Norway: Activity running at a solid clip

Activity indicators for the first couple of months of the year suggest that overall activity has started the year on a stronger-than-expected footing. The solid impression fits with what respondents reported in the most recent report from Norges Banks regional network: output increased fairly rapidly in winter while expectations ahead was for some moderation (as they tend to be), consistent with growth in mainland GDP i.e. excluding oil/gas and shipping at near 3% year-on-year rate in the first half of 2012. Relative to Februarys Nordic Outlook, we lift the forecast for growth in mainland GDP in 2012 to 2.6% from 2.3% while leaving the forecast for 2013 unchanged at 2.9% for now. Overall GDP is seen rising at a somewhat slower 2.1% rate in 2012 which nonetheless implies stronger growth than in 2011. We see upside risks to the forecasts. The run-up to the wage negotiations has seen the usual rhetoric of putting a lid on wage growth to stem deteriorating competitiveness in export industries. The trend-setting negotiation for manufacturing blue-collar workers has broken down with the official mediator stepping in. Pay increases might be slower than in 2011: according to media reports, labour unions will trade it for a common paternal leave in the private sector to be paid for by government. Actual wage inflation in manufacturing is likely to be stronger than agreed in the central negotiations due to wage drift (local pay), reflecting tight labour markets. Moreover, wage growth in the dominant public sector might not slow as much. In all, we expect overall wage growth to ease from 4.2% in 2011 to 3.9% in 2012, yielding a solid increase when adjusted for inflation. Norges Bank once again surprised by cutting the key deposit rate 25bps to 1.50% at its mid-March monetary policy meeting, citing still-lingering concern for global growth and lower inflation due to NOK appreciation. The bank lowered its optimal rate path quite markedly, putting any rate hike off to Q3/13. We think a hike will come next spring at the latest with the end-2013 level at 2.50% or 50bps higher than the rate path suggests.

MONDAY 2 APRIL 2012 Growth

Inflation

Labour-market

Stein Bruun, +47 2108 8534, and Erica Blomgren, +47 2282 7277, SEB Norway
Growth is seen holding near trend
Mainland GDP and Norges Banks regional network
8 6 4 2 0 -2 -4 03 04 05 06 07 08 09 10 Mainland GDP, % change year-on-year (LHS) Regional network output indicator, index (RHS) Output expectations 6 mth ahead, index (RHS) 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 10.8 1.6 2.6 3.3 1.2 0.9 13.6 2.1 2.6 3.3 1.5 1.5 11.5 2.4 2.9 3.2 1.9 1.9

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

Source: Norges Bank, Statistics Norway

Economic Insights

DEMAND AND PRODUCTION Momentum in private consumption starts resembling the turn in consumer confidence and firmness suggested by fundamentals. Real retail sales recovered solidly in January and February, and the indicator measuring consumption of goods were on average for the two months fully 2.1% above the level in Q4. Even if March should see a marked payback and Q2 be softer, consumption growth should accelerate from 2.2% in 2012 to a solid 3.0% for all of 2012. The short-term trend in manufacturing production (excluding energy) has been choppy since mid-2011, apparently mirroring a split between healthy domestic demand led by surging oil sector investment and exports feeling chilly winds from abroad. The 13-point jump in the PMI from December to a 4 -year high of 59.7 in March and an even stronger rebound for the new orders index looks exaggerated but do suggests a more broad-based recovery. Real residential investment jumped 22% in 2011 (adding one percentage point to growth in overall GDP), but following the strong turn since 2009, housing starts have levelled out in late 2011/early 2012. However, surging orders suggest a looming rebound. In fact, record-high population growth, with an extra boost from still-strong labour migration, implies that housing starts should surpass the 32.000 average annual level in 2005-07 period which marked the previous high.
Consumption has firmed in early 2012
3-month average
16 12 8 4 0 -4 -8 -12 03 04 05 06 07 08 09 10 Consumption of goods, % change year-on-year (LHS) % change from 3 mth. earlier (RHS) 11 4 3 2 1 0 -1 -2 -3 -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, net balance (RHS) 5.0 2.5 0.0 30 20 10 0 -10 10.0 50 7.5 40

as turn in confidence has suggested

Source: Statistics Norway

Source: Ecowin, Statistics Norway

Choppy momentum in manufacturing, but

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

sharp recovery in PMI suggests solid outlook

75 70 65 60 55 50 45 40 35 30 04 05 06 07 08 09 10 11
Source: Ecowin

75 70 65 60 55 50 45 40 35 30 PMI manufacturing (RHS) PMI new orders (RHS)

Source: Statistics Norway

The upturn in housing starts has levelled off..

