Economic Insights: Global economy resilient to geopolitical uncertainty

8/12/2019 Economic Insights: Global economy resilient to geopolitical uncertainty

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US economy: Q1 weakness will prove temporaryMONDAY

MARCH 14, 2014

We reckon that adverse weather conditions have shaved at least one percentage pointoff real GDP growth in the first quarter. According to the latest Beige Book from theFederal Reserve, nine of the 12 Districts said that weather had impeded hiring, disruptedproduction and depressed retail and auto sales. Indeed, there were more than 100 referencesto weather in the Beige Book. That publication has been around since 1996 and the second

highest reading is a little above 40. Activity should therefore bounce back; after a meagreestimated 1.7 per cent annualised real GDP growth rate in the first quarter, we havepencilled in a rebound in the second quarter to 3.5 per cent. But since fourth quarter real GDPgrowth was revised lower, we have also lowered our 2014 annual forecast to 3.1 per centfrom 3.3 per cent.

The underlying strength in Februarys employment report supports our view that economicweakness in Q1 is weather-related and temporary. While an inventory drawdown may be atplay too, not least in the auto sector, the hurdle is high for the Fed to taper the taper. Quite tothe contrary, if we get more numbers like the last jobs report, the market may well startpricing in rate hikes in the first half of 2015. While the risks are tilted towards earlier ratehikes,our forecast that rate normalisation will begin in the middle of 2015 is

unchangedfor now. What we find particularly interesting is that wage growth is showing signs of picking up,

thus indicating that the labour market is indeed tightening. Moreover, it is our view that overthe past few years the participation rate has fallen mostly due to demographic factors. Assuch, the unemployment rate is a good indicator of labour market health. Theunemployment rate will continue to a decent 5.4 per cent at the end of 2015, which is wellbelow most estimates of the non-accelerating inflation rate of unemployment (NAIRU).

Our headline inflation forecast has been revised half a percentage point higher compared tothe February edition of Nordic Outlookbased on higher natural gas and food prices. Coreinflation is not affected much by these changes but will nevertheless reach 2 per centin 2015 as an annual average.

Mattias Brur

SEB Economic

Research

+46 8 763 85 06

Key data

2012 2013 2014 2015

GDP, percentage change 2.8 1.9 3.1 3.7

Unemployment, % 8.1 7.4 6.4 5.7

Inflation, % YoY 2.1 1.5 1.8 1.9

Core inflation, % YoY 2.1 1.8 1.7 2.0

Source: SEB


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Economic Insights

SEVERAL FACTORS UNDERPINNING A REVIVAL IN CONSUMER SPENDING

While consumer confidence indicators have not been affected so much by bad weather in recent months, retail salesand auto sales, for example, have been harder hit. As such, durable goods consumption has weakened considerablyover the past few months. On the other hand, service spending is running stronger, driven by higher utilities andhealth care spending. Real consumer spending growth will thus be running at around a 2.5 per cent year-on-

year rate in the first quarter, unchanged compared to the fourth quarter. Looking ahead, the case for stronger consumer spending is compelling. For example, household net worth

expanded by USD 10 trillion last year and is at a record high, households are borrowing more and leveraging in thehousehold sector is at its lowest level in 14 years. Moreover, the job market is improving and average hourlyearnings are trending upward. As such, we forecast an uptick in consumer spending in the second quarter andsubsequent quarters to 3 per cent or above.

We also see stronger business investment ahead. Stronger capital spending usually follows in the wake of strongerconsumption growth. Capacity utilisation rates are back at levels consistent with around 10 per real capitalspending growth rates while core capital expenditure (CAPEX) goods shipments are tracking business spendinggrowth of around 7 per cent in the first quarter. The average age of factories and machinery is 22 years, which is thehighest such figure since the late 1950s. Moreover profit margins are high while credit availability is improving and

business investment as a percentage of GDP is still low, which is suggesting a considerable upside. After weak CAPEX growth in 2013 we see business investment growth accelerating to 8.5 per cent in 2014 and

11 per cent in 2015.


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Economic Insights

THE DELEVERAGING CYCLE HAS RUN ITS COURSE

Net worth of US households increased almost USD 3trillion in the fourth quarter of 2013, to USD 80.6 trillion.This is close to USD 12 trillion above the pre-crisis peak in 2007. As a percentage of disposable income, net worthrose to 639 per cent in the fourth quarter from 618 per cent in the third quarter. According to this metric, net worthis still below the pre-crisis high of 660 per cent, however.

