Tuesday, 22 July 2008

Finnish Ministry Of Finance: Economic Review

1- The Finnish economy is slipping into a downturn

To date, Finland has held up well in the midst of a weakening international economy. However, the strong economic upswing is now levelling off and starting to slip. Employment will continue to strengthen while cost and price pressure has mounted considerably.
Higher inflation and weaker competitiveness are now the main threats to sustained stable economic growth.

2- From Construction to Renovation

Construction is still operating at maximum capacity, as the drop in new building has been replaced with renovation activities. Nearly a half of all the hours worked in construction went into renovation activities. The volume of new building construction grew by nearly 10% between January and March on the year before, with residential construction down by 10% and other construction up by 30%.

However, the number of construction permissions granted was over one tenth less than last year and building starts are also decreasing. Overall construction this year will increase as forecast in March but will level off in the course of next year.

3- HouseHold Situation:

Household consumption is still growing robustly, up by 3% this year, but the volume of new house purchases is already decreasing. Higher employment and wage increases are perking household disposable income, but inflation is eroding a substantial part of the improvement in purchasing power.

As in 2007, purchasing power will increase by a mere 2½%. The household savings ratio has been dropping in the past few years and will remain highly negative.

Households have run into debt at a fast pace too, and their financial sustainability is declining while household asset values are no longer increasing.

Assets and liabilities are not evenly distributed, though, as nearly one half of all households have no debt at all. Households with the heaviest debt burden will probably cut consumption as interest rates continue to rise.

4- Interest, Loan and Housing price

Short-term interest rates have soared to 5% on the past few months. Mortgage interest rates have also risen to 5%. The number of new housing loans has continued to grow considerably but house prices have stopping rising.

In Q1 of this year, the price of secondhand flats rose by 0.6% on Q4 of last year both in metropolitan Helsinki and the rest of the country.
But with consumer price inflation having accelerated, the real prices of houses have already started dropping.

The Ministry of Finance's Economics department has shown clearly, in its june report, that real house price growth have started to decelerate since 2005, to show no growth or slight decline beginning of this year.

They are still pretty optimistic on the outlook for growth in the next 2 year to come albeit at a lower level (2%). If you go back in 1989, the similar forecast was done, growth was on the card, albeit a slowdown or a soft landing. So history tells us that no knows what is going to happen.

We understand that the global economy is holding up because of a still resilient emerging market growth. The question would be for how long? usually it's always the last to fall.

Even the U.S. through his strongest economic voice, Mr Bernanke, Chairman of the Federal Reserve, sounds pretty bearish, during a testimony before U.S. lawmakers in Washington, he said there are "significant downside risks to the outlook for growth" and "upside risks to the inflation outlook have intensified."

The U.K housing market is on free fall, their economy is on the brink of a recession. So what do British politicians think about the situation :
"The effect of what has happened is going to be far more profound than people predicted even at the turn of this year," Darling, English Chancellor of the Exchequer, said in an interview

While back Home, the situation doesn't look any better...
"During the past quarter, the economic outlook has deteriorated in the Nordic and Baltic countries, especially as a result of inflation, higher interest rate levels and weakened consumer confidence," Kesko said in a statement.

All the supports are slowly but surely melting....

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