Nordea Markets believes that Norway will be the first in the world to raise interest rates after the virus crisis – E24

From the end of April, the Norwegian authorities began to gradually ease virus restrictions, and by mid-June much of what was shut down was back in operation.

Since then, there have been signs that things are going better than previously feared with the Norwegian economy.

Inflation is above target, retail has recovered, and the housing market has high turnover and rising prices.

– It is still early days, but so far the Norwegian economy appears to be among the best performers, write chief economist Kjetil Olsen and analyst Dane Cekov in Nordea’s latest forecast report.

Here, the brokerage notes that the development of the economy has been “much better” than the starting point of the previous report in May.

Nordea Markets now estimates that the Norwegian mainland economy will fall 3.5 percent in 2020 as a whole. In May, the brokerage expected the drop to be 6 percent.

– We continue to assume a more gradual recovery of the Norwegian economy in the future, writes the brokerage.

Although Nordea Markets cannot rule out a further infection boom, they believe growth in 2021 will remain strong (about 4 percent), before activity approaches a more normal level during 2022.

Fewer vacancies, bigger differences

The reopening and increased activity have meant that many laid off workers have returned to work.

At the end of August, registered unemployment, which was above 10 percent in March, fell to 4 percent.

Nordea Markets believes that this unemployment will continue to fall, but that the pace of the decline will slow. By early 2021, the registered unemployment rate will have risen to 3.5 percent, the broker believes.

– We must expect higher unemployment than we are used to for quite some time. Basically, it offers prospects for low wage growth for some time.

At the same time, Nordea Markets notes that the virus crisis has had a biased effect.

– Low-educated wage earners have been disproportionately affected, and capacity in the worst-hit sectors may be permanently reduced, the brokerage writes, continuing:

– May contribute to a growing mismatch in the labor market in the future and a natural increase in unemployment. Therefore, we can put pressure on wages at a somewhat higher level of unemployment than we are used to.

– You can get a significantly stronger crown

Falling oil prices and market turmoil in March helped bring the krone’s exchange rate down to new record levels against the euro and the dollar. Since May, however, the exchange rate has recovered, in line with the rise in oil prices and the greater willingness to take risks in the market.

The Norwegian krone is a small currency and many investors look to safe havens like the dollar and yen when the market is turbulent. Due to the large oil business in Norway, the price of oil is also a major factor for the krone exchange rate.

Nordea Markets will not rule out further periods of a weakened crown right away, but:

– In the long term, however, we see good arguments for a further strengthening of the krona, both against the euro and especially against the US dollar.

Oil companies around the world have slashed their investments in the face of the virus crisis, which in experience may lead to an oil shortage in the future, the brokerage believes.

– If we look back a couple of years, it is not inconceivable that the price of oil could be significantly higher than today. In that case, we can get a significantly stronger crown.

Weaker oil brake

Also in Norway, the fall in oil prices led to a reduction in the investment budgets of oil companies. In Nordea Markets’ previous report, the brokerage house believed in a 20 to 25 percent investment decline from 2020 to 2021.

Now the tone is different:

– We believe the drop will be about half as large, writes Nordea Markets.

The reason is the higher price of oil, which lately is around 45 dollars. The brokerage also highlights the tax package for the oil industry, which the Storting adopted to help the industry and secure jobs.

I think house prices will continue to rise

The Norwegian housing market has developed strongly recently, and Nordea Markets believes prices will continue to rise.

When Eiendom Norge released the April figures, they showed a surprising 0.5 percent nominal price increase nationwide. And in May, prices rose 1.9 percent, the largest increase ever recorded in the spring month. The rally also continued in June with a new 0.8 percent.

This shows that Norwegian households have not lost faith in the future despite rising unemployment, believes Nordea Markets. They refer to the interest rate cuts from Norges Bank as the largest contributor.

– All things being equal, interest rate cuts help home buyers with a normal installment loan to bid on the price of a home between 15% and 20% without weakening the current household economy. Therefore, we expect home prices to continue to grow over the forecast period, Nordea Markets writes.

Waiting for a previous interest rate hike

Norges Bank did not surprise anyone when it decided to keep the key policy rate at a record low of zero percent at the previous interest rate meeting. At the same time, Governor Øystein Olsen declared that the interest rate “will probably remain at the current level for some time.”

Two months earlier, in June, the central bank’s forecast showed that interest rates could rise again from the fourth quarter of 2022 and then until 2023.

But Nordea Markets believes that interest rates will go up before that. They predict that Norges Bank will be the first central bank in the world to raise interest rates.

– The central bank has made it clear that interest rates can rise faster if the rise is stronger than expected or if house prices rise sharply and there are signs that financial imbalances are building, writes Nordea Markets.