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Slumping Crude Will Send Norway To ZIRP As Economy Careens Toward Recession
Late last month, the Norges Bank joined the global easing bonanza, surprising a slim majority of economists by cutting the overnight depo rate to a record low of 0.75%.
Norway, like Sweden and Denmark, is in a pickle. You can’t very well lean hawkish in a world of DM doves unless you plan on losing the global currency war and undercutting your inflation target, but then again, something has to arrest the inexorable rise in housing prices lest the risks to financial stability should outweigh any perceived benefits from keeping rates glued close to zero lower bound (or below).
If you’re Norway, the problem is complicated immeasurably by plunging crude prices.
Here’s what Goldman said after the Norges Bank’s latest rate cut:
Norges Bank adopted something close in line with our alternative scenario, whereby the fall in oil prices was seen as materially affecting the economic outlook (via weaker offshore oil investments) and the recent upside surprise to inflation was seen as more transitory, resulting in a cut and the adoption of a dovish policy rate path.
And here’s a bit from the Norges Bank itself on the housing bubble:
“[We’re] aware that lower rates could fuel the housing market.”
Put simply, it’s an impossible balancing act, and Thursday’s uber dovish Draghi presser didn’t do anything to help the situation.
While the slump in oil has pressured the krone and thus helped the country preserve some semblance of export competitiveness, the fact that i) everyone else is easing, and ii) global demand and trade are in the doldrums, serves as a kind of counterweight, leading directly to a situation wherein the currency, in Bloomberg’s words, “just can’t get weak enough.”
Now, Svenska Handelsbanken is out predicting that “lower for longer” crude will eventually force Norway to cut rates to zero.
Here’s more, via Bloomberg:
With oil prices still wobbling around $50, Norway is in danger of a recession that could drive its benchmark interest rates, already at a record low, to zero.
That’s what economists at Svenska Handelsbanken AB in Oslo say as they warn that “recessionary risks are significant.” The central bank in September cut rates to 0.75 percent and signaled more than a 50 percent chance for a third reduction since the drop in oil prices accelerated, about a year ago. Handelsbanken sees three cuts next year, bringing the benchmark to zero by the end of 2016.
“The Norwegian economy will now experience a deeper downturn than during the financial crisis, with output expected to stay below its potential for longer than it did last time,” Kari Due-Andresen and Knut Anton Mork, economists at Handelsbanken, wrote in their latest report.
Before the big oil price drop even got started, Norway was already battling a bigger-than-expected fall in investments. Now, with Brent crude lower still, investments by oil and gas companies operating in Norway are set to suffer.
As a reminder, Norway is now set to dip into its sovereign wealth fund for the first time. Earlier this month, budget estimates indicated that inflows from petroleum activities in 2016 will fall short of what the government plans to take out of the fund by nearly NKr4 billion. Here's a graphic from RBS which illustrates the relative size of Norway's SWF:
And while the asset allocation of SWFs varies meaningfully compared to official FX reserves, it's worth noting that this is but one more example of "Great Accumulation" reversal dynamic outlined in thse pages last November and highlighted by Deutsche Bank in the wake of the China deval. That is, regardless of what's being sold, it still represents a major turning point at which crude producers cease to be net exporters of capital.
Getting back to the Norges Bank, it's also worth noting that just today, Governor Oeystein Olsen mentioned NIRP. As reagular readers are no doubt aware, there's no surer sign that policymakers are in fact considering something than when they say they aren't considering it. The soundbite, from Bloomberg:
"We still have room to maneuver both ways. I hasten to stress that as prospects are now, we think it’s not likely in the near future that Norway will have negative rates. The board has not discussed moving into negative territory”
In the end, we suppose the real question is this: if the housing bubble that the Norges Bank has helped to inflate bursts, how does the central bank plan to deal with the fallout (which will be amplified by the economic drag from low oil prices) when it has exhausted its counter-cyclical capacity by cutting rates to zero?
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So, not so much Socialist Utopia but more Scandi-Beverly Hillbillies?
We have matters closer to home to worry about. The Vatican is trying to shut down the US government again:
Globalist Agenda Watch 2015: Updates 78-81 – The debt ceiling, the new abortion videos, and Presidential politics (+ a P.S. – The Vatican is behind the new video release)ZIRPLE NIRPLE
There’s no question that Norway’s strong economy in recent years created a strong real estate market that has seen prices quadruple or more in the past 20 years. Prices in Oslo, for example, have recently risen at a rate of around 8 percent per year, and while there are signs the market is flattening out because of the oil industry slowdown, prospective buyers still flock to property showings and bid up prices.
http://www.newsinenglish.no/2015/06/05/home-buyers-in-a-terrible-situation/
Oh come on ... nothing that importing a few hundred thousand refugees can't solve.
Bubbles are a failure of central bank policy.
The Shape of Things to Come.
Norway has been really proud of their economy for awhile, too bad they are just another one trick pony.....
Now, now - be fair, Knucks. Norwegians have always been well aware that their economy was a one-trick pony. That's the reason for a Sovereign Fund, after all. Unfortunately for them oil exports are down in value, yes, but that shouldn't affect the local prices of electricity and petrol for a while yet. Life is good over there, still!
