Norway: Still not quite like others

The broad contours of our expectations for the Norwegian economy remain intact: growth in overall GDP should accelerate to 2.1% in 2012 helped by a very strong investment cycle in the oil sector. However, relative to the latest Nordic Outlook, we have sliced our forecast for growth in mainland GDP excluding oil/gas and shipping to 2.4% in 2012, marginally slower than in 2011, but leave the 2013-forecast at 2.9%. While non-oil exports of goods slipped in late 2011, headwinds from abroad have been most visible in soft indicators. The manufacturing PMI has thus dropped markedly and consumer confidence has declined to a below-trend level which on the face of it suggests that private consumption will continue to lag well behind very solid income growth. Surging oil sector investment provides the Norwegian economy with an extra demand impulse others are lacking. This should show up in a split in manufacturing with activity among suppliers to the oil sector holding up well while producers of intermediate goods will be hit by weakness at main export markets. The decline in non-petroleum exports in the second half of 2011 is expected to carry over to early 2012. Norges Bank made a surprisingly deep 50bps cut in its key deposit rate to 1.75% in December. SEBs forecast is that the ECB will leave policy rates unchanged going forward. If so, Norges Bank should stay put as well, but should the ECB opt for cutting rates, a 25bps rate cut at the mid-March monetary policy meeting cannot be ruled out. Norway is in a unique fiscal position. The central government surplus of NOK 373bn in 2011 (some 13.5% of GDP) was NOK 106bn more than expected: higher income from the oil sector (higher prices) contributed a lot, but the non-oil budget deficit was 51bn lower than assumed on e.g. higher tax income. The 2012 budget puts the general government surplus at 11.5% of GDP, leaving the government ample room to stimulate if needed.

WEDNESDAY 18 JANUARY 2012 Growth

Inflation

Labour-market

Stein Bruun, +47 2108 8534, and Erica Blomgren, +47 2282 7277, SEB Norway

Growth should hold up rather well

Year-on-year percentage change
9 8 7 6 5 4 3 2 1 0 -1 -2 -3 SEB forecast 9 8 7 6 5 4 3 2 1 0 -1 -2 -3

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 10.8 1.4 2.5 3.3 1.2 0.9 13.6 2.1 2.4 3.4 1.4 1.5 11.5 2.4 2.9 3.3 2.1 2.0

03

04

05

06

07

08

09

10

11

12

13

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

Norwegian real GDP

GDP mainland Norway

So urce: Statist ics Norway, SEB

Economic Insights

DEMAND AND PRODUCTION Momentum in retail sales has been muted recently in part as unusual warm weather put a lid on sale of seasonal goods. In general, private consumption is surprisingly soft considering that households real disposable income surged 5.2% year-on-year on average in the first three quarters of 2011, twice the rate of consumption. However, developments abroad have hit consumer sentiment with the quarterly index below its long-term average suggesting sub-par spending growth and a monthly indicator ending 2011 at the weakest since the financial crisis of 2008. The acceleration in manufacturing production (i.e. excluding energy) last autumn - the September-November level was up a solid 1.9% from the previous three-month period - should prove short-lived. The manufacturing PMI has dropped markedly to a more than two-year low of 46.6 in December with the orders component particularly weak. Exports of traditional goods (excl. energy, ships and oil platforms) declined 0.9% in volume terms on the quarter in Q4, slightly more than in the previous one, to be up 3.4% year-on-year. As imports gained, net trade of traditional goods dented mainland GDP last Q4 with a larger blow to overall GDP as energy exports dropped sharply. Regarding the effect on GDP, it should be noted that while overall exports make up slightly more than 40% of GDP, non-oil exports of goods accounts for a rather limited 15-16% of mainland GDP.
Retail sales have been soft lately
3-month average
16 12 8 4 0 -4 -8 01 02 03 04 05 06 07 08 09 10 11 Real retail sales excl. autos, % change year-on-year (LHS) 3 mth. average from 3 mth. earlier (RHS) 4 3 2 1

