GDP growth in Norway was below Norges Bank's forecast in Q3. Mainland GDP growth was projected to be 0.7% compared to the bank's forecast of 0.8%, implying capacity utilization is lower than expected. This strengthens the argument for an interest rate cut in December. However, increased financial unrest and worsening of the Eurozone crisis will be the main drivers for any rate cut. The economic outlook remains uncertain depending on how the situation in Europe evolves.

1. Norway Update
GDP – growth below Norges Bank’s forecast
Economic Research, 21 November 2011
We forecast mainland GDP to have grown by Below Norges Bank’s forecast
0.7% q/q in Q3 compared to 1.0% in Q2. Norges Bank revised down its growth forecast for
Consensus is also 0.7%. Our forecast the second part of 2011 in the October monetary
implies that underlying growth in the policy report. But if we are right Norges Bank’s
mainland economy is about ¼% point below forecast will still be too high. Our forecast implies
Norges Bank’s forecast. If we are right it will growth at 0.5%, excluding electricity production,
be a signal that capacity utilisation is compared to Norges Bank forecast at 0.8%
somewhat on the downside to Norges Bank’s (electricity production is very volatile and does not
forecast. It will strengthen the argument for a affect the output gap and consequently monetary
rate cut in December, but the financial unrest policy according to Norges Bank). It will
and the worsening of the Euro-area crisis will strengthen the argument for a rate cut in December.
be the main argument for a cut. However,
given Norges Bank’s governors’ latest Euro crisis worse than in October…
signals a cut in December is far from given. The main argument for a cut is, however, increased
financial unrest and the worsening of the euro
crisis. According to the October monetary policy
Strong, but not that strong report Norges Bank’s forecast for unchanged rates
The Q3 2011 national accounts are due on 22 was based on a resolution of the Greek debt crisis
November at 10.00 CET. We project mainland that does not give rise to additional, severe
GDP growth at 0.7% q/q (2.6% y/y) in Q3 contagion effects on other countries. This is,
compared to 1.0% q/q (2.7% y/y) in Q2. The however, what has happened with a sharp rise in
consensus according to Reuters is 0.7% q/q. Total interest rates on Italian and Spanish government
GDP is forecast to change by 1.4% q/q (0.3% y/y). debt to unsustainable levels. The stress symptoms
The consensus is 0.8% q/q. in the credit market have also increased strongly.
The spread between expected 3-month money
Rather weak outside electricity production market rates and key rates is now probably about
What we know about the demand side points to 125 bp compared to Norges Bank’s forecast for an
rather modest growth with about zero growth both average spread at 90 bp in Q4 and then a gradual
in consumption and mainland exports. decrease. This all argues for a cut in December.
Moderate growth .. but should it worsen further?
Weight Growth Growth Contribution
Q2 forecast Q3 Q3 However, Central Bank Governor Øystein Olsen
Agriculture and fishing 2.1% 7.2% 0.4% 0.01%
Manufacturing 13.6% -0.2% 0.0% 0.00% has created some uncertainty. In an article in the
Electricity, gas and steam 2.7% 11.4% 8.5% 0.23%
Construction 6.2% 1.0% 0.4% 0.02% Norwegian Daily Dagens Næringsliv on Monday
Wholesale and retail 12.0% 1.1% 0.1% 0.01%
Other private services 40.4% 0.9% 0.6% 0.24%
22 November, he describes the situation in the Euro
Public sector 23.0% 0.6% 0.6% 0.14% area today and then concludes that key rates could
Mainland Norway 1.0% 0.7%
be cut if the outlook worsens. If this means that the
situation should worsen from today’s situation the
Production indexes also point to rather moderate
case for a December cut is much weaker. We
growth at least in manufacturing and construction.
however assume that Olsen’s intention was to give
Electricity production, however, grew strongly and
no new signals between meetings and referred to
pulls up our forecast by about ¼% point. We know
the description given in October. Norges Bank
little about services production but guess it grew
usually does not give signals between MPC
decently. At least outside the retail sector, which
meetings. We therefore still believe in a December
probably was rather weak due to weak growth in
cut, but are less certain than we were.
consumption of goods.
Erik Bruce
erik.bruce@nordea.com +47 22 48 44 49

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