Norges Bank to hike first; look out for off-colour mink - Capital Economics
Nordic & Swiss Economics

Norges Bank to hike first; look out for off-colour mink

Nordic & Swiss Economics Weekly
Written by David Oxley
We now forecast the Norges Bank to be the first advanced central bank to begin raising interest rates, in the second half of this year. This will provide a further fillip to the NOK, which we expect to be the best-performing G10 currency this year by some margin. Next week, the ETI from Sweden for February is likely to show that activity has remained resilient in the face of virus-related restrictions. Meanwhile, Q4 GDP data from Switzerland are likely to show that GDP flat-lined from the previous quarter.

 

Our latest Global State of Play webinar will be held on Thursday, 25th February. Neil Shearing will lead a discussion with our senior economists on a range of topics, including the progress of vaccinations and the impact on economic activity, the experience of Israel and others leading the vaccine race, as well as the latest on the US fiscal stimulus debate. Register here.

Norges Bank set to blink first

In case you missed it, we changed our view on the Norges Bank this week. Having previously forecast the key interest rate to remain on hold into 2023, we now expect the Bank to be the first advanced central bank to begin raising interest rates, in the second half of this year. (See here.) This is more hawkish than is currently priced into the market, and we have bumped up our forecast for the krone, to NOK 9.50 per euro by year-end, from 10.23 at present. We think it will be the best-performing G10 currency this year by some margin. (See Chart 1.)

Chart 1: Forecast Changes in G10 Currencies
(%, By 31st Dec. 2021)

Sources: Refinitiv, Capital Economics

Our change in view on monetary policy reflects a combination of factors including the comparative success that Norway has had in containing the virus, buoyant conditions in the housing market, and a backdrop of rising oil prices. The latest quarterly investment survey, released this morning, shows that energy firms revised up their investment plans for this year once again, helped by higher oil prices and tax changes; the current estimate for 2021 is about 20% higher than the gloomy forecasts made in H1 2020.

Pendulum swinging away from QE at the Riksbank

The pick-up in core inflation in Sweden in January was a bit stronger than we had expected (see here), although, as in Germany, some temporary factors were at play and may unwind in the coming months. In any case, policymakers have said that they will look through a temporary period of above-target inflation and so it is not a game changer.

Meanwhile, the minutes from the Bank’s February meeting, published this morning, show that asset purchases were not as divisive an issue as we had suspected. There is a sense that the pendulum is swinging away from asset purchases back towards the repo rate, which policymakers stressed still had a part to play if they deemed it necessary to make policy more expansionary.

Of course, there are differences in opinion as to when this might come into play. Per Jansson would be keen although he is wary of wasting “the remaining ammunition”. But while there was lots of now familiar talk about the repo rate being contingent on developments in inflation expectations, Anna Breman argued that “a rate cut may be an effective tool to contribute to a broad-based demand stimulus“. Moreover, Cecelia Skingsley spoke in favour of letting inflation run above target for a while, à la the Fed.

In other news, the Bank recently announced that it has extended its e-krona pilot project until at least February 2022. The Riksbank is ahead of ECB in its thinking on CBDCs but work on a digital euro is set to begin officially in the spring. (See here.)

Ask yourself: “does that mink look miserable?”

Just when you thought Minkgate was behind us, the European Food Safety Authority popped up this week with a report saying that all mink farms should be considered a COVID risk. Farmers and vets should be on the lookout for mink that are off their food and generally a bit under the weather. (Owners of pet ferrets are encouraged to keep an eye on them too.) This is mainly an issue for Finland and Poland, which now account for about 60% of mink farms in Europe following closures elsewhere, notably in Denmark.

The Week Ahead

The release of the ETI from Sweden for February is likely to show that activity has remained resilient in the face of virus-related restrictions. Meanwhile, we expect Q4 GDP data from Switzerland to show that GDP flat-lined from the previous quarter.


Data Previews

Switzerland GDP (Q4) & KOF Economic Barometer (Feb.) Fri. 26th Feb.

Forecasts

Time (GMT)

Previous

Median

Capital Economics

GDP q/q (y/y)

08.00

+7.2%(-1.7%)

0.0%(-2.1%)

KOF Economic Barometer

08.00

96.5

94.0

Flat-lining

We expect Swiss GDP to have flat-lined in Q4, and activity is likely to have stayed weak at the start of 2021.

The Swiss economy rebounded by 7.2% q/q in Q3, helped by a jump in manufacturing output.

Retail sales rose in the last three months of the year, despite a tightening of virus-related restrictions. That said, spending on services will have been much weaker; note that the services PMI fell below the 50-mark in November and December. Meanwhile, the manufacturing PMI has pointed to much better times for the industrial sector. That said, industrial production data for Q4 (released today) were a bit of a disappointment: output actually edged down in q/q terms – weaker than in Germany.

