When last we checked in on Norway, we outlined what we called the country’s “currency conundrum.”
The economy desperately needs stimulus in the face of the inexorable decline in crude, but here’s the rub as we described it last month: In order to fund the fiscal stimulus the economy needs to stay on its feet, Norway is tapping into its sovereign wealth fund. In short, expenditures are set to exceed revenues and so, it’s time to tap the piggy bank which, at $830 billion, is the largest rainy day fund on the planet. The problem here is that oil proceeds must be converted to kroner before they can be used to cover budget needs. That means the Norges bank is a buyer of NOK.
But by buying NOK, the Norges Bank is feeding into krone strength just when the economy needs a weaker currency to buoy exports and keep Norway from falling behind in the global currency wars.
So in the simplest possible terms, they’re damned if they do and damned if they don’t.
As you can see from the following charts, the krone has been depreciating against both the EUR and USD over the past year and lower oil prices certainly contribute to the cause, but really, Norway needs as weak a krone as possible and the FX purchases to plug the budget gaps aren’t helping – as you can surmise from the USD chart:
“This will add pressure to the appreciation of the krone,” DNB ASA’s Magne Oestnor said in January after Norway said it would buy 900 million kroner ($104 million) a day in February as it converts its oil income into local currency to cover budget needs.
On Tuesday, we got the latest GDP data out of Norway and as expected, economic growth has flatlined. Mainland GDP, which excludes oil, gas, and shipping, rose just 0.1% in Q4, and Q3 was revised to unchanged.
“The economy of western Europe’s biggest oil producer has been struggling to withstand a plunge in oil prices [as] companies such as Statoil ASA have cut thousands of jobs, sending ripples through the rest of the economy,” Bloomberg writes. “Exports fell 2.9% in the fourth quarter, while petroleum and shipping industry output decreased 5.6%.”
Here’s the full breakdown from Goldman:
- The expenditure breakdown showed strong private consumption at +0.6%qoq (after +0.2%qoq in Q3). Government consumption rose by +0.3%qoq on the quarter, while mainland investments weakened by -0.4%qoq. The softness of investment was mainly driven by a 2.7%qoq fall in government investment, representing somewhat of a payback from the +12.3%qoq increase in Q3. Mainland exports fell 1.0%qoq, while imports rose +1.4%qoq, leading to net trade weakening by -0.7%qoq. Inventories (and statistical errors; the headline growth figure is extracted from the production side of the national accounts) contributed +0.5%qoq to mainland growth in Q4.
- The GDP breakdown from the production side showed that mainland manufacturing GVA fell 1.5%qoq in Q4 (after -2.5%qoq). The weakness was concentrated in the repair and installation of machinery and equipment (-9.6%qoq after +0.1%qoq). Service production GVA rose by +0.1%qoq, while general government GVA remained steady at +0.5%qoq
- Total GDP (mainland plus offshore) fell by 1.2%qoq in Q4, somewhat weaker than expected (Cons: -0.4%qoq). Offshore GDP fell 5.6% on the quarter, driven by a 6.8%qoq fall in offshore stocks, and a 5.5%qoq fall in offshore net trade. More relevant for mainland support industries, offshore investments fell 2.6%yoy in Q4 after a 8.6%qoq fall in Q3.
- There were some downward revisions to past growth with today’s GDP vintage. Q3 mainland GDP growth was revised down 0.2pp from +0.2%qoq to 0.0%qoq, while Q2 and Q1 GDP growth was revised down 0.1pp to +0.2%qoq. Including all revisions, the level of Q3 GDP now stands 0.5% lower relative to the previous national accounts vintage.
- Today’s GDP release shows mainland growth at +0.4%yoy, below Norges Bank’s forecast of +1.0%yoy. While today’s data show a small acceleration in growth between Q3 and Q4, the downward revisions to GDP over the previous quarters have created a substantial downward surprise to the year-on-year figure when compared to Norges Bank’s forecast. Today’s Q4 GDP growth print of +0.1%qoq is slightly weaker than the +0.2%qoq indicated by our CAI.
Meanwhile, we also got a look at consumer confidence on Tuesday and (surprise!) it plummeted to a 23 year low:
So, what comes next you ask? Well, with Russia and Saudi Arabia having failed to stabilize oil prices by promising to freeze output at record levels, with the ECB and the Riksbank still in easing mode, and with Norges bank kroner buying running at a NOK900 million per day clip, we’ll probably see a rate cut.
“This confirms a March rate cut,” DNB’s Kyrre Aamdal told Bloomberg by phone. “The future growth outlook is fragile,” Handelsbanken’s Marius Gonsholt Hov adds.
Remember, the Norges Bank is still sitting at 75 bps. That’s a positive 75 bps, for everyone who has by now become conditioned to thinking solely in terms of NIRP when it comes to Europe.
But make no mistake, a token 25 bps cut won’t do it when it comes to shoring up the economy and driving the krone down, especially considering what Draghi is likely to announce next month. That means you can expect Norway to careen into recession in the not-so-distant future. We close with a quote from Erik Bruce, a senior economist at Nordea: “Recession is absolutely a risk.”
via Zero Hedge http://ift.tt/1onqeNO Tyler Durden