PRESS RELEASE
10 June 2009
The economy will continue to shrink – In Finland, unemployment will rise above 10 per cent
The world economy will continue to shrink during the latter part of the year, but more slowly than before. In Finland, a strong decline in exports threatens to prolong the recession in comparison to other industrial countries. The economic growth in Finland will shrink by 5.0 per cent this year. A risk of deflation still exists.
"This should be taken into account in the next salary round, as excessive salary increases weaken companies' competitiveness and decrease the number of jobs," estimates Tapiola Group's Senior Economist Jari Järvinen. Unemployment will rise above 10 per cent in 2010.
The recession is expected to continue in the industrial countries also during the latter part of the year, but the economic decline is nevertheless slowing down.
"At the moment, it appears that the free fall of the economy is over but there is a long phase of unusually slow growth ahead of us. According to the indicators that measure expectations, the situation is improving, but we will find out whether this is a temporary or permanent change later when we see the figures on the actual economic situation," says Tapiola Group's Senior Economist Jari Järvinen.
Central banks balancing between the risks of inflation and deflation
The US Federal Reserve (FED) will continue its zero-interest policy and aim to revive the economy and prevent the risk of deflation. Also in Europe, the drop in the prices of energy and raw materials, the calmer housing market, the interest rate cuts by the European Central Bank (ECB) and the unwinding of danger money regarding money market interest rates have turned inflation pressures into a risk of deflation. "In Finland and the United States, the risk of deflation is also increased by the drop in the prices of property values such as stock and housing wealth, the indebtedness of the private sector and the deep economic recession," says Järvinen.
According to Järvinen, the ideal ECB key interest rate would currently be 0.5 per cent. Easier monetary conditions are also needed. The recent rise in the long-term interest rates combined with the strengthening of the euro tightens the monetary conditions in the euro zone. If this continues, it may prolong and deepen the recession.
The outlook of the Finnish economy still very weak – unemployment continues to rise
High-technology economies like Finland that rely on the production and export of capital goods are hit particularly hard by the global recession. There is a fear that in Finland the recession will continue longer than in large industrial countries. In Finland's main export markets, economic growth is slowing down considerably more than the average growth rate of the global economy. Tapiola Bank has lowered Finland's growth forecast for the current year to -5.0 per cent (-0.4 Tapiola Bank’s Arjen katsaus 1/2009). per cent (-4.0 in Tapiola Bank's online review of business conditions 1/2009). The growth forecast for 2010 has been raised slightly to -0.5 (-1.1) per cent. (-1.1) per cent.
"This is for the most part a technical correction, as the prospects of the comparison year 2009 have weakened considerably. This year, exports may decrease by up to one fifth from the previous year. On the other hand, decreasing imports support domestic production. Although the confidence of companies and consumers has improved slightly, it remains to be seen whether the change in sentiments will result in decisions to save or to consume,” Järvinen says.
The strong rise of unemployment will keep private consumption demand weak throughout the forecast period. Already during this year, unemployment is expected to rise to 8.9 (8.5) per cent on average. The forecast for the average unemployment rate of 2010 is 10.2 (9.2) per cent.
Conflicting observations from the Finnish housing market
As a result of the recession, the Finnish housing market is heading towards a crisis, but on the other hand, observations on the market situation are contradictory. The decline in the prices of old residential properties has slowed down significantly and in some areas it has stopped completely. Nevertheless, expectations remain weak. "The number of home sales is still too low, and in some sub-markets the prices are not formed in a genuinely market-based manner. Home buyers and changers waiting for prices to drop are still very cautious, and it is a common impression that housing prices will decline during the autumn,” says Vesa Immonen, Managing Director of Tapiola Real Estate.
Read the entire review of business conditions in Tapiola’s online magazine for investment customers at www.sijoitustalous.fi (in Finnish).
Further information
Review of business conditions
Jari Järvinen
Senior Economist, Tapiola Group
(09) 453 2049
Housing and real-estate market
Vesa Immonen
Managing Director, Tapiola Real Estate
(09) 453 3412
E-mail: forename.surname@tapiola.fi