The US recovery slows down

The recovery in the US economy slowed down in the first-quart, much due to temporary factors. Here i

(29.04.2011) The recovery in the US economy slowed down in the first-quart, much due to temporary factors. Here in Norway, a fresh bank lending survey indicated that households have become somewhat more eager to loan.

By Anders Grøn Kjelsrud, Analyst at DNB Markets

According to the 1st estimate issued yesterday, US GDP grew at an annualized rate of 1.8 per cent in the first-quarter, down from 3.1 per cent in the final quarter of last year and slightly weaker than expected beforehand. Much of the slowdown was caused by factors that should be considered as temporary, as bad winter weather hampered industrial production in January and February, and probably pulled down investments as well.

Private consumption, which accounts for roughly two-thirds of the US economy, rose by a mere 2.7 per cent - down from 4.0 per cent in Q4. The decrease is directly associated with higher gasoline prices, which reduce the households’ disposable income. In all, we expect that growth will pick up again later this year, although the momentum in the recovery might be somewhat weaker than previously anticipated. In any case, it is not very likely that growth going forwards will be strong enough to bring unemployment (which remains high) quickly down, which is one of the main reasons why we expect that the Fed will remain on hold until well into 2012.

Meanwhile, the US dollar remains at low levels in forex, although it should be said that it gained somewhat versus the euro yesterday. EURUSD is currently traded around 1.484, slightly lower than yesterday morning, but up from 1.30 at the beginning of the year. This implies that the dollar has strengthened by as much as 12 per cent versus the euro in four months.

Much of this movement has probably been caused by divergent interest rate expectations – the Fed still doesn’t seem to be in any hurry to begin tightening, while the ECB, as we know, already has started to hike as a result of higher inflation.

Fresh CPI figures from the euro area are published later today (flash). According to Reuters, consensus except that the growth rate will remain unchanged at 2.7 per cent in April. Deviation from the market expectations will certainly be able to generate movement, especially in the light of the hawkish European central bank.

Norges Bank's survey of bank lending in the 1st quarter of 2011, released yesterday, shows approximately unchanged credit standards for households and enterprises. Still, the banks reported increased demand for loans in Q1, consistent with the credit growth figures from the Statistics Norway (C2), which have indicated a moderate increase in the pace of credit growth in recent months. This should come as no surprise, given the significant rise in housing prices since September last year. The strange thing is rather that the respondents expected unchanged loan demand, something they also do for the current quarter. On the contrary to the household sector, loan demand from enterprises where somewhat lower than expected in Q1, but the banks expect a moderate to strong increase in such loan demands in Q2.

In all, the survey supports the view that the Norwegian economy is improving gradually and should be well in line with Norges Bank’s general consideration regarding the economic outlook. Thus, we do not expect the report to affect the interest path by much. Not very surprisingly then, actors in FX did not seemed to put much emphasis in the news from the central bank. The Norwegain krone nonetheless gained versus the euro over the trading day, and EURNOK is currently trade down towards 7.76.

More Norwegian key figures are due later today. Already now at 08.00 p.m. we will get numbers for registered unemployment in April. One hour later Statistics Norway releases their quarterly business tendency survey, where we expect the index to climb from 11 to 13 – a level consistent with a gradual improving outlook.