PRESS RELEASE
9 December 2009
The recession in the industrial countries ended in the summer, but the sustainability of the growth that has started is uncertain. This is a risk for Finland's export-driven economy. Finland will be among the last to rise from the recession, and, according to Tapiola Bank's estimate, in 2010 the economy will grow by 1.0 per cent. “The government should continue with recovery measures, and restraint in pay rises is vitally important. Balancing the public sector economy requires tightening measures, but 2010 is not yet the time for tax increases”, says Tapiola Group’s Senior Economist, Jari Järvinen. We will face the unemployment peak in Finland next year, and the number of unemployed may even exceed 400,000.
Finland’s economy follows with some delay the trend of positive economic development in the United States, Japan, the euro zone and developing countries. Tapiola raises the GDP growth forecast to 1.0 per cent (-0.3%, estimate in September 2009). Due to the slow recovery, Tapiola estimates that the economic growth will remain at 1.5 per cent in 2011.
“The weak demand in the global markets is not sufficient to explain the slowness of the Finnish economy’s recovery. It is also about a lack of competitiveness. The strong euro goes some way to explain the weakness compared to competitor countries outside the euro zone, but not the significant delay in gaining new orders compared, for example, to Germany's industry”, says Jari Järvinen.
Consumer prices will start to rise in Finland. Tapiola forecasts that the average rate of inflation in 2010 will be 0.7 per cent (0.7%). In 2011, inflation is likely to accelerate to an average of 1.5 per cent.
Unemployment rate to be as high as 13 − 14 per cent in a year’s time
Due to the structural change in the industry, unemployment will continue to rise next year. By the end of 2011, as many as 150,000 jobs will permanently disappear from Finland. At worst, the number of unemployed may exceed 400,000, and the peak of the unemployment rate is likely to go as high as 13 – 14 per cent during the winter 2010 - 2011. Tapiola continues to forecast that the average rate of unemployment will be 11.2 per cent next year. The reduction in workforce will turn the rate of unemployment into a decline at the end of 2011.
Interest rates to remain low - rate cap not relevant to those with housing loans
Around the world, central banks are staving off the risk of general price decline, i.e., deflation, with low reference rates. The FED will continue the zero rate policy. According to Mr Järvinen, getting the euro zone into a sustainable rise means that governments should continue the stimulating financial policies, and the European Central Bank, ECB, should maintain the policy of low real interest rates for the next few years. From the viewpoint of customers with housing loans, interest rates will remain low for the next 3−5 years according to Mr Järvinen, and significant rise is not expected. Based on this, hedging against rising interest rates by, for example, interest rate caps, is not in the interest of a customer taking out a loan.
“Interest rates should rise quickly in the next couple of years to a far higher level than the current one and stay at a high level for a long time for an interest rate cap to be worthwhile. If you save 50 euros per month, in a year you have accrued 600 euros’ savings. With that amount, you can prepare for an interest rate rise of about 0.5 per cent in a loan of 150,000 euros. And if the interest rate does not rise, you have the money saved up for some other use”, says Harri Lauslahti, Tapiola Bank’s Managing Director.
Urbanisation and single person households will drive Finland’s future housing market
Housing trade has picked up thanks to functioning lending and low interest rates, and house prices are recovering to last year's level after the downswing. In the long term, significant background factors in the Finnish housing market are the rate of urbanisation, which is record-high even by international comparison, and the strong growth of the relative number of single person households and small families. Urbanisation causes increasing divergence in the price development between growth centres and regressing areas. The increasing number of single households will diverge the demand between large and small homes.
“Prices of studios and small one-bedroom apartments will increase, maybe even overheat, come the next upswing, unless there is a clear increase in their construction. As things stand at the moment, construction of large apartments is supported by planning regulations and if demand remains the same in relation to construction, there will be lowering pressures on the prices of large apartments”, says Vesa Immonen, Managing Director of Tapiola Real Estate.
TAPIOLA BANK’S FORECAST FOR 2010 – 2011
• Industrial countries broke the recession in the summer, and the anticipatory indicators indicate that the growth will continue also in the first half of 2010. The recovery is supported by substantial recovery measures in financial politics and the zero interest rate policy applied by the central banks of the industrial countries, as well as the unusual measures complementing these.
• The outlook of emerging economies has also improved, led by China. The international financial crisis has shown that the shock resistance of the emerging economies has improved significantly in recent years, although they are still not completely immune to the demand shocks from the Western industrial countries.