Softer sentiment suggest sub-par consumption

10.0 50 7.5 5.0 2.5
0 -1 -2

40 30 20 10

0.0 -2.5 98 99 00 01 02 03 04 05 06 07 08 09 10 11 Private consumption, % change year-on-year (LHS) Consumer confidence (RHS)

0 -10

Source: Statistics Norway

Source; Ecowin, Statistics Norway

Stronger momentum in manufacturing

3-month average
24 16 8 0 -8 -16 01 02 03 04 05 06 07 08 09 10 Manufacturing production, % change year-on-year (LHS) From 3 months earlier (RHS) 11 6 5 4 3 2 1 0 -1 -2 -3 -4

about to turn as indicators have deteriorated

Net balance (sentiment) and index (PMI)
37.5 30.0 22.5 15.0 7.5 0.0 -7.5 -15.0 -22.5 -30.0 01 02 03 04 05 06 Manufacturing sentiment (LHS) PMI new orders (RHS) 07 08 09 10 11 PMI manufacturing (RHS)
Source: Ecowin, Statistics Norway

75 70 65 60 55 50 45 40 35 30

Source: Statistics Norway

Exports has weakened

Percentage change
12.5 10.0 7.5 5.0 2.5 0.0 -2.5 -5.0 -7.5 01 02 03 04 05 06 07 08 09 10 11 Real exports traditional goods, from previous quarter (LHS) Change year-on-year (RHS) 50 40 30 20 10 0 -10 -20 -30 200 180 160 140 120 100 80

Relative prices a bit less favourable

Terms of trade. Index 2001=100
200 180 160 140 120 100 80 01 02 03 04 05 06 07 08 Overall exports and imports of goods Traditional goods (excl. oil and gas) 09 10 11

Source: Statistics Norway

Source: Statistics Norway, SEB

Economic Insights

LABOUR MARKET AND INFLATION Employment growth is likely to moderate compared with the solid 2.1% year-on-year rate on average in SeptemberNovember. Although the trend in vacancies has yet to show a turn to the worse, softer growth should put a lid on employment, and as the labour force is set to continue rising (with an extra lift from migration), the LFS unemployment rate is like to rise from 3.3% at present, although only marginally. Overall CPI inflation dropped a full percentage point to 0.2% in December on an extremely strong base effect for electricity prices (surging in December 2010 on colder-than-usual weather while declining this time around). Meanwhile, core CPI excl. taxes and energy (CPI-ATE) was steady at 1.0% in to year to December. The choppy pattern in core inflation over the past year is likely to persist but the general trend should be slightly upwards. Tight supply/demand conditions have fuelled existing home prices which were up 9.0% in 2011 and ended the year 33% above the trough in November 2008. Home prices seem way too high relative to CPI and rents, but not when measured against household income or housing starts which are lagging what demographics suggest. Despite tighter equity requirements for mortgages, persisting supply-demand imbalances should put a floor under prices.

Employment growing at a solid pace

3-month average
6 5 4 3 2 1 0 -1 -2 01 02 03 04 05 06 07 08 Employment, % change year-on-year (LHS) Unemployment rate, % of labour force (RHS) 09 10 11 3 2 1 0 7 6 5 4 45 40 35 30 25 20 15 10 5 0

Vacancies are still holding up

No in 1.000
45 40 35 30 25 20 15 10 5 0 03 04 05 06 07 08 Stock of vacant jobs, 3 mth. average New vacancies, 3 mth. average 09 10 11

Source: Statistics Norway

Source: Statistics Norway

Core inflation is moving sideways

Year-on-year percentage change
6 5 4 3 2 1 0 -1 -2 01 02 03 04 05 06 07 08 09 10 11 6 5 4 3 2 1 0 -1 -2 -1.5 -3.0 -4.5 6.0 4.5 3.0 1.5 0.0

Softer domestic inflation at end-2011

Year-on-year percentage change
6.0 4.5 3.0 1.5 0.0 -1.5 -3.0 -4.5 01 02 03 04 05 06 07 08 Core CPI domestic goods and services Core CPI imported consumer goods 09 10 11

