The Economic Growth in Finland under Three Per Cent
According to the review of business conditions published by Tapiola Bank, the global economic growth slackens. The economic growth in Finland will be 2.8 per cent this year and 2.7 per cent 2005.
The oil price is the greatest single risk factor. A rise in oil price could accelerate inflation, slow down the growth and increase interest rates. In the worst-case scenario this combination could increase the unemployment rate and cause a fall in house prices.
According to Tapiola’s senior economist Jari Järvinen, there is an emerging hope for employees and entrepreneurs. However, he urges consumers to carefully consider taking long-term liabilities. No sudden changes are expected on the housing market.
Summary of the review:
• The situation in the USA and Asia slackens the global economic growth. The peak of the economic cycle shall be reached this year, and 2005 the global economic changes from a gradual cyclic recovery to a structural frailty.
• The economic growth in Finland is 2.8 per cent this year and 2.7 per cent 2005. The growth rests mainly on private consumption, although both the net export and investments will increase in comparison with the year before.
• The inflation in Finland remains slow during the review period. This year, the inflation slows down to 0.4 per cent, and next year it will be 1.7 per cent. Low inflation increases the purchasing power, but also puts up the real interest rates among the highest in the euro area. The unemployment rate will remain on the present level of 9 per cent.
• ECB continues with an easy monetary policy. FED continues to increase the interest rates gradually towards a “neutral” level. Regarding long-term interest rates, changes in policy has mainly been foreseen and the pressure to increase the rates is limited.
• The weakening of the dollar in relation to the euro continues. The adjustment of the deficit in the balance of current accounts demands a weaker dollar. The Chinese exchange rate policy is in a key position. If China does not revalue its currency, the pressure on the euro will continue. A revaluation would solve many problems; it would dampen the economic overheating and adjust the imbalance in the USA’s trade. However, a revaluation is not probable in the near future.
• No sudden changes expected on the housing market.
• The oil price is the greatest single risk factor. A rise in the price could accelerate the inflation which would result in decreased growth and higher interest rates in Finland. In the worst-case scenario this could increase the unemployment rate and lower house prices.
• Other significant risks relate to the double shortage in the US economy, protectionism and a sudden economic halt in China.
• In an environment of low interest rates, consumers should carefully consider taking long-term liabilities. Even though no remarkable increase in interest rates is in sight, it is advisable to prepare for higher interests due to the fact that in the long term the interest rates will occasionally be at a higher level.
• For employees and entrepreneurs, the review means an emerging hope, but on the other hand great uncertainty. Lesser tax increases the purchase power, but the uncertainty regarding durability of the increase puts off investment decisions.