2020 was a choppy year for the Norwegian krone as the pandemic-induced economic fallout and oil market collapse caused the currency to depreciate over 27% against the euro and 33% against the dollar. This resulted in record highs in EURNOK and USDNOK, but the Norwegian currency has pared back losses since then and is trading close to pre-pandemic levels against its G10 peers, while having fully recovered against the US dollar.
We anticipate a continued appreciation in NOK over the coming twelve months as the currency benefits from increased global growth expectations, a continued recovery in crude oil markets and a powerful domestic economic rebound.
Monex’s March Forecasts submitted to Reuters
Norwegian krone recovers after pandemic-induced record highs in EURNOK and USDNOK
A recovery in oil markets has been a dominant driver in the krone’s climb back to pre-pandemic levels. Over the course of 2020, supply cuts by OPEC+ aided the recovery, with West Texas Intermediate surging from -$40/b to around +$40/b, while Brent oil recovered from just below $16/b at its lowest level to around $45/b after the measures were implemented. In the last couple of months, drawdowns in Chinese and American stockpiles supported the NOK rally along with an improving demand outlook, which led to both WTI and Brent holding steady above $60/b. With global growth expected to pick up along with demand in the energy sector, the krone is likely to continue to rally over the course of 2021. On the domestic front, a large increase in Norwegian household savings lay the foundations for solid growth in services consumption once virus conditions improve. The anticipated release of pent up demand comes in spite of Norway’s economy already experiencing a much milder hit from the pandemic than many other developed economies, with a large share of the output lost in 2020 already recovered. Norway’s government offset the initial economic hit by dipping into the country’s enormous sovereign wealth fund, which has also been a key factor in why the Norges Bank was able to stay away from quantitative easing programmes throughout the pandemic. Norway continues to rely on the fund for fiscal support to fall back on, while the fund also paves the way for the Norges Bank to justify tightening policy earlier than other central banks. Overall, the current economic data, increased growth expectations and prospects of a rate hike support the narrative of a stronger Norwegian krone throughout the coming year; however, several risks to the outlook remain. Comments from the latest NB press conference led many to believe a hike as early as this year may be incoming if vaccine distributions progress at an adequate rate, which could pose an upside risk to our NOK outlook. On the other hand, the general global recovery outlook is far from certain. Vaccine efficacy against all virus strains and vaccine supply logistics remain a downside risk for the procyclical krone outlook, while current lockdown measures have not ended yet either and consumption patterns upon economic opening remain uncertain.
Norwegian households still save 17% of their disposable income while pandemic peak has passed (QoQ saving rate)
NORWAY’S ECONOMY MORE RESILIENT TO SECOND LOCKDOWN
Mainland GDP contracted by over 6% MoM between February and March 2020 when the pandemic hit, but this was quickly offset in May and June when the Norwegian government raised spending from the nation’s enormous oil fund. Before the pandemic, the government had planned to spend NOK243.6bn from the fund, but in May the government raised its projected 2020 spending to NOK424.6bn – almost double the initial amount. The recovery continued after summer, albeit at a slower pace, before higher infection rates forced the government to impose stricter containment measures. While this weighed on activity in October and November, monthly data showed activity held up better in December following a slight easing of restrictions before Christmas, which left output 1.3% below its pre-pandemic peak. The unexpected jump in December and an upward revision to the November reading led to an increase in mainland GDP of 1.9% in Q4 2020, confirming that Norway took less of a hit from the second lockdown than most other advanced nations.
The robust finish to the year means Norway’s GDP shrank by a modest 2.5% in 2020 compared to 6.8% in the eurozone and 3.5% in the US.