Norway's infrastructure is in tatters they totally missed out on maintaining it, the country is also being drowned by migrants as we speak, they have a slow and inefficient social state,....should I continue?
And yes I know what I'm talking about!
i thought that every Norwegian would retire as multi-millionaire?
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Their fund is currently at $166k per person.
If you begin spending even a little bit of that per person per year, it runs out pretty quick over a period of 20 years.
The central planning conceit always fails in the end. Zerohedgers sometimes seem tempted to lose sight of that because these years under bankster rule tend to be a drag, but the fact is that the central banks lost a lot of their leverage at the zero rate boundary. Hence, QE and now nirp, their latest sign of desperation. Ultimately, they will fail as all attempts to engineer wealth via stock/credit/currency bubbles have failed for the past thousand years.
Paper money always seeks its intrinsic value...zero.
how does the central bank plan to deal with the fallout (which will be amplified by the economic drag from low oil prices) when it has exhausted its counter-cyclical capacity by cutting rates to zero?
Sell to Chinese?
Never Believe Anything Until It Is Officially Denied
Link: quoteinvestigator.com/2015/08/07/believe
One has to wonder how banks can indefinitely hold up stock prices and yet they are seemingly powerless to hold up commodity prices.
It is probably because, in this upside down world, commodities have actual utility and stocks are simply artifacts of financialization.
Sweden's rich neighbor Norway has been able to take advantage of steady oil revenues to fund a national lifestyle both rich and at times a little demoralizing. The prudent Norwegians have a large Sovereign Wealth Fund. Budgets have been made looking long term and the oil price shock did catch them a bit more flatfooted than they will admit.
Norway had the oil revenue to fund education to a level not seen before. Students could count on post secondary education to extremely high levels. Norway is full of scholars of social subjects as this is what pleases women and many men as far as ambition goes.
A very special film was made a few years ago called "Oslo August 31st ". It portrays a heroin addict's struggle in rehab. But that character is just the vehicle for the expose of young adult culture in Norway. As he makes his way through his social group we see all kinds of young educated Norwegians living a life off of the state's vast education system and subsidies for the arts and media. The expose shows just how many youth are really tied to government money, the private sector was hardly seen, and what was seen had a firm government subsidy keeping the unprofitable enterprise alive. There are allusions to this in the movie if you keep an eye out.
Sweden on the other hand, with no oil revenues, has been forced to enter the world marketplace and compete with their industry and technology for business. Those with no knowledge of Sweden think socialism. And social services are strong there. But what those without knowledge miss totally is the very real private sector industrial and technological base, plus the many small businesses and private farmers. My family there runs the range. From top executive in an automotive engine plant, to a private contractor home builder, to private farmers and small business shop owners. Socialism is a word, and it applies to Swedens health care system, social services and education. But I argue that when business has zero cost for employee health care, they compete much better in the world. My family does not pay insurance for employees they have in their businesses, that is not an overhead cost. People enter the world force without much if any student debt, allowing "free movement of labor", as does state health care. You go work where your talents lead you, not to where Health Insurance is good! This matters.
Norway I think missed the highly competitive market experience Sweden has had. This they will suffer for. Because the world only needs so many gender studies experts. Which Norway has plenty of. While Sweden has the engineers, Bio Tech, computer, electronics technicians in abundance. Norway had an easy ride from Oil, Sweden had to fight in the market place for every dime they got. Big difference.
Another good analysis there JB. I have Norwegian connections and go there a few times a year. It is pretty much as you say although inevitably there are exceptions, especially in marine, including oil, technology.
One thing the analysis omitted was the impact of Russian sanctions on their white and red fish exports, from $1B a year to 'where the hell do we ship that fish?'
The difference in Norway between the time I first went there, in 1965, and now is astonishing especially in rural areas. The difference in Sweden will be far less marked. Norway has, to an extent, been from boom to bust before, first with whaling and secondly with herring, looks like there is another culteral shock coming. They have the wealth to jump out but I doubt they have political will or skill.
Good point about the Fish ban. Russia is a 144 million person market, who love their fish. Norway is perfectly placed to fill that need. But Merkel and Obama had a better idea! Yes. all those fish farms and fishermen, where do you sell a billion dollars in surplus fish?
"You'll get cornholed once or twice, living in a Socialist Paradise" - Thorstadt "Coolio" Svendsen
The country will become a NOK shop.
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The Norwegian currency was typically around 18 cents during the 2020-2013 period. It is now around 12 cents. As long as oil stays "cheap" so will the kroner. This is a pretty big drop and should bring on some inflation as import costs skyrocket. Maybe the central bank should raise rates?
I meant 2010-2013 period. A burger on the Nor. ferries cost about $15 US a few year ago. Now it is probably only ten bucks. Bargain time!!
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Your definition of "cheap" is still relative.
They have the higest costs of living and goods and services in the world. The "Big Mac" index? Norway has the most expensive big macs in the world. Or maybe second most expensive since their currency drop. Switzerland may be the most expensive.
EDIT: you beat me after I refreshed browser....
No worries. The innovative genius of all those vibrants from Pakistan and Somalia (Mohammed is now the most common name for new-borns in Norway) will save the silly natives.
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All oil economies will go Bust
until they group together & hike prices
But USA will not allow them ,
so the only option for them is to side with Russia
and abandon petrodollar
petrodollar stinks