Tuesday, 15 April 2008

Second-round Effects Materializing

10 January 2008 : "The ECB was "prepared to act pre-emptively so that second-round effects and upside risks to price stability over the medium term do not materialise," "

26 March 2008 :"ECB President Jean-Claude Trichet said March 26 it's ``imperative'' to avoid ``second-round effects,'' a term that describes attempts to offset higher costs for items such as food and energy through bigger pay or price increases."

15 April 2008 : "According to Statistics Finland, year-on-year growth in the same period of 2006-07 had been 5.2 percent. Pay rose in all sectors. The briskest growth was in construction, where wages were up by 11.1 percent from a year earlier.

Wages climbed almost as steeply in private health care and social services (10.5 percent) and financial services (10.3 percent). Even in sectors where growth was moderate, there was still considerable improvement in paycheques. Growth was the slowest in private-sector educational services, where pay was up by 6.2 percent

That's it.

Second round effect have materialized. It's irreversible. It means that high inflation in Finland is here to stay...at least until the next recession (2009-2011?) restabilize the economy.

What does that mean?

Loss of competitiveness, loss of purchasing power for the ones who cannot bargain wage higher.

The outcome?

Sluggish growth ahead with high risk of a deeper slump.


As contruction cost goes higher so do housing prices. As house prices go higher, less buyers are attracted. As Buyers vanish, less contruction is made. Construction company are less profitable and start to cut cost. Unemployment in construction sector start to increase. (you will see a sudden increase of taxi drivers)

As salaries goes higher in public sector, the government debt increase. As debt increase, the government is less flexible in reducing income tax. Other tax or public service start to increase to compensate.

As private healthcare increase their fee due to rising employee wage, consumers start to see their purchasing power decreasing as more money is needed to service private and public healthcare (public as the queue to get any service will shoot up). If their purchasing power goes down then the local economy will be affected.

So what does that mean overall? interest rates will have to stay high. Housing construction and price will go down, albeit slowly but surely. The risk of a bigger downturn will increase if inflation and loss of competitiveness is spiraling out of control.


Anonymous said...

This report seems to make it seem that you will have to wait a bit longer for the Finnish housing bubble to burst: http://virtual.finland.fi/stt/showarticle.asp?intNWSAID=18498&group=Business

Real estate agents expect business to pick up again this spring. According to the Finnish property barometer published on Monday, the economy's deceleration has slightly slowed down the growth of the real estate market and prolonged sales times. Currently sales times have stabilised and are expected to remain at their present level.

Property prices are expected to remain where they are or to rise slightly during the next six months. However, the price of holiday homes will keep on rising and the rate of sales will stay at the current level or pick up a bit.

"The bleak outlook of last autumn seems to be behind us and the markets are showing clear signs of normalising. The market is functioning well and is quite predictable now," said Tommi Rytkönen, the head of Kiinteistömaailma, Finland's second largest real estate agency.
End of quote


HousingFinland said...

This is the kind of news that you would expect from real estate agent after all.

This remind me the Technology bubble in 2000. Where newspaper were pushing private people to invest when at the same time smart investor were deleveraging. They were saying it's the new economy, this time it's different. Well market collpased a year or two after.

I read this article but though not worth to play the game of real estate agent.

For me it just confirm even more that we are now at the inflection point.

This week I will try to publish statistics that show strongly that the downturn has already started: Construction starts is on free fall and comes with a time lag the fall of the housing price.

I think what nobody knows is the extend of the price drop: 5%, 10%, 30% or 40%...after all it's all depending on the global economy and the maturity of the economical cycle.