank should attain a tightening bias in late 2014 followed by a rate hike early next year. Our forecast of a 2.00% and 2.75% key rate by end 2015/2016 remains above markets expectations.
Norges Bank has continued to lower its rate path
Per cent

A very elevated spread versus Bunds

Weekly average

7 6 5 4 3 2 1 0 06 07 08 09 10 11 Norges Bank deposit rate Optimal rate path, MPR 3/13 12

7 6 5 4 3 2 1 0 13 14 15 16 Optimal rate path, MPR 4/13

Source: Norges Bank

7 6 5 4 3 2 1 0 07 08 09 10 11 12 NOK 10-year government bond yield, % (LHS) Spread vs. Bunds, basis points (RHS) 13

150 125 100 75 50 25 0

Source: Reuters, SEB

Sharp depreciating trend has come to a halt

Weekly average

NOK index back at Norges Banks trajectory

Weekly average

10.5 10.0 9.5 9.0 8.5 8.0 7.5 7.0 6.5 07 08 09 EUR/NOK (LHS) 10 11 12 USD/NOK (RHS) 13

8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5

Source: Reuters, SEB

106 102 98 94 90 86 82 07 08 09 10 11 NOK import-weighted NOK assumption MPR 3/13 12

106 102 98 94 90 86 82 14 15 13 NOK assumption MPR 4/13

Source: Norges Bank, SEB

Credit growth has slowed recently

Year-on-year percentage change
24 21 18 15 12 9 6 3 0 -3 05 06 07 08 09 10 11 12 13 Domestic credit growth Credit to non-financial companies Credit to households
Source: Statistics Norway

Banks eased credit standards to households last Q4

Change in credit standards, net balance
24 21 18 15 12 9 6 3 0 -3

40 30 20 10 0 -10 -20 -30 -40 -50 -60 2008 2009 2010 2011 2012 2013 Households Non-financial businesses

40 30 20 10 0 -10 -20 -30 -40 -50 -60

Source: Norges Bank