The economic outlook for Norway – it’s stormy outside, but the refuge is comfortable Rīga, 13 October 2015 Pēteris Strautiņš, DNB Banka

Overview: Slowdown, not downturn

•  Global backdrop: Modest growth, higher oil price in 1-2 years •  Norway: Oil-induced slowdown •  Buffers…

1.  Not all regions affected equally 2.  NOK has weakened and improved competitiveness 3.  Rates may be cut further 4.  Wage growth has almost halved 5.  Fiscal policy is expansionary 6.  Immigration is responding to slowdown

Global background

Modest growth, low interest rate environment

-4

-2

0

2

4

6

8

10

1984 1989 1994 1999 2004 2009 2014

GDPPercent change y/y and grow th contribution

Adv. EMEs Adv. EMEsSource: IMF WEO/Thomson Datastream/DNB Markets

-1

0

1

2

3

4

5

6

Sep-08 Sep-10 Sep-12 Sep-14 Sep-16 Sep-18

Signal rates

US Japan EZUK Sweden Norway

Source: Thomson Datastream/ DNB MarketsSource: Thomson Datastream/ DNB Markets

Actual/forecast 19-Aug-2015

Higher oil prices over the medium term $50 is unsustainable – it kills investment. Aim at $70 in 2017-20

0

20

40

60

80

100

120

140

160

0

100

200

300

400

Jan-95 Jan-00 Jan-05 Jan-10 Jan-15 Jan-20

China's oil imports & oil price

Imports, 12mcs (rha) BB A-12 A-15Source: Thomson Datastream/DNB Markets

2,5002,5502,6002,6502,7002,7502,8002,8502,900

Jan Mar May Jul Sep Nov

Commercial oil inventories in OECDMillion barrels

5-year range 5-year average2014 2015

Source: IEA/DNB Matrkets

-2.5

-1.5

-0.5

0.5

1.5

2.5

3.5

Jan Mar May Jul Sep Nov

IEA's supply/demand balanceImplied stock buiilding/reduction. Mill. brls a day

5-year range 5-year average2014 2015

Source: IEA/DNB

Norway: Golden age to slowdown

Norway: From «golden age»… Productivity growth has not matched real wage growth

50

75

100

125

150

175

200

1900 1925 1950 1975 2000

Norway: terms of Trade2000=100

Source: Revidert nasjonalbudsjett 2014/DNB Markets

100

150

200

250

300

1970 1980 1990 2000 2010

Mainland Norway1970=100

Real wages ProductivitySource: Revidert nasjonalbudsjett 2014/DNB Markets

…to oil-induced slowdown Cyclical as well as structural

0

2

4

6

8

10

12

14

1970 1980 1990 2000 2010 2020 2030 2040

Oil Sector's use of resourcesPercent of Mainland GDP

Inputs Wages GFCF RNB15Source: Statistisk sentralbyrå/IFIN, RNB15/DNB Markets

75

100

125

150

175

200

225

1995 2000 2005 2010 2015

Terms of Trade and RULC1995=100

Export-/import prices RULCSource: OECD EC. Outlook/IMF/Thomson Datastream/DNB Markets

Q3 survey confirm slowdown NOK 193bn in 2015, 181bn in 2016 (but exploration investments too high)

0

40

80

120

160

200

240

1985 1990 1995 2000 2005 2010 2015

Norway: Oil investmentsNOK billion. Estimated and actual

Actual Aug t-1 Aug tSource: Statistics Norway/DNB Markets

Substantial uncertainty Norges Bank sees 21% decline (vs. our 31%)

0

50

100

150

200

250

2003 2007 2011 2015

Norway: Petroleum investmentsBn 2015-NOK. 2015-2018: Norges Bank's

estimates

Fields on stream Field devlp. Explor.Shutd./rem. Pipes/onshore

Source: Norges Bank/DNB Markets

Also, exports will be hit Trad.exp. +76’’’ (2.4%/yr) since 1999, half oil-related (5.3%/yr). Brazil 10%/yr

0102030405060708090

1980 1990 2000 2010

Norway: Goods ExportsBn 2005-NOK

Engineering Metals ChemicalPrimary Pulp/paper

Source: Statistisk sentralbyrå/DNB Markets

The slowdown is here already

45

55

65

75

85

95

105

-30

-20

-10

0

10

20

30

40

Aug-05 Aug-10 Aug-15

Employed and unemployed1000 persons

Employed, change 3m/3m Gross unempl. (rha)Source: NAV/SSB/Thomson Datastream / DNB Markets

Q2: Weak investments pull down GDP

-4.5

-3.0

-1.5

0.0

1.5

3.0

4.5

6.0

7.5

-3

-2

-1

0

1

2

3

4

5

Q1 2007 Q1 2009 Q1 2011 Q1 2013 Q1 2015

Norway: Mainland-GDP

%, q/q, sa. %, y/y, sa.

