PRESS RELEASE 15 JUNE 2011
The economic recovery in Finland took off later than in many other euro zone countries, but economic growth in the past year has exceeded even the growth rate of the German economy. Tapiola is raising its growth forecast for this year by one percentage point to 3.5 per cent. Inflation is expected to rise to 3.2 per cent. The increase in costs and the euro zone debt crisis will undermine consumer confidence in the economy. In Tapiola’s view the Greek and Portuguese crises are at an explosive phase, and debt restructuring is likely in both countries.
The Finnish economy has grown at an average rate of more than 5 per cent in the past year. Total output still remains more than 3.5 per cent below the peak three years ago, though. Tapiola forecasts that the previous peak level will be attained again in 2012.
The weakening of worldwide demand is, however, gradually beginning to reflect on Finnish economy, too. Growing cost inflation is affecting households’ real purchasing power, creating pressure on companies’ profit margins and slowing down a recovery in investments. Inflation will be up to 3.2 per cent this year. Tapiola forecasts inflation of 2.0 per cent for next year. Costs seem likely to rise next year, however, following an increase in indirect taxes and possible interest rate rise.
Unemployment has decreased as expected. Tapiola maintains it estimate for this year’s unemployment rate at 7.8 and next year’s at 7.4 per cent. The employment rate has turned to a more pronounced growth.
“The financial crisis caused Finnish industrial output to shrink by almost 25 per cent. The industrial jobs lost in the recession are for the most part gone for good. In the future, ensuring competitiveness will be our utmost priority and we should strive to keep inflation below the rate in competing countries. Tax increases will make it more difficult to maintain competitiveness. Taxing work and companies’ capital is particularly problematic from the viewpoint of investments and the creation of new jobs,” says Economist Timo Vesala of Tapiola Asset Management.
Euro zone threatened by new financial crisis if debt spirals further
The growth of the world economy is slowing down, led by the most developed countries. The euro zone grew strongly in the first half of 2011, but the spread of the debt crisis, the deceleration of growth in the world economy and the overvalued euro will slow down growth this year and next. In the worst case, the deepening of the debt crisis may trigger a new financial crisis. New bail-out packages, for struggling economies such as Greece, are nevertheless considered necessary.
“This is a way of buying time for banks to acquire sufficient capital buffers to protect them against the impending crisis. At the same time other problem states are offered the opportunity to seek market trust for their own housekeeping. However, bail-out packages are disadvantageous to taxpayers, which eats up their political acceptability. There is also the risk that Portugal and Ireland will not get their economies back on a credible track soon enough,” says Vesala.
The European Central Bank (ECB) will continue to raise interest rates, but not by as much as markets expect if the series of crises continues to unfold. The US Federal Reserve (Fed) will continue with a guideline interest rate of zero.
Tapiola Asset Management continues to recommend underweighting stocks
Raw material prices have traditionally predicted changes in demand. Recent price increases may be a sign of either accelerating growth or a rise in speculative demand. Various finance and commodity market variables and stock exchange rates are also good indicators of the real economy.
Tapiola Asset Management shifted its profit-driven investment strategy towards a greater focus on hedging this spring. The decision is based on the medium-term outlook and on the relative valuation and risks of asset classes. Tapiola reduced the weighting of stocks in its model portfolio from 50 to 40 per cent. Tapiola Asset Management continues to recommend underweighting stocks.
“We recommend that investors overweight the United States, keep Europe at a neutral level and underweight Finland, the emerging markets and Japan. The operational environment is challenging since the real economy is weakening and monetary policy is tightening up. We risk stagflation: stagnation of economic growth combined with rising inflation,” says Jari Järvinen, Tapiola Group’s Senior Economist and Assistant Director of Tapiola Asset Management.
New sobriety in the housing market
The prices of old dwellings in apartment blocks increased by roughly one per cent in the first quarter of 2011 compared with the previous quarter. In the Greater Helsinki Area, prices were up 4.3 per cent from a year earlier and elsewhere in Finland by 3.6 per cent. These figures are considerably lower than the 16.0 and 7.7 per cent growth figures of a year earlier. In the first quarter of 2011, the average price per square metre of an old apartment in the Greater Helsinki Area was EUR 3,338 and EUR 1,632 in the rest of Finland.
In real terms, salaries fell faster in the first quarter of 2011 than at any other time since the year 2000, which also has a curbing effect on the increase in home prices.
“More and more homebuyers seem to have be aware of the fact that the exceptionally low interest rates of the past few years may not last forever, and many are seriously considering hedging against interest rate hikes. Due to prevailing uncertainty factors, homes now take longer to sell and buyers are not bidding as boldly as a year ago. We nevertheless expect a positive price trend to continue,” says Managing Director Vesa Immonen of Tapiola Real Estate Ltd.
Housing supply is clearly on the rise as many construction projects launched after the recession have been completed this year. In terms of cubic metres of space, 54 per cent more homes were completed in the first quarter than a year earlier.
FURTHER INFORMATION:
Economic forecast:
Timo Vesala
Economist, Tapiola Asset Management
+358 50 5320 702
Jari Järvinen
Senior Economist, Tapiola Group
+358 40 5639 761
Housing and real estate markets:
Vesa Immonen
Managing Director, Tapiola Real Estate
+358 40 5322 808
E-mail: firstname.lastname@tapiola.fi
Read the entire economic forecast on the Tapiola website for investment customers at
www.sijoitustalous.fi
(in Finnish).