Disappointing consumption growth

Yesterday’s Norwegian key figures were on the weak side, and in particular has the consumption trend

(01.06.2011) Yesterday’s Norwegian key figures were on the weak side, and in particular has the consumption trend surprised Norges Bank on the downside so far this year. In the US the tendency remains weak, without this being sufficient to curb the rise in equity markets driven by new hopes for Greece.

By Maren Romstad, Analyst at DNB Markets

Both yesterday and today is characterized by several Norwegian key figures. Yesterday, we received consumption figures for April. These were clearly on the weak side and retail sales only rose by 0.1 per cent from March to April. Late Easter may have disrupted the figures, but the trend in recent months on a whole is weak.

One possible explanation is that the high electricity bills have continued to weigh on the Norwegian consumer. If we take a closer look at goods consumption, which also evolved relatively weak, it’s clear that consumption growth is dampened by a sharp decline in electricity consumption. Aside from that household consumption of electricity and fuels fell by 8.1 per cent, the remaining goods consumption rose by 0.8 per cent. The effects of high electricity prices should soon be out of the figures and there are several factors that indicate that consumption will pick up.

Among other things, the figures from the shopping centers have been showing strong growth and, hence, the weak April numbers were surprising. Furthermore, consumption so far this year has probably surprised Norges Bank on the downside. With an estimate of a growth in private consumption of 3.5 per cent, consumption must pick up significantly over the next months.

Yesterday’s figures also confirmed that household debt growth remains high. However, credit growth slowed marginally from March to April, but an annual increase of almost 7 per cent implies that the household debt ratio continues to rise. This is not surprising in light of the recent increase in housing prices. Last month, house prices fell by 1.0 per cent, but we believe that the surprising decline was temporary. We suspect the fall in April to have been driven by the unusually late Easter vacation in combination with extraordinary warm weather. Today’s house price statistics is expected to show a 0.9 per cent monthly rise. In addition to housing prices, the PMI index, investment statistics for the manufacturing sector and current account figures are published later today.

The different key figures gave small market reactions, but the Norwegian krone weakened somewhat. A contributing factor may be that the central bank will buy foreign currency for 400 million NOK per day in June (up from 300 million in May). It is uncertain how large impact the FX purchases has on the Norwegian krone, since purchases are announced in advance and they are relatively small compared to the total turnover in the Norwegian FX market. But all things being equal, FX purchases should affect flows negative, imply increased NOK selling and thereby result in a potential depreciation of the Norwegian currency.

Yesterday’s weakening was, however, reversed during the afternoon, which may be due to another strong day for equities and higher oil prices. Our forecast indicates a weaker krone in the short run. This is mainly due to dividend payments from some major Norwegian companies (for example today and Friday), which may result in some foreign banks selling the Norwegian krone and taking money home.

In addition to a number of Norwegian figures there will also be published several US macroeconomic figures today. In recent months the trend has been generally weak, which again have contributed to lower interest rates and the dollar remaining relatively weak. Thus, both today's ADP report and the ISM index may give market reactions if they deviate from consensus.

Several indicators suggest that the ISM index will follow the weak trend. The regional indices indicate a marked decrease in May, and also the Chicago PMI published yesterday. The index fell from 67.6 to 56.6, its lowest level in eighteen months. Furthermore, house prices fell more than expected and consumer confidence disappointed market players.

Yesterday's figures, thus, fall into the line of disappointing US macro news, which may explain the dollar weakened against the euro. But perhaps more important are hopes of a solution for heavily indebted Greeks, which also has contributed to the robust stock market recovery in recent days.