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Fast Comment NorwayPreview: Core inflation (May) and Norges Bank’s Regional Network (Q2)

  1. Core inflation closer to Norges Bank's estimate
  2. Regional Network pointing to still-solid GDP growth, in our view...
  3. ...but the key question is: have we been too optimistic about growth in 2018?
Core inflation closer to Norges Bank's estimate
Next week, we will see figures for core inflation in May (due Monday) and the Q2 update from Norges Bank’s Regional Network (Tuesday). Core inflation, as expressed by the CPI-ATE, has again proved lower than Norges Bank expected; the deviation has been about -0.3 percentage points over the past two months. However, we believe that the CPI-ATE picked up toward Norges Bank’s short-term estimate in May. We know that there is a possible and negative base effect this time around because the monthly gain was solid in May last year compared to past standards. In isolation, this suggests the annual rate for the CPI-ATE could have dropped from April to May; if so, the CPI-ATE will fall even further below Norges Bank’s estimates. However, there are reasons to believe the monthly gain was solid this May as well, and actually could exceed the pace from 12 months ago. We thus believe the CPI-ATE picked up from 1.3 percent y-o-y in April to 1.5 percent in May (Norges Bank: 1.6 percent). The key reason is that we believe prices for air fares rose markedly in May, compared to a solid decline 12 months ago. On the other hand, there was a record gain in food prices in May last year, something we do not believe was repeated this time. This will dampen the rise in the CPI-ATE in y-o-y terms. All told, we believe the CPI-ATE picked up in May, bringing it closer to Norges Bank’s short-term estimates. However, we were debating back and forth whether we should go for 1.4 or 1.5 percent. We decided for the latter, which implies some downside risk to our estimate. Anyway, further down the road we still believe Norges Bank’s trajectory for price inflation is too high. The key part of our critique is that Norges Bank has factored in a steep increase in nominal wage inflation, which is at odds with expectations of the social partners.
Regional Network pointing to still-solid GDP growth
We expect the upcoming report from Norges Bank’s Regional Network to be mostly unchanged. In the Q1 survey, the contacts reported growth at 0.66 percent q-o-q, increasing to 0.71 percent over the next couple of quarters. Contrary to some expectations (market participants) of a slowdown by the start of 2018, the actual figures for mainland GDP showed that activity growth had held up better than expected. There has been some decline in momentum, but not to the extent that was speculated prior to the GDP print. Judging from a variety of sentiment indicators, growth appears to be maintaining a solid pace. The tracker of financial news, FNI-Retriever/CAMP (BI), has improved further and the 12-month expectations from Norges Bank’s Expectations Survey show stable growth signals. All told, we expect the Network to be mostly unchanged, signaling still-robust growth rates for the mainland economy. However, we note that Statistics Norway has recently published a softer outlook for 2018, expecting mainland GDP growth of 2.1 percent, whereas we and Norges Bank expect 2.5 and 2.6 percent, respectively. Where we and Statistics Norway diverge the most is the view on the trajectory for petroleum investments. These investments are expected to rise this year, but new information could point to a softer increase this year than previously anticipated. Thus, we will look in particular at the Network’s growth expectations for the oil-supplying industries. The Network will provide valuable information about whether we have forecast a near-term scenario that is too optimistic for the mainland economy overall. However, our base case is that our 2018 estimate remains intact.


Marius Gonsholt Hov

Senior Economist


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