Thursday, 1 January 2009

2009, What Year Would It Be?



Let's try to make some predictions on what we will see in 2009 in Finland.

1- The economy will probably enter into recession from 1st or 2nd quarter amid rising unemployment. Today unemployment is about 6%, it will most probably rise to 11%. Although we won't reach levels of the 1990's of 25%, for technical reason: the number of employed, the working force, will drop dramatically as the massive retirement forces start to kick in.

2- The Finnish Stock market will go side ways during the first half of 2009, in trying to assess the extent of the damage done to the real economy due to the credit crunch. Should a hint of recovery appear to be on the agenda from 2010, then we will see the stock market pointing it -rising- during the second half of 2009. I think we could have a growing optimism during the second half of 2009 only be watered out in the first 2010.

3- The Finnish has transformed itself, thanks to globalization, into an export economy. Relying mainly on the external demand, its strength of the past 10 years as become its weakness. The first sign of Finland recovery will be seen when Russia, Baltics and China start to recover...I do not see that until, maybe, end of 2010 at the earliest.
Regarding the domestic economy, it was a factor of internal growth, partly due to an unprecedented credit growth, due to cheap credit and reckless lending. This will vanish too as consumer will start saving amid witnessing their principal source of wealth - housing- shrinking.

4- Eastern Europe will see a major downturn that will put a very high pressures on Nordic and western exposed banks. Merging to survive could be a possible event as credit growth velocity will slow dramatically questioning the necessity of having a fragmented banking sector. The same will apply to the construction sector as well as satellite activities (real estate agents merger or disappearance could be on the agenda too)

5- Housing price downward spiral had started end of 2008, and will accelerate on the first half of 2009. a 10-20% drop during 2009 cannot be ruled out. 2010 will see the same phenomenon or worse if a recovery is not at the end of the tunnel.

6-Current politicians will still get the same support as they have enjoyed during 2008. During crisis, citizens tend to be conservative. History has shown that the same political group or figures are reelected. Matti Vanhanen could resign or be ousted from his party after failing to stop the decrease of popularity of his party.

7-Deflation will be pointing its noise during the first half of 2009 with all asset/product prices going downward - all prices set by the market. On the contrary, prices set by government will rise, which can be seen as a form of taxation (Train tickets , Alcohol ,Electricity ....). Second half will see a pick up of inflation, although as for the first half, it will be mainly technical and short lived.

8- Interest rates will first stabilize at 2%, and depending if a recovery is on sight or if the deterioration is dramatic, they will fall to an unprecedented 1% or lower, clearly signaling that the deflation threat is real.

9- Rent will start falling from the second half, synchronizing with the unemployment growth. That will add to the deflationary threat.

10- This blog will slowly but surely disappear as the sole existence of it was to express the risks of a dramatic fall of housing price, something which was viewed as improbable, especially by figures such as the Bank of Finland, IMF, politicians and economists: they misunderstood, deliberately or mistakenly, the impact of the financial crisis, the leverage build-in in the past 20 years and its impact on the real economy.

This predictions could be seen gloomy by some, but it's unlikely to see 2009 as a good year as any policy decisions will take time to propagate to the real economy. I'd rather prefer to be ready for the worse than listening to the "out of touch" economists that predicted that the stock market will gain 10% in 2008 when it lost 50%, or some that said that house price will rise 3%/year at the time when the price downward motion started.

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