Lower than expected GDP-growth

(18.02.2011) Norwegian GDP rose far less than expected in Q4 – but the upswing still seem to be in place. The central bank governor Mr Olsen did not give any new signals regarding interest rate in his first annual speech.

By Knut A. Magnussen, Senior Economist at DNB Markets

illustration norwegian krone cc DNB marketsNorwegian GDP rose only 0.3% in Q4, far weaker than expected. The reason was a larger than expected negative contribution from net exports. Domestic demand showed strong performance, as expected.

Due to upward revisions the annual growth rate for 2010 ended at 2.2% after a drop of 1.3% in 2009. The outcome for 2010 is higher than forecasted by the central bank in the October report (1,75%).

Statistics Norway also launched their forecasts for the coming year yesterday. The organization is painting is very favourable picture of the economy, with strong growth and low inflation for several year to come. In 2014 the forecast for the money market rate is 5.8%, the forcecast for wage growth is 5.8% and the forecast for growth in housing prices is 5.8%. The reason is that unemployment has fallen to only 2.6%.

As expected the annual speech by the central bank governor did not give any new signals regarding monetary policy. He reiterated the message that low inflation calls for low interest rates, but that the risk of future imbalances implies that rates should not be kept low for too long.

The NOK
strengthened somewhat under the speech and the EURNOK was traded down towards 7.74 before correcting up again. The recent stronger tendency for the NOK seems to be related to the high and rising crude oil price, lifted by the Middle East tensions. A stronger NOK wil dampen inflation further, while higher rates in Sweden and the UK will probably make it easier for Norges Bank to lift rates. However, we still expect that the next hike will occur in June.

Swedish headline inflation was 2.5% in January – well in line with the forecasts. However, underlying inflation fell more than expected to only 1.4%. The unexpected decline was due to changes of weights from January, raising the effects of higher mortgage rates. The low inflation may imply a somewhat less aggressive central bank going forward. Swedish unemployment rose marginally on a seasonally adjusted basis in January. This was somewhat disappointing even if employment is now at the pre crisis level. The SEK weakened vs the EUR after the release of the data.

US inflation grew by 0.4% m/m in January and hence lifted annual inflation to 1.6%. This was as expected. Gasoline prices rose 3.5% and food prices by 0.5%. Core inflation rose 0.2% m/m, lifted by clothing prices. Still core inflation is low (1%) and with the high unemployment rate it is not very likely that core inflation will pick up further short term. Initial claim rose somewhat to 410.000 last weak and seems to have stabilized at around 400.000. This would normally be consistent with far lower unemployment than 9% - which was recorded in January. Philly Fed rose to the highest level in seven year in February. The subindex for employment even reached the highest level since 1963. Hence it seems that the very strong industrial recovery continues. 

British manufacturing industries continue to perform well. According to the February report from CBI is optimism rising. Expected production and orders are both rising. Exports orders rose to the highest level since 1995, pointing at continued sound export growth going forward. Today retail sales for January are due. Sales are expected to increase by 0.5% after the weather related drop in December. However, the VAT increase from the start of the year may be a negative risk factor to the data.

Spain undertook a successful ten year auction yesterday. A total of 3.5 bill. EUR was sold and the yield on the ten year issue was 5.2% - somewhat lower than when the same bond was auctioned in mid-December.