PRESS RELEASE
For release on 15 December 2011 at 9:00 am
Tapiola is significantly lowering its growth forecast for the Finnish economy in 2012, to -1.5 per cent (1.0% in the September 2011 forecast). Unemployment is likely to rise to 8.5 per cent next year. Weak employment prospects are the biggest risk for consumers. Tapiola estimates the likelihood of disintegration of the euro area as having risen to 30–35 per cent. Saving the euro will inevitably restrict national budgetary powers. The most significant risks for the global economy involve disintegration of the European monetary union, the threat of a new downswing in the US economy, and bursting of the housing price bubble in China.
The key industrialised countries will descend into recession, led by the euro area, and the deepening and expansion of the credit crisis in Europe is also threatening to push the US economy toward recession. Bursting of the Chinese housing price bubble would freeze construction, which would have significant effects on global raw material markets and for the growth prospects of raw material suppliers.
The OECD’s anticipatory economic trend indicators describing the Finnish economy are now falling even more rapidly than in autumn 2008.
‘The biggest risks for the Finnish economy are seen in the weakening of exports, commodity markets, and financial markets and in a decline in trust indicators. The paring down of Tapiola’s growth forecast is significant, because the common estimate for next year has been one of some growth. This time, the drop in the GDP is curbed by companies not having large stocks, the rapid unloading of which would result in large contractions in production. On the other hand, the public economy does not have any recovery reserve, so it is likely that budget policies will have to be tightened simultaneously with a period of decreasing private demand,’ says Tapiola Group's Senior Economist and Assistant Director of Tapiola Asset Management Jari Järvinen.
The Finnish national debt is likely to increase by almost 10% in 2012. If the GDP contracts at the same time, Finland's debt-to-GDP ratio would weaken very rapidly. In Finland, consumers’ confidence in their economy took a dive after the summer months. The framework agreement for the labour markets and decreasing inflation would, however, seem to guarantee a rise in real income in 2012.
The weak employment situatin will slow down economic growth in the long term
Tapiola estimates that unemployment will rise to 8.5% next year and to 9.0% in 2013. If investment demand remains low globally or, as is possible, starts to decline again as a result of the euro area’s credit crisis, the need to cut industrial jobs may increase considerably also in Finland. It is unlikely that a new recession could be controlled through layoffs; instead, we may see a clear rise in unemployment rates, Tapiola estimates.
In the next few years, the Finnish economy will also be weighed down by a sharp decline in the working-age population. ‘Unless the employment rate can be significantly increased and the development of the productivity of the public sector and the service industries improves significantly, the long-term growth rate of the Finnish economy threatens to remain in the region of 1.5 per cent”,’ says Järvinen.
He continues: ‘Economic cycles have become shorter, and variation in the key elements of economics has increased. In practice, this means that we would descend into a new recession in conditions of high unemployment. This will pose new kinds of challenges for economic policies, because the recovery reserve is limited in the current situation.’
The European Central Bank will have to lower interest rates and increase purchases of problem states’ government bonds
According to Tapiola, saving the euro system will require significant deepening of economic integration at the cost of national budgetary powers. However, the issue is politically difficult to resolve quickly.
‘The focus of the European Central Bank’s (ECB) policies is on the treatment of the acute phase of the credit crisis. The inflation and money supply targets have been pushed into the background. We predict that the ECB will be forced to cut the key interest rate to almost zero and, in the end, is likely to be forced to increase purchases of problem states’ government bonds significantly from the current level. Therefore, the ECB has an important role in the resolution of the credit crisis,’ says Järvinen.
According to Tapiola, interest rates will remain so low that, for example, an interest rate cap connected to a housing loan is not a cost-effective product for the customer. An interest rate cap would be cost-effective only if interest rates were to rise substantially and remain high for a long time. A significant increase in interest rates does not, however, seem likely in the time frame covered by the forecast.
Risk-free interest income is no longer available for the investor either. Cash – i.e., bank accounts; money market investments; and accounts with a short, fixed term – are over-weighted in Tapiola’s investment recommendation. The gradual increase in equity risk has also been taken into consideration.
Decision-making on residential property purchases becomes slower
Residential property selling times started to get longer in the autumn also in large growth centres. In growth centres, slowing down of sales was particularly evident in the sales of new properties, as well as for exclusive properties. Prices of new properties went into a slight decline both in the Greater Helsinki area and elsewhere in Finland. According to information from Statistics Finland, also prices of older flats and terraced houses decreased slightly throughout the country. In October, the decrease in the Greater Helsinki area amounted to 0.3 per cent and elsewhere in Finland to 0.5 per cent. However, prices in Finland as a whole still increased by 1.6 per cent from those of the previous year.
‘The prospect of the reference rate for housing loans remaining low for the near future supports the housing market. Moreover, a moderate salary solution supporting both purchasing power and the economy will contribute to support for the housing market in the longer term. Recession would have an effect, in particular, on housing markets in municipalities with a negative moving-in balance, where prices of residential properties may decline,’ says Vesa Immonen, Managing Director of Tapiola Real Estate.
Construction costs have been rising continuously since the 2009 recession – for nearly two years now. They saw a year-on-year increase of 2.4 per cent in October. Costs in the earthwork industry rose by as much as 7.1 per cent from the previous year’s levels. The rise in construction costs is creating pressure in the production chain toward price elasticity and decreased profits, as in a recession cost increases cannot be transferred in full to the prices of residential properties.
ADDITIONAL INFORMATION:
Economic forecast:
Jari Järvinen Senior Economist,
Tapiola Group
+358 40 5639 761
Housing and real-estate markets:
Vesa ImmonenManaging Director,
Tapiola Real Estate
+358 40 5322 808
E-mail: fistname.lastname@tapiola.fi
Read the entire economic forecast (pdf)
You can read the entire economic forecast on the Tapiola Web site for investment customers, at www.sijoitustalous.fi (in Finnish).