All told, we have pencilled in zero GDP growth (but given the industrial data, the risks are probably to the downside). This would be consistent with the economy contracting by 3% in 2020 as a whole – more than it did during the global financial crisis but less than the 5.3% fall in Germany, say.

Looking ahead, the surge in virus cases and associated extension of virus containment measures will weigh on activity in Q1. We suspect that the KOF fell further in February (see Chart 2) reasserting its relationship with the euro-zone Composite PMI, which barely rose. More generally, we expect GDP to rebound in Q2 as restrictions are eased. However, the slow progress on vaccine rollouts so far presents a downside risk.

Chart 2: GDP & KOF Economic Barometer

Sources: Refinitiv, Capital Economics


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time CET

Time (GMT)

Previous*

Median*

CE Forecasts*

Mon 22nd

Nor

Unemployment (LFS, Dec)

08.00

(07.00)

5.0%

Tue 23rd

Swi

Producer & Import Prices (Jan)

08.30

(07.30)

+0.5%(-2.3%)

Swe

Unemployment (LFS, Jan)

09.30

(08.30)

8.2%

CE

Webinar: Euro-zone Inflation & ECB

16.00

(15.00)

Wed 24th

Den

Retail Sales (Jan)

09.30

(08.30)

-7.7%(+1.0%)

Swe

ETI (Feb)

09.00

(08.00)

100.0

Fri 26th

Den

GDP (Q4, Prov., q/q(y/y)

08.00

(07.45)

+0.6%(-3.1%)p

+0.6%(-3.1%)

Swi

GDP (Q4, q/q(y/y))

09.00

(08.00)

+7.2%(-1.7%)

0.0%(-2.1%)

Swi

KOF Leading Indicator (Feb)

09.00

(08.00)

96.5

94.0

Swe

GDP (Q4, 2nd Est., q/q(y/y))

09.30

(08.30)

+0.5%(-3.0%)p

+0.5%(-3.0%)

Swe

Trade Balance (Jan, SEK, n.s.a.)

09.30

(08.30)

+2.7bn

Swe

Retail Sales (Jan)

09.30

(08.30)

-4.9%(-0.6%)

Nor

Unemployment Rate (NAV, Feb)

10.00

(09.00)

4.4%

Selected future data releases and events

Mon 1st

Nor

Retail Sales Ex. Motor Vehicles (Jan)

08.00

(07.00)

-5.7%(y+8.6)

Swe

Manufacturing PMI (Feb)

08.30

(07.30)

62.4

Swi

Retail Sales (Jan)

08.30

(07.30)

+2.6%(+4.7%)

Swi

Manufacturing PMI (Feb)

09.30

(08.30)

59.4

Nor

Manufacturing PMI (Feb)

10.00

(09.00)

51.8

Den

Manufacturing PMI (Feb)

11.00

(10.00)

42.1

Tue 2nd

Den

Change in Currency Reserves (Feb, DKK)

17.00

(16.00)

-12.0bn

Wed 3rd

Swe

Services PMI (Feb)

08.30

(07.30)

59.3

Swi

CPI (Feb)

08.30

(07.30)

+0.1%(-0.5%)

*m/m(y/y) unless otherwise stated. p=provisional.

Sources: Bloomberg, Capital Economics

Main Economic Forecasts

Share of

World GDP

GDP

Consumer Prices*

2019

2020

2021

2022

2019

2020

2021

2022

Switzerland

0.46

0.9

-3.0

2.3

2.8

0.4

-0.7

0.5

0.3

Sweden

0.42

1.3

-2.8

2.0

3.0

1.7

0.5

1.2

1.4

Norway

0.26

2.4

-2.5

3.5

3.3

2.2

3.0

2.0

2.0

Denmark

0.26

2.3

-3.7

3.3

3.3

0.7

0.3

0.8

0.8

Sources: Refinitiv, Capital Economics. *CPI for Switzerland, CPIF for Sweden, CPI-ATE for Norway, HICP for Denmark.

Key Market Forecasts

Forecasts

Forecasts

Latest

End 2021

End 2022

Latest

End 2021

End 2022

Swiss policy rate

-0.75

-0.75

-0.75

Swiss fr/euro

1.09

1.10

1.12

Swe. repo rate

0.00

0.00

0.00

Swed. Kr/euro

10.04

9.75

9.50

Nor. depo rate

0.00

0.50

1.00

Nor. Kr/euro

10.22

9.50

9.50

Den. depo rate

-0.60

-0.75

-0.75

Dan. Kr/euro

7.44

7.46

7.46

ECB depo rate

-0.50

-0.50

-0.50

US$/euro

1.21

1.25

1.25

Sources: Refinitiv, Capital Economics


David Oxley, Senior Europe Economist, david.oxley@capitaleconomics.com