Tapiola Bank's Review of Business Conditions 2/2008, Outlook for 2009-2010

Global Economy Faces Long-Term Recession – Finnish Economic Growth Turns Negative

Year 2009 will not bring immediate relief in the global economy; the growth is estimated to slacken further in the beginning of the year, and the credit crisis will cause problems in the real economy. Tapiola Bank estimates that the economic growth 2009 is -1.5 percent in the US and -1.0 percent in the euro area. Also in 2010 the growth will be negative. The Finnish economic growth will be -0.5 percent in 2009, and the unemployment will increase significantly. The central banks are forced to continue the interest rate cuts in 2009. ECB may have to decrease the key interest rate to as low as 1 percent.

Besides the US, recession is a fact also in the euro area and Japan. Contrary to the prior assumption that the growth will become differentiated, the emerging economies will not be able to boost the global economy.

– The recession in the industrial countries will have a decreasing effect on the growth of the emerging economies. The global credit crisis cuts consumption and investments. A financial policy with a fast kick-starting and stimulating effect is now called for, Tapiola Group Senior Economist Jari Järvinen estimates.

Finnish Growth to Recover in 2010 - Housing Market at Turning Point

The effects of the global financing crisis have reached the Finnish real economy at the end of the year and unemployment will probably increase by 8 percent in 2009, being 6.5 percent in the previous review. The growth of the domestic consumption and public demand are not enough to repair the notch in the investments and export, and therefore the economic growth will decrease to -0.5 percent in 2009.

– The economic expectations of corporations and consumers have swiftly turned worse. The significance of a stimulating financial policy is emphasized; tax relieves support the purchasing power of households and investments should be enliven with public construction projects, Järvinen states.

On the housing market, the development of average prices has reached its turning point. The nominal price of old dwellings decreased by 1.4 percent in July-September in the entire country, and by 3 percent in the Helsinki metropolitan area. The consumers' expectations on the Finnish economy have darkened significantly, and some of the households have postponed home purchases due to the unsteadiness. In the entire country, the home purchases decreased by some 20 percent from the corresponding figures last year.

­– After the first quarter of 2009, we will probably have a clearer picture of how deep the depression on the Finnish market is. For the meantime, it is positive that the lower interest rates improve the situation of mortgage households, Managing Director Vesa Immonen at Tapiola Real Estate estimates.

Central Banks Continue to Lower the Interest Rates – Inflation Fear Replaced by Deflation Fear

The bank-lead credit crisis weakens the effects of the monetary policy which emphasizes the importance of cooperation in the financial policy. According to Jari Järvinen, the future calls for increased supranational supervision and regulation since local omissions in supervision may result in global crisis similar to the one we are witnessing today.

The FED will continue the zero rate policy next year. Also the ECB will continue to cut interest rates.

– The recession requires that the key interest rate is cut to an all-time low of 1.0-1.5 percent. The decrease of short-term and long-term interest rates in connection with the weaker euro has eased the financial economy situation in the euro area, but the financial economy cannot quite enough support growth yet, Järvinen says.

The threat of inflation has given way to fear of deflation. The oil price which boosted the inflation in the beginning of the year has decreased very rapidly which has had a positive effect on the global economy.

– The oil price bubble burst quickly as estimated in the June review 2008. We estimate that the barrel price will remain at an average of 50 dollars during the review period.

Equities Still Expensive when Considering the Outlook and Risks

– Equities may seem cheap in relation to their result expectations, but they are still expensive when considering the outlook. The unsteadiness will continue on the equity market, and investors should not take big risks, Järvinen advises.

The entire review of business conditions is published in Finnish online at www.sijoitustalous.fi.

