2005-09-29
According to Tapiola Bank’s latest review of business conditions, the economic outlook for Finland has slightly improved. In relation to the euro area the outlook is still moderate, albeit the global economy continues to decelerate.
–The Finnish economy grows by 2.1 percent this year and by 3.4 percent in 2006, the inflation remains slow and the unemployment rate will go below 8 percent, estimates Tapiola’s Senior Economist Jari Järvinen.
There is however a risk that strong growth generates a false sense off well-being among the Finnish politicians and consequently necessary structural reforms are put on hold until after the next parliamentary election. This would be a mistake, Järvinen warns.
Järvinen does not expect major changes in the interest rate level in the near future.
–At present the ECB has no reason to increase or decrease the interest rates. It is too late for decreases, and increases are not necessary in the short run.
The global economic growth is still decreasing and moving from boom to stagnation. The growth is also evening out between continents: In US and China the growth is slackening whereas in the euro area and Japan it is accelerating.
–The outlook has weakened due to the continuous high oil price and stricter monetary policy in US. The real price of an oil barrel has exceeded the barrel price during the first oil crises. The dollar will continue to weaken in relation to the euro, but probably not “linearly”, says Järvinen.
For debtors and savers the decreased growth means continuous low interest rates. Yet, debtors should prepare for a slight increase in interest rates. The housing market is calming down. It seems however, that the housing market is going through a distinct structural change. Owning has become more popular than renting.
–For mortgage holders, the greatest risk at present is not an increase in interest rates, but a strong economic decrease, says Järvinen.
Summary of review for this year and 2006:
- The global economic growth continues to decrease. The outlook has weakened due to the continuous high oil price and stricter monetary policy in US. The real price of an oil barrel has exceeded the barrel price during the first oil crises. The peak of the economic cycle was reached in spring 2004, and after that the growth has constantly descended. Consequently the global economy is moving from boom to stagnation.
- The growth is evening out between continents: In US and China the growth is slackening and in the euro area and Japan accelerating. A surprisingly heavy decrease in the US economic growth would easily 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 and therefore desirable. There is a 20 percent probability for a downswing in the US economy.
- The economic outlook for Finland has improved slightly. However, the dispute regarding the collective labour agreement for forest industry will disturb the growth this year and 2006; this year is not as bad and 2006 not as good as the figures imply. The increase of the figures for 2006 should not be interpreted as a significant growth but rather as a “technical adjustment” due to the modest figures of the reference period.
- In relation to the euro area, the outlook is still moderate. The economic growth is 2.1 percent this year and 3.4 percent in 2006. Inflation will remain slow and the unemployment rate goes under 8 percent. The growth is still depending on private consumption. The growth of investments will be modest and the growth of exports is surrounded by significant risks due to the modest growth in the euro area and high-priced euro.
- FED continues to increase the interest rates gradually towards a “neutral” level. So far, the increases have not significantly affected the US economy. The decrease in long-term interest rates, increase in stock and housing prices as well as the weakening dollar has rather eased than strained the financial circumstances. The interest rate rising cycle is going to be shorter and more gentle than expected.
- ECB continues with an easy monetary policy. At present, there is no reason to increase or decrease the interest rates. It is too late for decreases and increases are not necessary in the short run. Overvaluation of the euro, underutilization of resources and expectations of a moderate inflation enables the present interest rate level. Also the long-term interest rates in the euro area will remain low. On the other hand, the strong housing market and the diverging economic growth in the big euro area countries makes it even more difficult to practice monetary policy.
- The dollar continues to weaken in relation to the euro, but probably not “linearly”. The fact that the dollar has grown stronger the resent months is a result of the referendums in France and Holland as well as the weak economy figures in the euro area. In the long run, an adjustment of the current account deficit requires a weaker dollar. However, a weaker dollar is not enough; a decrease of the economic growth in the US is also required.
- China’s revaluation in July has no major effects on the real economy but it scattered a conceivable trade war with US. Instead the fact that China is now practicing an easier currency policy is an important factor and decreases the pressure of a stronger euro in relation to the dollar. The worst fall of the dollar is probably over.
- The housing market is calming down. It seems however, that the housing market is going through a distinct structural change. Owning has become more popular than renting.
- By Finnish perspective, the greatest risk relates to a surprising slackening of the global economic growth, mistakes in the monetary policy on the continents, the dollar, oil price and increased protectionism. At worst, these risks combined could result in a major decrease in the Finnish economy.
- There is a risk that strong growth generates a sense off well-being among politicians and consequently necessary structural reforms are put on hold until after the next parliamentary election. This would however be imprudent. At present, political management is important since the long-term outlook for the Finnish economy is 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 decreased growth means continuous low interest rates. Yet, debtors should prepare for a slight increase in interest rates. For mortgage holders the greatest risk at present is not an increase in interest rates, but a strong economic decrease.
- For employees and entrepreneurs the slower growth means increased uncertainty, which may decrease consumption and postpone investment decisions.
Further information
Review of Business Conditions:
Jari Järvinen, Senior Economist, Tapiola Group
Tel. +358 9 453 2049
Housing Market:
Vesa Immonen, Assistant Manager, Tapiola Group
Tel. +358 9 453 3412
E-mail: forename.surname@tapiola.fi