Consumer prices

CPI excl. taxes and energy

Source: Statistics Norway

Source: Statistics Norway, SEB

Existing home prices continue to rise

25 20 15 10 5 0 -5 -10 01 02 03 04 05 06 07 08 09 10 Existing home prices, % change year-on-year (LHS) Existing home prices per sqm in NOK 1.000 (RHS) 11 15 10 25 20 35 30
75 60 45 30 15 0 -15 -30 -45

Housing starts are trailing demographics

40 35 30 25 20 15 01 02 03 04 05 06 07 08 09 10 11 Housing starts 3 mth. average, % change year-on-year (LHS) Housing starts in 1.000, 12 mth. aggregate (RHS)
Source: Statistics Norway

Source: Norw. Ass. of Real Estate Agents

Economic Insights

MONETARY POLICY AND FINANCIAL CONDITIONS Norges Banks surprisingly deep 50bps cut in the key deposit rate to 1.75% in December, departing from the October Monetary Policy Report which called for unchanged policy rates until autumn 2012, was first and foremost motivated by the global slowdown and ongoing sovereign debt stress in Europe. The Board thus wanted to take measures to mitigate effects of a particularly adverse outcome on the economy. The bank also took note of persistently high money market premiums and short-term rates have declined quite a lot since then. As such, developments abroad will be of particularly importance for monetary policy going forward. SEB expects the ECB to keep policy rates unchanged going forward. If so, it would take a marked deterioration of domestic economic conditions for Norges Bank to cut the deposit rate further. While momentum in mainland GDP has slowed, the economy is operating at close to normal capacity which suggests that real policy rates are low enough. However, should the ECB opt for a rate cut in the near term, Norges Bank would likely follow up at the midMarch policy meeting as it seemingly is focused on relative interest rates and the exchange rate to dent the headwinds from abroad. Strong demand from foreign investors has pushed down government yields to new record lows and Norwegian bonds have outperformed markedly vs. Germany recently. With no imminent solution to the Euro zone debt crisis and relatively neutral risk appetite going forward we expect the underlying demand for Norwegian bonds to remain solid in the coming 3-6 months. However, current tight levels should trigger some fresh selling by domestic accounts. In addition we expect Norges Bank to take advantage of current low yield levels with front loaded supply which also should help stabilize spreads vs. Germany. We expect the 10-year yield to remain in a historically tight range vs. Germany of 0-40bps in the near term. The Norwegian krone has weakened recently in trade-weighted terms due to USD appreciation. However, strong fundamentals make the krone attractive from a credit perspective. Financial flows have been most supportive in the bond sphere while foreigners' appetite for Norwegian equities has been rather stable in recent months, a trend likely to continue in the near term. With Norges Bank expected to sell krone against FX equivalent of NOK 350-500m/day in H1, the flow outlook looks positive. Nevertheless, Norges Bank is likely to keep its guard against a too strong NOK, putting a floor in EUR/NOK above the previous 7.50 low, and EUR/NOK should range-trade in the near term.
Norges Bank moving aggressively
Per cent
8 7 6 5 4 3 2 1 0 02 03 04 05 06 07 08 Norges Bank deposit rate Scenario weaker growth abroad 09 10 11 12 13 14 Optimal rate path, MPR 3/11
Source: Norges Bank, SEB

Yield-spread has tightened considerably

Weekly average
8 7 6 5 4 3 2 1 0 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

200

150

100

50

EURNOK has been rather stable

Weekly average
10.5 10.0 9.5 9.0 8.5 8.0 7.5 7.0 6.5 6.0 2004 2005 2006 2007 2008 2009 EUR/NOK (LHS) USD/NOK (RHS) 2010 2011
Source: Reuters, SEB

NOK weaker in trade-weighted terms

Weekly average
9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 116 112 108 104 100 96 92 88 84 2004 2005 2006 2007 NOK trade-weighted (LHS) 2008 2009 2010 2011 NOK import-weighted (RHR) 112 108 104 100 96 92 88 84 80

Source: Reuters, SEB