Tapiola Bank's review of business conditions 2/2008: Estimate for 2009-2010

• The global economy growth slackened towards the end of the year, and the retardation is expected to continue also in the beginning of 2009. The economic outlook has worsen due to the weak housing market in the US and the international credit crisis that is partially transforming and shifting from finance market to real economy.
• The outlook for emerging economies has also weakened, and the differentiation of growth is about to be proven unrealistic. The emerging economies are not immune to western demand shocks, and as the industrial countries are simultaneously heading towards a recession, the growth of the emerging economies will slacken even though they have gained in strength during the past years.
• In the US the dwelling prices have continued to fall, and the credit crisis will cut consumption and investments. The euro area is in a recession after the US, and a financial policy with a fast kick-starting effect is now called for. Also Japan is in a slump, but when compared to the other major industrial countries, Japan has the best abilities to recover towards the end of the review period.
• The economic outlook for Finland conforms to the slow down of the general economic activities in the industrial countries, and the Finnish economy will reduce next year. Companies' and consumers’ economic expectations have rapidly worsened, and it remains to be seen how the lower expectations will affect the actual savings, consumption and investment decisions.
• FED will continue its zero rate policy and by statements and direct purchases try to decrease the long-term interest rates to a significantly lower level than the present level. By low interest rates FED fights the deflation. The decreased raw material prices, credit crisis, decreased housing and financing assets, increased unemployment and a stronger dollar are signs of deflation. There is a risk that the FED causes long-term inflation problems while dealing with short-term problems. However, this is a risk worth taking in the current situation.
• ECB will continue to cut the interest rates. The increase of short-term and long-term interest in connection with the weaker euro has eased the financial economy situation, but the financial economy cannot yet support growth. The recession requires a leaner financial economy and therefore the ECB is forced to cut the key interest rate to a record low level; 1.0-1.5 percent.
• There is still room for the dollar to rise against the euro. Valuation, cyclic factors and increased overall prudence will support the dollar. In relation to Asian currencies, there is still pressure for a weaker dollar due to structural factors.
• The oil price bubble has burst, and during the review period the barrel price will remain at an average of 50 dollars. In the long term, there is still a significant pressure for an increased oil price due to overdemand and limited refining capacity.
• The increased price of financing as well as the difficulty to get it due to the credit crisis has weakened the companies’ and households’ consumption and investment possibilities. The increase of financing expenses and uncertainty have already resulted in lower dwelling prices, longer dwelling sales periods, increased number of dwellings for sale and fewer new loans.
• Decreased energy and raw material prices, calmer housing market, ECB interest rate cuts and the unwinding of danger money regarding the money market interest rates have turned the inflation pressure into a deflation risk. This must be taken into account in the next general salary negotiations. An oversized pay increase will reduce both companies’ competitive ability and jobs.
• Slower inflation, decreased reference rates, higher salaries and tax relieves will increase the Finnish household’s purchasing power. There is a risk of increased carefulness that might channel the increased purchasing power to savings.
• From a Finnish perspective, the greatest single risk is still a recession and deflation in the US. Bad news from the US would affect the Finnish economy through slower export, weaker finance and commodity markets and decreased economic confidence indicators.
• In the long term, the biggest risks for the Finnish economy relate to ageing, long-term unemployment, Asian competition and the high income tax. Actions to avoid these risks must be taken now and not later on. 
• An acute treatment of the global credit crisis requires cooperation in economic policy. The bank-lead credit crisis weakens the effects of the monetary policy which emphasizes the importance of financial policy.
• The future also calls for increased supranational supervision and regulation since local omissions in supervision may result in global crisis.
• The current crises is not caused by a single factor, but banks (to generous lending and greediness), investors (in search of potential additional return) as well as debtors (believing in ever increasing housing prices) are all responsible for the current situation. One common factor lies behind the current situation: the low interest rates that forced banks to develop new, complicated, structured financing innovations and incited the investors to invest in such products as well as encouraged consumers to take out over-sized debts.
• On the housing market, the development of average prices has now reached its turning point. During the third quarter of 2008, the price of new apartment and terraced houses still increased by 1.2 percent in the Helsinki metropolitan area but decreased by 1.3 percent in the rest of the country. The average square metre price for new houses is EUR 3,765 in the Helsinki metropolitan area and EUR 2,889 in the entire country.
• When compared to the corresponding period last year, the number of housing trades decreased by 20 percent in the entire country and as much as by 30 percent in the metropolitan area. Sales of new houses and apartments have cooled down dramatically. Constructions of new dwellings with the highest prices per square metre have been postponed. The number of granted building permits for dwellings decreased by some 4 percent in September in comparison with the corresponding period the previous year.
• For the meantime it is positive that the lower interest rates improve the situation of mortgage households. The one-year Euribor that is commonly used as a reference rate for housing loans has during the last one and a half month decreased by 1,5 percent, and the market rates are expected to decrease significantly in the near future. The growth of household loans was 11 percent during the second quarter of the year, and the total amount of household loans was EUR 67 billion.
• The next review of business conditions is published in June 2009.

Further information:

Review of Business Conditions
Jari Järvinen
Senior Economist, Tapiola Group
(09) 453 2049
forename.surname@tapiola.fi 

Housing and Real Estate Market
Vesa Immonen
Managing Director, Tapiola Real Estate Ltd
(09) 453 3412
forename.surname@tapiola.fi