Norway: A new type of balancing act - HSBC

According to James Pomeroy, Economist at HSBC, Norway’s economy is at a crossroads as on the growth front, the economy has seen a clear upturn in 2017.

Key Quotes

“Mainland growth in the first two quarters of the year has averaged 0.7% q-o-q, up from the average of 0.2% seen over the previous two years. The survey data suggest continued resilience too: with PMIs close to post-crisis highs and the Norges Bank’s regional network survey moving higher in recent quarters, the Norwegian economy has now shaken off its oil-induced weakness of 2015 and 2016 that saw the Norges Bank cut its main policy rate from 1.50% down to 0.50% in less than 18 months.” 

“There is now a case to undo some of that easing. Just like the Bank of Canada has done over the summer, the Norges Bank may decide that such unprecedented stimulus is no longer required.”

“Financial stability remains the key reason for the Norges Bank to tighten policy. Although the housing market has shown signs of a summer wobble, especially in Oslo, the broader housing market data have been strong for some time and house prices, household indebtedness and credit growth all remain stretched. The Norges Bank expects the housing market to remain subdued in the second half of 2017 and into 2018, so any upside surprise on that front could easily become a trigger for a rate rise.” 

“Inflation is pulling in the other direction – as it continues to fall. The August inflation numbers were much lower than expectations on lower food prices, and we’ve long expected Norway’s inflation rate to remain comfortably below the Norges Bank’s 2.5% target into 2018. However, the Norges Bank’s own forecasts on inflation are still very low, and so disappointment on this front may be hard to come by.”  

“And so, in the trade-off between the low inflation data, stronger activity data and financial stability concerns, it is hard to see what wins out. However, we would find it difficult to see the justification for record-low rates in Norway as other parts of Europe start to tighten policy in 2018. We look for one rate rise in Q2, but the pace of any tightening will be extremely slow and put the second and final rate rise over our forecast horizon in Q1 2019.”