Source: Statistics Norway/Thomson Datastream/DNB Markets

Norway Quarterly National Accounts

Q1 2015 Q2 2015 Q2 2015Private consumption 1.0 0.5 2.5Public consumption 0.1 0.5 2.0Gross fixed capital formation -0.6 -1.3 -4.8

Mainland Norway -1.3 -0.3 -2.0Mainland companies -6.4 -1.0 -2.5Accrued oil investment 0.9 -3.0 -11.9

Exports -3.4 -0.1 3.2Traditional goods 3.2 -0.2 5.2Oil and natural gas -6.1 -0.8 1.6

Imports 2.7 -1.3 4.1Traditional goods 2.5 -0.1 3.1

GDP 0.1 -0.1 1.2GDP excl. oil and shipping 0.3 0.2 0.9Net trad. exports, contr. GDP -0.1 0.0Stocks contribution to GDP 1.9 -0.5Sources: Statistics Norway and DNB Markets.

Per cent, q/q y/y

Buffers

The shock is assymetric 330’ jobs (1 in 8), with Rogaland most exposed

Employment still quite stable in most regions

-20

-10

0

10

20

30

40

Aug-11 Aug-12 Aug-13 Aug-14 Aug-15

Norway: Registered unemploymentPercentage y/y change, 3-m. moving average

Norway East (7) Inland (2)West (5) Mid (2) North (3)

Source: NAV/Thomson Datastream/DNB Markets

Monetary policy is ‘first line of defence’ Cut, as expected, in June. Another in December

0.00

0.50

1.00

1.50

2.00

2.50

2014 2015 2016 2017 2018 2019

Norway: Key Policy RatePer cent

Actual MPR2/15 DNB MarketsSource: Thomson Datastream/Norges Bank/DNB Markets

0.70

0.80

0.90

1.00

1.10

1.20

1.30

1.40

Jan-15 Mar-15 May-15 Jul-15

Norway: 3m FRAs

SEP15 DEC15 MAR16 JUN16Source: Thomson Datastream/DNB Markets

External devaluation TWI weakened 20%. NB sees appreciating NOK

85

90

95

100

105

110

115

120

125

7.0

7.5

8.0

8.5

9.0

9.5

10.0

Sep-07 Sep-09 Sep-11 Sep-13 Sep-15

Norwegian krone

EURNOK TWI (rha)Source: Thomson Datastream/DNB Markets

92949698

100102104106108

Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17

Norway: Import-weighted NOK (I-44)

I44 Norges Bank MPR 2/15Norges Bank MPR 1/15

Source: Thomson Datastream/Norges Bank/DNB Markets

Traditional exports boom Trad. exports +7% y/y in 2015H1, hotel nights +5% y/y (12m sum)

-12-9-6-30369

1215

Q2 2005 Q2 2010 Q2 2015

Norway: Traditional goods exportsGoods excl. oil, gas, ships & oil platforms

q/q, sa, %a y/y, sa, %Source::Statistics Norway/Thomson Datastream/DNB Markets

47

49

51

53

55

57

-6

-4

-2

0

2

4

6

8

Jan-00 Jan-05 Jan-10 Jan-15

Hotel nights & capacity utilizationPercent. 12m mav

Hotel nights y/y Capacity utilization (rha)Source: Statistisk sentralbyrå/DNB Markets

However, NOK likely to rise. Euro 8.30 in 12m

7.88.08.28.48.68.89.09.29.49.6

7.88.08.28.48.68.89.09.29.49.6

11-Sep-14 11-Sep-15 11-Sep-16

EURNOK

Fwd CF Sep 15 PPP DNB

Source: Thomson Reuters/Consensus Economics/DNB Markets

5.5

6.0

6.5

7.0

7.5

8.0

8.5

5.5

6.0

6.5

7.0

7.5

8.0

8.5

11-Sep-14 11-Sep-15 11-Sep-16

USDNOK

fwd DNB CF Sep 15 PPP

Source: Thomson Reuters/Consensus Economics/DNB Markets

Lower wage growth From 2.6% real wage growth to below 1%

0

1

2

3

4

5

6

7

2000 2004 2008 2012 2016

Norway: Wages and unemploymentAnnual change and level in percent

Real wage CPI UnemploymentSource: Statistisk sentralbyrå/DNB Markets

0

1

2

3

4

5

6

7

Q3 2005 Q3 2007 Q3 2009 Q3 2011 Q3 2013 Q3 2015

Expected wage growthEmployers and employees

This year Next year In 5 yearsSource: NBs Expectations Survey/Thomson Datastream//DNB Markets

However, increasing traditional exports will not be easy High wage level and overall small differences

020406080

100120140160

Nor.

Ble.

Den.

Ger

m.

Swe.

Aus.

Finl

.Fr

a.Ne

th.

Irel. It. UK

Spai

nCz

e.Po

l.

