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Fast Comment NorwayPreview: Fiscal Budget 2019, core inflation and manufacturing output

  1. The budget proposal for 2019 should be a non-event for the market
  2. Core inflation expected lower in Sep; we expect 1.7 pct, Norges Bank 1.6 pct
  3. Manufacturing probably pulled back a bit in Aug; trend still positive
The budget proposal for 2019 should be a non-event for the market
Next week we will see the budget proposal for 2019, as well as core inflation (CPI-ATE) in September and manufacturing output for August. Starting off with the budget, the revised budget for 2018 showed a structural non-oil deficit of NOK 226bn in 2018. This amount constitutes 7.6 percent of trend mainland GDP, up from 7.5 percent in 2017. The fiscal impulse is calculated as the deviation between these two figures, hence 0.1 percentage point. Historically speaking, the said impulse has averaged around 0.3 p.p. But with a lowering toward 0.1 p.p., revenue spending has turned toward a more neutral stance, suiting an economy that is about to return to full capacity utilisation. Note in this regard that Norges Bank has assumed the negative output gap will close by the end of this year. The upshot is that revenue spending, which gave important stimulus to the economy during 2014-16 in particular, has turned to a pace that is just a tad above the potential for the mainland economy, i.e. broadly neutral. And the signals received ahead of the budget proposal also imply a broadly neutral budget. This is also what Norges Bank is factoring in. In its latest Monetary Policy Report, Norges Bank assumed a fiscal impulse of 0.1 p.p. in coming years (including 2019). The upcoming budget should be a non-event for the market.
Core inflation expected lower in Sep; we expect 1.7 pct, Norges Bank 1.6 pct
Turning to core inflation, recall that August was a major surprise. The CPI-ATE rose sharply to 1.9 percent y-o-y, following 1.4 percent in July. However, Norges Bank has played this down. In Norges Bank’s view, the rise seen in August was first and foremost a noisy event, i.e. it was not driven by an abrupt upward shift in underlying price pressure. As such, Norges Bank has also factored in a sharp downward shift in September; the CPI-ATE is expected to decline to 1.6 percent, which is also close to our estimate of 1.7 percent. Norges Bank is in particular expecting a lower reading (y-o-y) for price inflation on imported consumer goods. But also the annual rate for domestically produced goods and services is expected to ease a bit.
Manufacturing probably pulled back a bit in Aug; trend still positive
Finally, manufacturing output, which rose by 0.9 percent in July, as broadly expected. This shows a clearer upward trend, fitting the fundamentals. The outlook remains positive, in particular due to the ongoing rise in petroleum investments, which will intensify from next year. Normally, we would have expected a positive reading for manufacturing output also in August. But a peculiar pattern has emerged over the past few years, namely that output has dropped sharply in August, down around 3 percent m-o-m. Previous press statements have attributed this to fewer working days. It remains to be seen whether the same was the case in August this year. We have chosen some kind of a middle ground, factoring in -0.5 percent in August, which still would imply positive quarterly growth in manufacturing in Q3.


Disclaimer

Marius Gonsholt Hov

Senior Economist

Norway

maho60@handelsbanken.no

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