PRESS RELEASE
15 June 2010
The Finnish gross national product continued to decrease in the beginning of the year. As the growth remained negative also during the previous quarter of the year, the Finnish economy is technically in a recession again. Tapiola Bank lowers the Finnish total economic growth forecast 2010 to 0.0 percent (1.0%). The whole euro zone is suffering from the debt crisis and is currently the weakest link of the world economy. The European debt crisis is also the biggest threat to the Finnish economy. The domestic employment rate has, however, remained better than expected. Tapiola’s estimate for the unemployment rate of this year is 9.5 percent (10.5%).
Tapiola Bank lowers the forecast of the GDP development in the Finnish economy because of the weaker-than-expected accounting figures of the first half of the year and the weakening outlook of the world economy. The single primary explanation for the more pessimistic view is the weakening net exports outlook. The export was reduced on the quarterly level by no less than 11 percent. The figure shows, among other things, the effects of the harbour strike in the spring.
“The demand for Finnish exports is still low. Depreciation of the euro strongly improves the competitiveness of Finnish exports outside the euro zone, so there is potential for significant improvement of demand. It must be noted, however, that even the “zero growth” scenario calls for a clearly positive economic growth in the latter part of the year,” says Jari Järvinen, Tapiola Group's Senior Economist.
Tapiola lowers the growth forecast for the year 2011 by 0.5 percentage points to 1.0 percent.
European debt crisis biggest threat to Finnish economy
The growth of the industrial countries has continued in the beginning of the year, but the anticipatory indicators indicate that the growth will slow down. Next year is going to be weaker than this year. The outlook is weakened by the tightening measures in financial politics aimed at controlling the indebtedness and balancing the economies. However, too early tightening measures may lead to a decline in tax income and an increasing deficit. The outlook of emerging economies has also weakened.
The greatest risk for the Finnish economy is related to the European debt crisis and its management. The Finnish economic situation is quite good compared to the euro zone, but bad news will be reflected on us through exports, the financial and commodity markets, and a drop in trust indicators.
“Special attention should continuously be paid to Finland's economic competitiveness. In the next few years, the competition on new orders in the global market will be extremely tight, and cost development must remain under control.”
The employment rate in Finland has remained better than expected, and Tapiola estimates the unemployment rate of this year to be 9.5 percent (10.5%). On the other hand, the unemployment rate is still expected to peak in 2011.
Interest rate remains low – euro should drop further in value
The central banks in United States and Europe, FED and ECB, will continue their current interest policy. Due to the debt crisis, the ECB had to re-adopt unusual measures such as buying government bonds, and to prevent the risk of a new downswing and price decline it must keep its key interest rate low until the end of next year.
“The euro zone is currently the weakest link of the world economy, and the debt crisis threatens to push the euro zone into a new recession and a downward spiral of prices. The weakening of the euro against the main currencies continues, but the euro is still overrated against the dollar. The return of competitiveness would require an underrated currency,” says Järvinen.
Besides the weakening euro, the stability of the monetary union requires growth of the international economy, stimulating financial policies in Germany and other core countries, more stimulating monetary policies from the ECB and tighter coordination of financial policies between the EU Commission and the EU member states.
From the viewpoint of customers with housing loans, interest rates will remain low. For example, having an interest rate cap is currently not in the interest of a customer taking out a loan; it is more advisable to prepare for the increase in interest rates by saving. According to Tapiola’s estimate, the 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.
Metropolitan area housing market heated up at start of year
The prices of residential properties in Europe have not recovered after the decline, which started last year. The recent accelerating increase in prices in Finland is exceptional in the whole continent. In the Helsinki metropolitan area the prices of old properties increased by no less than 15.7 percent and in the entire country by 7.7 percent from the previous year. It should be kept in mind that this time in 2009 prices were still on the decline.
“The historically low interest rates are speeding up the demand and sales of residential properties. As the production of market-financed housing rapidly decreased during the recession, the supply of new apartments is still short of demand. Specially in the Helsinki Metropolitan area, property prices will continue to rise,” estimates Vesa Immonen, Managing Director at Tapiola Real Estate Ltd.
According to Immonen, one explanation for the difference between Finland and the rest of Europe is the Finnish convention of using short reference rates for housing loans almost without exception.
“Probably this kind of exceptional price development in Finland would never have occurred if long interest rates of more than 5 years were used for housing loans. In the long range, the euro zone interest rate will rise from the current level. In Finland the risks of increased interest rates are almost completely on households, while in Europe it is more common that the risk is on the financial institution. Therefore the responsible lender should instruct the customer on risk formation and possible means of preparing for them.”
Read the entire economic forecast on the Tapiola website for investment customers at www.sijoitustalous.fi (in Finnish). The next economic forecast will be published in December 2010.
Click here for a version (pdf) including the tables and a summary.
FURTHER INFORMATION:
Economic forecast:
Jari Järvinen
Senior Economist, Tapiola Group
(09) 453 2049
Harri Lauslahti
Managing Director, Tapiola Bank
(09) 453 7100
Housing and real-estate markets:
Vesa Immonen
Managing Director, Tapiola Real Estate
(09) 453 3412
Emails: firstname.lastname@tapiola.fi