• In the United States, house prices have started to rise, but the tightening of lending and the repayment of debts are cutting consumption and investments. Similar to the US, the euro zone has broken the recession but still needs stimulating economic policies. In Japan, growth has been faster than in the US and the euro zone, but the strengthening yen is decelerating growth in export.
• The Finnish economy will get back on the growth track. Tapiola raises the growth forecast for 2010 to 1 per cent (-0.3). Annual growth will remain modest, as the dramatic drop in the GDP this year lowers the starting level of total production to an extremely low level. Growth will remain at 1.5 per cent in 2011. If demand in the international markets continues to grow without disturbances, faster growth is possible.
• In Finland, the mood among companies and consumers has continued to improve in recent months, but caution has increased. The average rate of inflation in 2010 will be 0.7 per cent. In 2011, inflation is likely to accelerate to an average of 1.5 per cent.
• The FED will continue the zero rate policy. With the low interest rates, the FED aims to revive the economy and prevent the risk of deflation. The underutilisation of resources (workforce and capacity), the decline in housing and financial wealth, the increase in unemployment and private sector indebtedness are all deflationary risks. The risk of inflation is very low.
• The European Central Bank, ECB, will maintain the current interest rate level. The inflation and money supply targets would make even lower interest rate levels possible, but together with other unusual measures, the financial economy is currently lighter and more growth-supporting than ever. A higher key interest rate creates strengthening pressures on the euro against the US dollar, a situation which, if continued, would threaten to slow down recovery and move industrial production out of the euro zone to other markets.
• The risk of the dollar crashing is small. The existing dollar reserves of China and Japan “force" them to continue buying dollar loans in the future. The significance of the dollar as a reserve currency will diminish in the long term, but in the short term, it is difficult to find a credible alternative for it. Additionally, the undervaluation of the dollar and the brighter outlook of the US economy support the dollar against the euro in the medium term.
• The oil price has halved from its peak and the price will remain at an average of 60 to 70 dollars a barrel during the review period. In the long term, the oil price is under pressure to rise due to excess demand and limited refining capacity.
• The increased price and decreased availability of financing resulting from the credit crisis have weakened the consumption and investment possibilities of companies and households.
• The Finnish economy will be among the last to rise from the current recession as a result of the structure of our industry (investment goods) and competitiveness (expensive euro and unit labour costs). A further challenge for the Finnish economy is the structural change of the industry (forest industry and subcontracting in the electronics industry).
• The greatest risk for the Finnish economy is related to the sustainability of the international economy’s growth. If the growth is not sustainable, the bad news would be reflected on us through exports, the financial and commodity markets, and through a drop in trust indicators.
• In the long term, the biggest risks for the Finnish economy concern the ageing of the population, government indebtedness, competition from the Far East and high income taxation.
• Balancing public sector economy will in future require tightening of taxation, reconsideration of priorities and cost cuts. However, due to reasons related to the economic cycles, 2010 is not yet the time to implement these.
• The after-care of the global credit crisis requires cooperation in economic policy. The inoperability of the credit channel, i.e. supply and demand, weakens the strength of monetary policies, emphasising the significance of financial policies.
• In the future, more multinational monitoring and control is needed because failing to monitor locally can result in a global crisis.
• There is no single reason behind the current crisis, but banks (generous lending and greed), investors (looking for additional return potential) and borrowers (trusting in ever-increasing house prices) are all responsible. The common factor is the low interest rate level that drove banks to develop new and complex financing innovations, encouraged investors to invest in these products and pushed consumers to excessive indebtedness.
• In Finland, house prices have reverted to the levels of the same time period last year. In the Helsinki area, growth rate has been 1.1 per cent. In Vantaa, Tampere and Oulu, prices are still slightly lower than last year. The prices of old residential properties increased by 2.5 per cent during the period July to September compared to the previous quarter. According to preliminary information from Statistics Finland, the prices of old residential properties increased by 3.6 per cent in the Helsinki region. In Helsinki, the increase was 4.0 per cent, in Espoo and Kauniainen, 3.7 per cent and in Vantaa, 1.6 per cent.
The next economic forecast will be published in June 2010. Tapiola Bank’s online financial review and the Forecast on Finnish Economy will be published in March 2010.
FURTHER INFORMATION:
Economic forecast:
Jari Järvinen
Senior Economist, Tapiola Group
+358 (0)9 453 2049
Harri Lauslahti
Managing Director, Tapiola Bank
+358 (0)9 453 7100
Housing and real estate markets:
Vesa Immonen
Managing Director, Tapiola Real Estate
+358 (0)9 453 3412
Emails: fistname.lastname@tapiola.fi