80 60 40 20 0 -20 -40 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

.. but orders suggest much more in the pipeline

11 10 160 140 120 100 80 60 40 20 0 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Housing starts in 1.000, quarterly average (LHS) Nominal orders new residential buildings, 2Q earlier (RHS)

40 35 30 25 20 15

9 8 7 6 5 4 3

Source: Statistics Norway

Economic Insights

LABOUR MARKET AND INFLATION The labour market continues to exhibit strength, presumably reflecting ongoing solid momentum in the economy. Employment was thus up an above-trend 2.4% year-on-year on average in December-February (and 0.7% from September-November). The gain is even stronger than the very solid increase in the labour force, lowering the LFS unemployment rate to 3.2% in December-February. We expect a broadly unchanged rate trough the year. Core consumer prices have yet to show any trend-change as the year-on-year rate on the CPI-ATE measure excl. taxes and energy was unchanged at 1.3% in February, only marginally above the average in H2/11. Norges Bank for its part cut the inflation forecasts quite noticeably in the March MPR in part as a stronger NOK puts a lit on import prices (which accounts for almost 30% of the core index). The bank sees core inflation only slightly higher in the second half of 2012, rising slowly thereafter but holding below the 2.5% medium-term target in 2015. Existing home price inflation measured in y-o-y terms has eased, but at 6.8% in March to record-high levels sets Norway apart from peers. Tighter equity requirements for mortgages (from 10% to 15%) might still have to be felt, but the fundamental supply/demand imbalance persists: while some 20.000 homes were completed in 2011, new household formation surpassed 30.000 and the under-supply will thus put a floor under prices in the short term,
Employment growth continues to run strongly
3-month average
5 4 3 2 1 0 -1 -2 01 02 03 04 05 06 07 08 Employment, % change year-on-year (LHS) Unemployment, % of labour force (RHS) 09 10 11 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 0 87 89 91 93 95 97 99 01 03 05 Wage growth, % change year-on-year (LHS) LFS unemployment rate, reversed (RHS) 07 09 11 4 2 10 8 6 0 1 2 3 4 5 6 7

Wage growth to moderate slightly in 2012

Source: Statistics Norway

Source: Statistics Norway

Core inflation shows no definite trend-change

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 Consumer prices CPI excl. taxes and energy
Source: Statistics Norway

Imported goods are denting inflation

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

7 6 5 4 3 2 1 0 -1 -2

Source: Statistics Norway

Existing home prices continue to climb ..

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

..as home completions lag household formation

Thousands
50 40 30 20 10 0 -10 -20 02 03 04 05 06 07 08 09 10 11 Net balance No of households, change y/y Housing completions 50 40 30 20 10 0 -10 -20

Source: Norw. Ass. of Real Estate Agents

Source: Norges Bank, Statistics Norway

Economic Insights

MONETARY POLICY AND FINANCIAL CONDITIONS Norges Bank surprisingly cut the key deposit rate 25bps to 1.50% on March 14. While growth in the Norwegian economy is still rather healthy, the bank is still almost solely focusing on the NOK. With the trade-weighted NOK index expect to remain strong throughout the forecasting horizon, the inflation forecast and rate path was lowered markedly in the March Monetary Policy Report. The new rate path indicates a key rate at 2.00% and 3.00% by end 2013 and 2014 respectively. We expect the NOK to remain key driver for monetary policy until signs of a global recovery are more profound. Nevertheless, the strong domestic economy will force Norges Bank to eventually hike rates ahead of peers; we expect a rate hike in early 2013 and a key rate at 2.50% by the end of next year. The recent NOK weakness should be temporary considering a stronger growth outlook and superior fundamentals relative to peers: we target EUR/NOK at 7.45 by end-Q2. In H2, however, markedly higher FX purchases by Norges Bank on behalf of the Government Pension Fund Global should weaken the NOK. We expect EUR/NOK to trade in a 7.30-70 range through 2012. Norwegian government bond market has been balancing between capital preservation inflows from foreigners and front-loaded supply mostly digested by domestic investors. With ~45% of estimated supply in 2012 done, we see current spread levels vs. Germany as attractive. In May, a new 11y bond will be issued.
Norges Bank sees rates 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

..as NOK is expected to remain stronger

Index
8 7 6 5 4 3 2 1 0 95 93 91 89 87 85 83 2010 2011 NOK import-weighted NOK assumption MPR 3/11 2012 2013 2014 NOK assumption MPR 1/12
Source: Norges Bank, SEB

95 93 91 89 87 85 83

Low rates spur stronger credit growth

Year-on-year percentage change
25 20 15 10 5 0 -5 25 20 15 10 5 0 -5 01 02 03 04 05 06 07 08 09 10 11 Domestic credit growth Domestic credit to households Credit to non-financial companies Source: Statistics Norway
9 8 7 6 5 4 3 2 1 0

Tight spread vs. Germany didnt hold for long

Weekly average
200

150

100

50

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

NOK marginally weaker after latest rate cut..

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

.. but is still stronger than at end-2011

Weekly average
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

9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5

Source: Reuters, SEB