22 MARCH 2006
REVIEW OF BUSINESS CONDITIONS
According to Tapiola Bank’s latest review of business conditions, the economic outlook for Finland remains good. For the euro area the outlook is moderate, albeit the global economic growth is still decelerating.
– The economy grows accordant with the growth potential, the inflation remains slow and the unemployment rate will go under its structural level, Tapiola Group’s Senior Economist Jari Järvinen estimates.
Private consumption will still be the engine for the growth but the export is also increasing due to accelerated growth in the euro area and weaker euro.
– There is however a risk that the households become over-indebted and consequently use a major part of their assets to pay off their housing loans. This decreases the purchasing power and reduces other consumption, Järvinen warns. The Helsinki area has already shown signs of decreased housing trade.
ECB continues to increase the interest rates gradually towards a neutral level. However, debtors should not panic.
– The interest rates will probably remain historically low in the near future. A significant increase requires events which are not expected the moment. The Finnish economy can take higher interest rates and the increased carefulness on the housing market is good news, says Järvinen.
From a Finnish perspective, the greatest single risk is an unexpected and intense stagnation of the economic growth in the US.
The global economic growth will accelerate in the beginning of the year but will not reach the same level as last year.
– The outlook is undermined by the high oil price and stricter monetary policy in the US and euro area and soon also in Japan. In the long run there is risk for a weaker dollar in relation to the euro due to the US current account deficit.
The complete review is published in Finnish online at www.tapiola.fi/suhdannekatsaus. Tapiola publishes a review of business conditions four times a year, the next one in June.
Summary of the review concerning this year and year 2007
- The global economic growth decelerated temporarily at the end of the year but will accelerate again in the beginning of 2006. However, the total growth 2006 will not reach the level 2005. During the forecast period the economic growth will be slightly under the potential growth. The outlook is undermined by the high oil price and stricter monetary policy in the US and euro area and eventually also in Japan. The real price of oil is still at the level of the first oil crisis.
- The growth is also evening out between continents: In the US and China the growth is decelerating whereas in the euro area and Japan it is accelerating. A surprisingly heavy decrease in the US economic growth would abolish any positive surprises in the euro area and in Japan. Regarding the US current account deficit, a slower but stabile growth in the continents is easier to maintain.
- The hurricanes’ negative effect on the US economy became evident in the economic statistics in the end of the year. This year the rebuilding will boost the economy but not enough to alone maintain the growth. The economic growth in Japan has increased since focus shifted from export to domestic consumption. In Germany, the domestic demand is still low and therefore the increase of VAT fits poorly with the current economic situation.
- The economic outlook for Finland during the forecast period remains good; the economy grows accordant with the growth potential, the inflation remains slow and the unemployment rate will go under its structural level. Private consumption will still be the engine for the growth but the export is also increasing due to accelerated growth in the euro area and weaker euro.
- The FED’s cycle of raising interest rates is about to end. The increased short-term and long-term interest rates and stronger dollar have tightened the monetary conditions. The effects are already visible on the housing market.
- The ECB continues to increase the interest rates gradually towards a neutral level. So far the increase of interest rates has not tightened the monetary conditions. The key interest rate is still about zero and the weaker euro has functioned as an effective counterbalance to increased interest rates. In the short run there is pressure for a cyclic increase of long-term interest rates in the euro area but in the long run structural factors will keep them low.
- The inflation in the euro area and the energy-excluded inflation are diverging. This however indicates that the demand-inflation is not a problem. The energy-excluded inflation is still decelerating. At worst, a too aggressive interest rate increment weakens both the external (stronger euro) and internal demand (decreased consumption and investments). An expensive euro, slow growth and ineffective use of resources again next year will continue the historically low interest rate level.
- The IFO index exaggerates the acceleration of growth. In February the figure was the highest within 14 years estimating a total production growth of 3-4% in Germany. The IFO index has lost significance as a prognosticator for national growth due to the fact that it nowadays reflects the optimism of companies’ management regarding the global economy. Companies move the production to countries with lower labour costs and as a consequence the profits increase regardless of the situation in Germany.
- In the long run there is risk for a weaker dollar due to the current account deficit. In the short run the different between the US and euro area key interest rate supports the dollar. At the end of the year the difference decreases which may result in a weaker dollar in relation to the euro.
- The Finnish economy can take higher interest rates and the increased carefulness on the housing market is good news. So far the increase of interest rates has not significantly affected the housing market or lending. There is however a risk that the households become over-indebted and consequently use a major part of their assets to pay off their house loans. This reduces other consumption which has negative effects on the domestic enterprises and employment.
- From a Finnish perspective the greatest single risk is an unexpected and intense stagnation of the economic growth in the US. This would have a negative effect on the export, finance and commodity market as well as economic confidence indicators.
- The long-term outlook for the Finnish economy is still significantly weaker than the short-term outlook. Measures regarding ageing, long-term unemployment, Asian competition and the high income tax must be taken now and not later on.
- For debtors and savers the increased interest rates mean more expensive loans, but also better deposit rates. Despite the fact that the interest rates have started to increase, they will remain historically low during the next couple of years. A significant increase of interest rates requires events which are not expected at moment.
- In the near future the housing prices will decelerate or even stagnate in the Helsinki area. There are already signs that the housing market has calmed down. In the rest of Finland the prices will develop in accordance with the development of income level. There are no signs of factors causing a major drop in prices.
- The office, commercial hall and space market is brisk. Especially the average rent on the office market has increased due to more efficient space arrangement.
- For employees and entrepreneurs the uncertain growth and increased interest rates may decrease consumption and postpone investment decisions.
FURTHER INFORMATION
Review of Business Conditions:
Jari Järvinen, Senior Economist, Tapiola Group
Tel. +358 9 453 2049, forename.surname@tapiola.fi
Housing Market:
Vesa Immonen, Assistant Manager, Tapiola Group
Tel. +358 9 453 3412, forename.surname@tapiola.fi