Norway’s GDP returning to pre-pandemic levels faster than peers
Unemployment has also come down from historically high levels as Norway’s labour market shows a smaller hit from the second virus wave. Norway’s jobless claims data, which include furloughed workers, rose from 4% in December to 4.4% in January after rising from 2% to a peak of 10% in Q2 2020. However, the hit to the labour market may be more severe than the initial data shows. Those registered at the Labour and Welfare Administration (NAV) to receive unemployment related benefits rose to 7.1% recently. This is a more timely measure than the overall labour force survey as it measures underemployment and temporary layoffs too, which aren’t fully captured in the headline index. While unemployment has picked up somewhat following the latest round of restrictions, it is nowhere near 2020 highs as Norway’s furlough scheme helps to keep unemployment levels grounded. The government announced in January that the scheme would be extended until July 1st, which leaves people who were put on temporary leave in Q1 and Q2 last year at a more favourable position as they can now be furloughed for longer than 52 weeks. For many other countries, furloughed workers are not included in the jobless rates which means that when the furlough schemes end, they will likely see a big spike in unemployment if the labour market hasn’t fully recovered yet. For Norway, this risk is out of the picture as the unemployment rate does include these furloughs.
New public spending and unemployment benefits have likely helped to keep saving rates elevated, with Norwegians now saving around 17% of their disposable income on average.
The lack of job security and uncertain business outlook, combined with the fact that the lockdowns limit consumption options, are keeping the saving rate elevated for now, allowing for a spike in consumer spending when economies open and economic conditions gradually normalise. This all comes at a time when oil prices are recovering along with demand, making fiscal conditions in Norway favourable as well as much of the fiscal surplus comes from crude oil.
ROSY ECONOMIC OUTLOOK MEANS RATE HIKE IN SIGHT
The Norges Bank can’t help but notice the rosy outlook for the Norwegian economy and already signalled a rate hike at the beginning of 2022, making it the first central bank in the DM space to signal policy normalisation. The Norges Bank kept its benchmark rate unchanged at 0.0% in its January 2021 meeting and repeated its stance from December’s monetary policy report, which stated the central bank aims to start raising rates early next year. The first rate hike is now pencilled in at Q2 2022 vs previously Q4 2022 according to the report, but in the January meeting, Governor Olsen stated the central bank may raise its main interest rate as early as this year as the prospect of bringing the pandemic under control seems slightly brighter than previously assumed. Norway has the lowest real benchmark interest rate in developed markets as both headline and core inflation stay well above the 2% target of the central bank. Headline inflation printed at 2.5% YoY and 1.1% MoM in January, while the core index, which excludes energy products and tax changes, printed at 2.7% YoY and 0.1% MoM. The inflationary pressures mainly come from goods and services inflation. Looking ahead, CPI inflation will likely edge up in February and March as the recent surge in oil prices will start to leave its mark, while higher wage growth will also contribute to an increase in the core reading as the labour market recovers in the next couple of years.
Norges Bank’s economic projections
The timing of the first rate hike will depend mostly on the progress of the vaccination programme. The Norwegian Institute of Public Health (NIPH) has published several scenarios for when they believe the population will be offered a vaccine. In the moderate scenario, they expect the majority to have been vaccinated by late summer. When considering the current pace of vaccines the moderate scenario of the NIPH seems likely as nearly 6% of the population has received their first dose within the first 1.5 months of vaccinations already. The Norges Bank, however, kept a cautious tone about the vaccine progress and stated it should be possible to vaccinate the entire population by year-end. Despite the rather cautious tone on the vaccine outlook, the Norges Bank highlighted in its latest policy statement that market expectations point to a rate increase in December. The decision to include this in the statement may come across as hawkish, which led many to believe a rate hike may come sooner than what the Norges Bank is currently suggesting.
For this reason, we believe the risks are tilted to earlier tightening of policy than 2022, however, as with every economic outlook at the moment, vaccine distributions and the reopening of the economy will largely determine when the central bank can start the normalising cycle.
Even when the economy is reopened, consumption patterns and the path for economic recovery remain uncertain as it is unclear whether there will be a catch up effect between demand and supply or whether there will be a completely new consumption effect in markets.
Author: Ima Sammani, FX Market Analyst