Household deleveraging appears to be yesterdays story; households have increasing their borrowings for threeconsecutive quarters. Looking at the details, consumer credit is the driving force behind the upswing while homemortgages are lagging behind. Despite adding more debt to the balance sheet, the household debt to incomeratio is remaining relatively flatsince the income side is improving too. Furthermore, household debt as apercentage of net worth which is an indicator of how leveraged households are is at 16.2 per cent,the lowestreading since 2000.


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Economic Insights

STILL STRONG HOUSING FUNDAMENTALS

After a long string of quarterly increases since 2010, residential investment fell by almost 9 per cent in Q4 last year.Housing starts, meanwhile, increased 55 per cent at an annualised rate in Q4 2013 thus suggesting that a rebound inresidential construction spending lies around the corner when weather effects have faded away. According to theBeige Book, most areas attributed the slower pace of improvement to unusually severe winter weather. The housing

market index plunged in February but that can be attributed to brutal winter weather too. Indeed fundamentals generally suggest that housing will rebound again, notwithstanding the downdraft in

mortgage applications. Housing inventories are tight by historical standards and household formation is runningwell above the current level of housing starts. Looking at the 25-34 age group, which includes many first-timebuyers, it is evident that the underlying demographic demand is large and growing rapidly.

Our forecast is for housing starts to rise to 1.5 million in 2015andreal residential investment to grow byaround 10 per cent annuallyin 2014-1015. Home prices increased 11.3 per cent year-on-year in the fourth quarteraccording to the Case-Shiller price index: the most since 2005. Despite these strong price gains, affordabilityremains high by historical standards. We still expect home price gains of 8 and 6 per cent in 2014-2015.


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Economic Insights

THE LABOUR MARKET: WAGES ARE RISING

The underlying strength in Februarys employment report convinces us that the economic weakness since the turnof the year is mostly weather-related, and thus temporary. More than 600,000 people were unable to work due tothe weather in February, which is double the norm. Moreover, nearly 7 million worked part-time rather than full-timedue to weather; only once before have we seen a higher number. Looking ahead, the March jobs report may well

be strong, not least since initial jobless claims are down to a three-month low. The unemployment rate, at 6.7 per cent, is still above the Feds 6.5 per cent threshold but not by much, and will

likely slide through that barrier soon. According to the Chicago Fed it only takesjob growth of more than about80,000 jobs per month to put downward pressure on the unemployment rate. That is significantly lower thanthe pre-crisis norm. The unemployment rate will reach 6 per cent as early as the end of 2014,according to ourforecast.

Moreover, in our assessment the unemployment rate is a good barometer of labour market healthsince atleast 80 per cent of the drop in the participation rate over the past few years can be explained by people moving intoretirement. While the discouraged worker effect was an important driver five years ago, that is not the case today.

Basically what the unemployment rate is suggesting is that the labour market is tightening relatively rapidly which the wage data are finally beginning to respond to. Compared to a year earlier, average hourly earnings rose

by 2.5 per cent in February, compared to 2.3 per cent in each of the prior four months.

Wage growth is the canary in the coalmine when deciding how much spare capacity is left in the labour market. It isour view that spare capacity is lower than commonly acknowledged.


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Economic Insights

FED POLICY: TIME TO REVAMP FORWARD GUIDANCE

Federal Reserve ChairJanet Yellen, in her testimony before Congress a few weeks ago, said that the recent choppy andsloppy economic data was explained by bad weather for the most part. If that assumption is correct, economic weaknessis temporary and monetary policy will be unaffected.

The Feds monthly asset purchase program will almost certainly be reduced by another USD 10 billion to USD 55 billion atthe March 18-19 Federal Open Market Committee meeting. If the economy accelerates in Q2 and Q3, speculations of aquicker reduction in asset purchases may well increase too. While tapering is not necessarily on a pre-set course,the bar for altering the path is high. As such, the Fed will continue to taper its bond purchases by USD 10 billion ateach policy meeting during 2014, according to our forecast.

With the unemployment rate fast approaching 6.5 per cent the FOMC must revamp its forward guidance, probablyas early as at the March 18-19 FOMC meeting. According to the most recent set of minutes, however, what form thenew forward guidance might take was uncertain. Some favoured lowering the threshold while others preferred aqualitative approach that would provide additional information about the factors the FOMC finds important in thedecision. Aside from a broader range of labour market indicators, several participants wanted risks to financial stability toappear more explicitly among the list of factors. Others wanted a greater emphasis on willingness to keep interest rates

low if inflation were to persistently remain below the 2 per cent target.