Manufacturing wage costs, in common currency, 2014

Norw ay's EU 18 trading partners = 100

Source: Teknisk beregningsutvalg/DNB Markets

Use of oil money continues to increase NOK 150bn (+0,6%) in 2014, 169bn (+0.5%) in 2015. 2.6% of GPFG

-100

-50

0

50

100

150

200

250

300

1985 1990 1995 2000 2005 2010 2015

Public Net AssetsPercent of GDP

Norway GPFG EMU OECDSource: Ministry of Finance, RNB2015/DNB Markets

0

1500

3000

4500

6000

7500

9000

0

50

100

150

200

250

300

350

2001 2004 2007 2010 2013 2016 2019

Structural oil-adjusted balanceNOK Bn, 2015-prices. GPFG in current prices

Actual 4% GPFG (rha)Source: Ministry of Finance, RNB2015/DNB Markets

Housing market is expected to cool

-10-505

1015202530

1985 1990 1995 2000 2005 2010 2015

Norway: Home pricesPer cent change from previous years

Actual/estimate DNB's modelSource: Eiendom Norge//Finn.no/Eiendomsverdi/DNB Markets

High home prices rel. to CPI, but not income

50

100

150

200

250

300

1985 1990 1995 2000 2005 2010

Norway: Real Home PricesIndex. 1985=100. Selected deflators

CPI Building costsAnnual wages Disposable income

Source: EFF/finn.no/Eiendomsverdi/Statistisk sentralbyrå/DNB Markets

Price/income 17% above 28-year average Share of income spent on necessities (food, clothes etc) lower than before

60708090

100110120130140

1985 1990 1995 2000 2005 2010

Home prices1985=100

Price/Income Price/Income ex necessitiesSource: Statistics Norway/DNB Markets

Limited building boom in Norway Note: In 1990 Ireland had 3.5m inhabitants, Norway had 4.2m

-50

0

50

100

150

1990 1995 2000 2005 2010

Norway: Population and HousingAnnual change in 1000

Pop. Net immigration Home completionsSource: Thomson Datastream/DNB Markets

-50

0

50

100

150

1990 1995 2000 2005 2010

Ireland: Population and HousingAnnual change in 1000

Pop. Net immigration Home completionsSource: Thomson Datastream/DNB Markets

Indebted households source of concern Ranks high in international comparisons

0

50

100

150

200

250

0

4

8

12

16

20

1980 1985 1990 1995 2000 2005 2010 2015

Norway: HouseholdsPer cent of disposable income

Interest expences Debt (rha)Source: Statistics Norway/DNB Markets

Signs that migration responds to weaker growth

-100

1020304050607080

Q2 1985 Q2 1995 Q2 2005 Q2 2015

Thousands

Norway: Migration 1000, 4 quarter sum

Immigration Emigration NetSource: Statistics Norway/Thomson Datastream/DNB Markets

0

5

10

15

1997 2000 2003 2006 2009 2012

Norway: ImmigrationSelected nations of origin

Sweden Other Nordics GermanyUSA Baltics PolandPIIGS Pakistan Iran/Iraq/Afg.Horn of Africa

Source: Statistics Norway/Thomson Datastream/DNB Markets

Summing up: Temporary slow-down •  Multi-speed recovery globally, higher oil prices medium-term

•  Oil-induced slowdown in Norway -  Temporary growth pause. But oil sector will remain a drag on activity -  Several buffers will dampen the overall effects

•  Plenty of uncertainties (as always) -  Oil price (both ways) -  Savings/consumption -  Home prices -  Migration

Latvia – the direction is up, but from much lower place

GDP growth acceleration is likely to be sustained

Source: Statistics Latvia

Seasonally adjusted GDP growth on quarterly and annual basis

It would be very surprising if consumption growth doesn’t pick up

Source: Statistics Latvia

GDP from expenditure side, annual change, since Q1, 2013, %

-4

-2

0

2

4

6

8

10

GDP

Private consumption

Government consumption

Investment (GFCF)

Exports

Imports

Imports of capital goods signal that investment should improve

Annual change of capital goods imports and gross fixed capital formation, %,

These data more or less tell you what’s going on ...

Source: Statistics Latvia, Bank of Latvia

Annual change, %

Deflation is possible in autumn Annual inflation for main aggregates and some important product groups in Latvia, %

Source: Statistics Latvia

-20

-15

-10

-5

0

5

10

15

20

-4

-3

-2

-1

0

1

2

3

4

Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15

TOTAL (LA)

Goods (LA)

Goods - food (LA)

Services (LA)

Goods - non-food (LA)

Energy consumed at home (RA)

Transport fuel (RA)

Commodity prices – not all are equal

Source: Bloomberg

Sub-indices of Bloomberg commodity index since 2010. 01.01.2010=100

Labour market Main labour market data, ‘000

Source: Statistics Latvia

0

50 000

100 000

150 000

200 000

250 000

750 000

800 000

850 000

900 000

950 000

1 000 000

1 050 000

1 100 000

Occupied job positions (LA) Employed (LA) Job seekers (RA)

Deleveraging will end one day Main cash flows between banks and non-financial sector, in quarters, Y/Y, % of GDP

Source: FCMC

data, DNB bank

forecasts

Forecast

Once the next lending boom starts ... ... ...

Increased lending to

households

Willingness to buy

RE price expectations

RE prices

RE purchases

WEALTH EFFECTS

Income

RE prices

Additional lending Additional

lending

Collateral value

INCOME EFFECTS

Boom will start from a very low point

Total domestic lending by financial sector (% of GDP)

Source: World Bank

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