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Fast Comment NorwayPreview: Regional network and core inflation

  1. Probably too early to call a slowdown in the economy
  2. Core inflation to continue to run above Norges Bank’s short-term estimates
  3. Norges Bank to hike its policy rate in June
Regional Network and core inflation due next Tuesday
The report from Norges Bank’s Regional Network is due next Tuesday, along with the figures for core inflation (CPI-ATE) in May. Owing to the backdrop of increasing downside risks to the global economy, accompanied by downward revisions to the market outlook for policy rates (both abroad and domestic), attention will primarily be directed toward the growth expectations among the network contacts.
Probably too early to call a slowdown in the economy
While we may see some downward revisions among the sectors that are most exposed to the global cycle, solid growth expectations among the oil suppliers are likely to pull in the other direction, in our view. Overall, we believe the six-month outlook has remained fairly intact. Note that six-month growth expectations have plateaued somewhat on the high side of 0.7 percent q-o-q since the beginning of 2018. While we may see these expectations nudged a bit closer toward 0.6 percent this time, as suggested by other survey data, we would be surprised to see them any lower than that. True, the latest Expectations Survey from Norges Bank showed a clear downward revision to the profitability outlook. However the recent turmoil, initiated by the breakdown of negotiations between the US and China, may have induced some ‘growth scare’ and thus exaggerated the revision. On the other hand, the downward revision to the separate Business Tendency Survey has been more modest. Overall, we do not think the upcoming report from the Regional Network will be much changed. Our base case remains for output growth to hover around 0.6-0.7 percent in the near term. Further ahead, a sharper slowdown is in the pipeline, however. For starters, the impulse from rising petroleum investments will start to fade, and the consequences of slower global growth have already started to show up in parts of the non-oil manufacturing sector. Combined, we expect a clear deceleration in GDP growth from 2020. However, for the near term the state of the economy looks good and we still believe Norges Bank will hike its policy rate in June; although market expectations for such a move have fallen markedly over the last week (the implied probability is less than 50 percent).
Core inflation to continue to run above Norges Bank’s short-term estimates
Keeping it a bit shorter this time, we expect the CPI-ATE to have continued to surprise Norges Bank on the upside. We forecast the CPI-ATE at 2.6 percent, unchanged from April, but still above Norges Bank’s estimate of 2.47 percent. If confirmed, such a deviation would normally have been treated as trivial. However, Norges Bank is still likely to point to this modest upside surprise as something that, in isolation, strengthens the case for a rate hike in June. Note that the report from the network as well as the said inflation figures are the final set of key data prior to the upcoming policy rate meeting. We will send out a separate preview on Norges Bank by the end of next week.


Marius Gonsholt Hov

Senior Economist


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