According to our forecast, headline inflation will reach 2.3 per cent late this year but will fall again somewhat in2015.According to the latest FOMC forecasts from December last year, the central tendency for Personal ConsumptionExpenditure (PCE) inflation is 1.4 to 1.6 for 2016, which is looking a little bit low now.

Inflation expectations, according to the 5-year, 5-year forward break-even, are trending somewhat lower compared toright after the Fed decision to begin scaling down asset purchases last December.

When the tapering process is done in the fourth quarter of 2014, the stage is set for monetary policy normalisation tobegin, at the earliest in the first half of 2015. The last key rate hike was in 2006 a long time ago and there is a risk thatthe Fed will stay accommodative for too long. Historical experience shows that the Fed has previously been caughtunaware by rising inflation during similar stages of the business cycle.In 2003, too, the deflation risk was regarded

as dominant, yet inflation took off and interest rates were raised sharply as early as the following year. In 1993 there werealso few observers who thought that the rate hiking cycle would begin by the following year. If real GDP expands 3 percent or more in 2014-2015, then the US economy may well begin to strain scarce supply-side resources, especially sincethe unemployment rate already is suggesting that the labour market is tightening rapidly. We fail to see how labourcost inflation stays low in this environment. As such, the first hike may come a little bit earlier than in our currentforecast of mid-year 2015. In December 2015 the federal funds rate will stand at 1.25 per cent, according to our forecast,which is much more aggressive compared to current market pricing.

While the unemployment rate is still above most estimates of NAIRU (the labour market gap is positive) some wouldargue that short-term unemployment is a better predictor of future wage inflation. In previous cycles the distinction hasnot been important, since the unemployment rate and the short-term unemployment rate have not diverged much, butthat is hardly the case in the current cycle. While the short-term unemployment rate indicates little or no slack inthe labour market, other metrics such as the employment rate have not improved at all since the recovery began.


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Norway: Subtle signs of firmer momentumTHURSDAY

20 MARCH 2014

Theres no mistaking the slower growth rate in the Norwegian economy since 2012, butmomentum regained some lost speedlast Q4 as sequential growth in mainland GDP i.e.excluding oil/gas and shipping was the best in more than a year. The just-released reportfrom Norges Banks regional network suggests stable though continued below-trend growth inearly 2014 and a slight acceleration ahead.

The outlook continues to be marked by strong crosscurrents. First, investment growth in oiland gas extraction is downshifting markedly from 18% in 2013 to 4% in 2014 on ourforecast, and will thus lend only modest demand impulses to the rest of the economy. Whilenot deflating the effect, one shouldnt over-emphasise it either: according to calculations byStatistics Norway of the direct and indirect effects, approx. one tenth of aggregate growth inmainland GDP from 2002 to 2012 can be attributed to oil sector investment. On anothernegative note, we expect weaker residential investmentthis year and next.

At the same time, non-petroleum exports should gain speed. Foreign orders have thusrebounded strongly according to the manufacturing Business Tendency Survey, spurred byaccelerating activity at main exports markets and improved competitiveness due to the sharpNOK depreciation since early 2013. In addition, growth in private consumption should pickupsomewhat in 2014 (though still trailing the pace in 2010-12).

Meanwhile, declining existing home prices from last spring to late autumn fuelled fears of animminent steep plunge, and was seen as a - if not the major downside risk to the economicoutlook. However, demand shows surprising resilience, and sustained turnover has helpedstabilising prices in recent months. Its too early to sound all clear, but our forecast for a 3-4% decline in prices on average in 2014 might prove too pessimistic.

The full-year forecast for growth in mainland GDP is nudged lower to 2.1% for 2014 dueto back-revisions leaving less of a carry-over effect from 2013 and slightly softer-than-expected private consumption in Q1, and to 2.4% for 2015.

Recent developments suggest few forecast revisions in Norges Banks MPR due March 27,and the bank should repeat its intention to keep rates on hold in 2014. We expect the ratehike cycle to start in spring 2015, somewhat earlier than indicated by the banks rate path.

