Norges Bank just published the Q2 Regional Network Survey, which is its preferred gauge of economic activity. The aggregated output index (next 6 months) rose from 1.02 to 1.29 (Danske: 1.2, no consensus estimate). This translates to 0.64 % q/q growth in mainland-GDP for the next two quarters. This is higher than Norges Bank's projection from the MPR in March (+0.5 %). Keep in mind that the GDP figures for Q1 and revised data for Q4 16 revealed that growth has been somewhat stronger than Norges Bank anticipated in March. Hence, Norges Bank would need to revise up its growth forecast for 2017 from 1.6% in the March report to 2.0% in the next report (June 22). Despite inflation falling short of Norges Bank's expectations again in May (0.3pp gap), the Regional Network Survey and the last months' NOK weakness are arguments for removing the rate path implied rate cut probability.
Details strong as well. It is most noteworthy that domestic oil industries are back in positive growth territory for the first time in almost three years. Also the report reveals solid acceleration in both retail trade and construction. Capacity constraints, a proxy for the output gap, are up to 28.97, which is the highest since August 2013. Expected employment growth is the highest since November 2012.
All in all, a VERY strong report, clearly indicating growth is higher than expected, the labour market is improving and capacity utilisation is rising. The output gap is closing much faster than NB expected in March, so it is time to talk about when to expect the first hike to be delivered.
On the NOK. The RNS brings back domestic factors as a possible reviver of near-term NOK strength as the question of when Norges Bank possibly can hike rates is brought back into question. The global picture, however, remains less supportive for the NOK with not least the demand picture painting a less supportive near-term oil outlook. We are in the process of revising our NOK forecasts (currently 9.30 in 1M, 9.30 in 3M, 9.10 in 6M and 9.00 in 12M).
To read the entire report Please click on the pdf File Below