Stein BruunSEB Norway+47 21 00 85 34

Erica BlomgrenSEB Trading Strategy

+47 22 82 72 77

Key dataPercentage change

2012 2013 2014 2015

GDP 2.9 0.6 2.0 1.9

Mainland GDP 3.4 2.0 2.1 2.4

Unemployment* 3.2 3.5 3.7 3.7

Inflation 0.8 2.1 1.9 2.0

Core inflation 1.2 1.6 2.1 2.1

* Per cent of labour force

Source: Statistics Norway, SEB

Markedly stronger orders should fuel non-oil exportsYear-on-year percentage change, index

28

34

40

46

52

58

64

-12-9

-6

-3

0

3

6

9

12

15

05 06 07 08 09 10 11 12 13

Source: Statistics Norway

Exports of non-oil goods, volume (LHS)

Manufacturing survey actual export orders, 2Q earlier (RHS)


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Economic Insights

DEMAND AND PRODUCTION

Growth momentum has been rather soft over the past year, and the evidence from Norges Banks regional network,covering the supply-side of the equation, suggests more of the same in the near term although aggregate outputexpectations are slightly firmer. Suppliers to petroleum sector continue to see moderation in tandem with slowerinvestment growth, while other manufacturers and service providers expect firmer activity in the near term.

One exception is retail sales which only have managed to stabilise recently. Note, though, that growth in spendingon services and abroad, which together makes up slightly more than half of overall consumption, is healthy enough.Consumer confidence has continued to slip, but the level is consistent with only slightly below-trend growth inspending and thus a pick-up. The outlook for households real disposable income suggests as much.

The recent oil sector investment survey, based on projections from operators at the Norwegian continental shelf,was reassuring as the 2014-level is put at a new record high. Nonetheless, annual growth will slow sharply and isbound the affect production of investment goods which has been surging in recent years. However, manufacturershave on aggregate lifted their production expectations due to very solid gains in export orders during H2/13 whichwas the strongest in 6-7 years as measured by the manufacturing Business Tendency Survey.

Norges Bank network sees a slight acceleration

Year-on-year percentage change, index

-2

-1

0

1

2

3

4

-4

-2

0

2

4

6

8

05 06 07 08 09 10 11 12 13 14

Source: Norges Bank, Statistics Norway

Mainland GDP (LHS)

Regional network output indicator (RHS)

Momentum in retail sales still soft in early 2014Percentage change

-2

-1

0

1

2

3

-8

-4

0

4

8

12

05 06 07 08 09 10 11 12 13


Real retail sales excl. autos, year-on-year (LHS)

3 mth. average from 3 mth. earlier (RHS) Short-term trend in manufacturing likely to turn up

Percentage change

-3

-2

-1

0

1

2

3

4

5

-12

-8

-4

0

4

8

12

16

20

05 06 07 08 09 10 11 12 13


Manufacturing production, year-on-year (LHS)

3 mth. average from 3 mth. earlier (RHS)

as suggested by firmer expectationsYear-on-year percentage change, index

38

42

46

50

54

58

62

66

-12

-9

-6

-3

0

3

6

9

12

05 06 07 08 09 10 11 12 13


Manufacturing production, 3 mth. average (LHS)Production expectations, 2Q earlier (RHS)

Housing starts are heading lowerNo in 1.000

16

19

22

25

28

31

34

37

16

19

22

25

28

31

34

37

04 05 06 07 08 09 10 11 12 13

Source: Statistics Norwa

Approved housing starts in 1.000, 12 mth. aggregate

Housing completions, 12 mth aggregate

Record high oil sector investment, more modest growthNOK bn

40

6080

100

120

140

160

180

200

220

240

40

6080

100

120

140

160

180

200

220

240

01 02 03 04 05 06 07 08 09 10 11 12 13 14


Actual and planned investment oil/gas extraction and pipelines


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Economic Insights

LABOUR MARKET AND INFLATION

Unemployment started trending higher in late-2012 in tandem with softer momentum in the broader economy. Atthe same time and somewhat surprising, employment growth as measured by the Labour Force Survey has re-accelerated since mid-2013. The fact that LFS unemployment has ticked up recently is thus due to an outsized gainin the labour force which is volatile and occasionally erratic. Meanwhile, registered unemployment the measure

favoured by Norges Bank has stabilised in recent months. We still expect unemployment to show a marginalincrease in 2014 on either measure with the LFS unemployment rate inching up from 3.5% to 3.7%.

Core CPI inflation has shifted markedly higher since last spring with the year-on-year rate on the ex.-taxes andenergy measure at 2.4% in January and February, the highest in four years except for a spike last August. Theuptrend has been broad-based with prices for domestically-produced goods accelerating fast and prices forimported goods turning from being a constant drag to rising as NOK depreciation during 2013 has filtered though.

While the currency effect on imported inflation has yet to be exhausted, core domestic inflation has levelled out inrecent months as rents (a fifth of the core CPI basket) seem to have peaked. As such, core inflation should moderategoing forward although the full-year forecast for core inflation is nudged up to 2.1% due to the high starting point.

on higher domestic and imported inflationYear-on-year percentage change

Employment growth is holding up

3-month average

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

-2

-1

0

1

2

3

4

5

05 06 07 08 09 10 11 12 13

Source: Statistics Norwa

Employment, % change year-on-year (LHS)

LFS unemployment rate (LHS)

while unemployment measures diverge somewhatNo in 1.000

40

55

70

85

100

115

130

40

55

70

85

100

115

130

05 06 07 08 09 10 11 12 13


LFS unemployment, 3 mth. average

Registered unemployed and employment schemes Core inflation has shifted upwards

Year-on-year percentage change

-1

0

1

2

3

4

5

6

7

-1

0

1

2

3

4

5

6

7

06 07 08 09 10 11 12 13


Consumer prices CPI excl. taxes and energy -2

-1

0

1

2

3

4

5

6

-2

-1

0

1

2

3

4

5

6

06 07 08 09 10 11 12 13

Source: Statistics Norwa , SEB

Core CPI domestic goods and services Core CPI imported goods

Goods prices have turned sharply, rents peakingYear-on-year percentage change

-1

0

1

2

3

4

5

6

7

-1

0

1

2

3

4

5

6

7

06 07 08 09 10 11 12 13

Source: Statistics Norwa , SEB

Core CPI domestic goods Rents Core CPI services

Existing home prices shows subtle signs of stabilisingPercentage change

-3.0

-1.5

0.0

1.5

3.0

4.5

6.0

-12

-6

0

6

12

18

24

05 06 07 08 09 10 11 12 13

Source: Nef, Eiendomsverdi

Existing home prices, year-on-year (LHS) From 3 mth. earlier (RHS)


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Economic Insights

MONETARY POLICY AND FINANCIAL CONDITIONS

Economic developments so far this year have largely been consistent with Norges Banks expectations of stable andsoft growth in mainland GDP for this year and indicators are in line with what the central bank sees in terms ofmomentum in H1 as well. If anything, the large uncertainty surrounding the banks forecasts at the time has beenreduced. Hence, there is little suggesting any substantial forecast revisions in the upcoming March 27 MPR.

The bank should thus stick to its message that the key rate will remain on hold until next summer. The Decemberpath implied one or two rate hikes in the course of 2015, and the new rate path should confirm this view. However,any possible revision beyond that is likely dovish as long-term interest rates abroad have declined since late 2013.

We continue to expect the rate hike cycle to commence somewhat earlier than signalled by Norges Bank.Uncertainty regarding the housing market and growth will gradually recede in the course of the year and coreinflation (although volatile) will remain close to the target. Consequently, the bank should attain a tightening bias inlate 2014 followed by a rate hike early next year. Our forecast of a 2.00% and 2.75% key rate by end 2015/2016remains above markets expectations.

Norges Bank has continued to lower its rate pathPer cent

0

1

2

3

4

5

6

7

0

1

2

3

4

5

6

7

06 07 08 09 10 11 12 13 14 15 16

Source: Nor es Bank

Norge s Ba nk deposit ra te Optimal rate path, MPR 4/13

Optimal rate path, MPR 3/13

A very elevated spread versus BundsWeekly average

0

25

50

75

100

125

150

0

1

2

3

4

5

6

7

07 08 09 10 11 12 13

Source: Reuters, SEB

NOK 10-year government bond yield, % (LHS)

Spread vs. Bunds, basis points (RHS) Sharp depreciating trend has come to a halt

Weekly average

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

07 08 09 10 11 12 13

Source: Reuters, SEBEUR/NOK (LHS) USD/NOK (RHS)

NOK index back at Norges Banks trajectoryWeekly average

82

86

90

94

98

102

106

82

86

90

94

98

102

106

07 08 09 10 11 12 13 14 15

Source: Norges Bank, SEB

NOK import-weighted NOK assumption MPR 4/13

NOK assumption MPR 3/13 Credit growth has slowed recently

Year-on-year percentage change

-3

0

3

6

9

12

15

18

21

24

-3

0

3

6

9

12

15

18

21

24

05 06 07 08 09 10 11 12 13


Domestic credit growth Credit to households

Credit to non-financial companies

Banks eased credit standards to households last Q4Change in credit standards, net balance

-60

-50

-40

-30

-20

-10

0

10

20

30

40

-60

-50

-40

-30

-20

-10

0

10

20

30

40

2008 2009 2010 2011 2012 2013

Source: Norges Bank

Households Non-financial businesses


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Economic Insights: Global economy resilient to geopolitical uncertainty