Ajankohtaista

(English) Business cycle will reach its bottom next year

  • PTT’s macroeconomic forecast 2008 – 2009

     Business cycle will reach its bottom next year

    Turmoil in the world financial markets will not leave the Finnish economy unaffected. Because of the relatively rapid economic growth in the first three quarters, the Finnish economy will still grow at the rate of 2.7% this year. In 2009, however, the GDP growth rate will slow down to 0.9%, mainly driven by the deteriorating export markets.

    The crisis in the US financial markets has caused a global deterioration in financial conditions. Financial institutions are now reluctant to lend each to other because of high uncertainty regarding the risks hidden in the balance sheets of their counterparts. Due to this uncertainty, it is also more difficult for banks to improve their solvency by raising new capital, which also forces many banks to contract their lending. As a result, the risk premiums of market interest rates and corporate debt have increased, not only in the US but also in Europe. Fortunately, financial institutions have not had to contract their lending to their customers in Europe. The US government is currently drafting a rescue plan for the US financial sector, which involves absorbing the most toxic securities from the balance sheets of financial institutions into a specially designed state-owned institution.

    If the rescue plan works as expected, and if the US housing markets also start to recover, we might expect the US economy to gradually start to recover at the end of 2009.

    The economy of the euro area still seems to be coupled to the world economy. The rapid rise in food and energy prices has curbed private consumption by eroding the growth of real incomes in 2008. At the same time, the growth of exports is stalling because of the diminishing export markets and the strong euro. Accordingly, the growth rate of the euro area will slow down to 1.5% this year, but the recovery of the world economy will boost the euro area growth rate to nearly 2% in 2009.

    It’s all about consumption

    In recent years, private consumption has strongly contributed to the brisk growth of aggregate demand in Finland. It is up to the Finnish consumer whether the Finnish economy will avoid recession despite the turbulence in the world economy. Steadily growing employment, along with relatively strong consumer confidence, boosted consumption in 2008. Consumption kept growing even though the growth rate of incomes stagnated in real terms due to the rapid rise in consumer prices in 2008. In the past few months, confidence indicators have shown that consumer sentiment has been steadily deteriorating. At the moment, however, there is still no sign of a recession in sight. Private consumption is being supported by the expected steady growth in incomes, boosted both by wage increases and generous income tax cuts. This time, not even inflation will erode purchasing power. Although CPI inflation will temporarily peak this year at the level of 4.2%, inflation will not escalate to a wage-price spiral, but will slow down to the level of 2.5%.

    For this year, Finnish exports will still grow at the rate of 3.4%. However, beginning from the end of this year, the growth of export demand will start to dry up in almost all the most important export markets of Finland. Consequently, export growth will stagnate and even turn slightly negative in 2009. Despite the appreciation of the euro and the increase in unit labour costs, the competitiveness of the Finnish export sector still remains good.

    The diminished expectations regarding the business climate have also hit private investment. Residential investment is shrinking as the housing markets are calming down. Business and industrial construction, as well as investment in machinery and equipment, are also being hit by the cooling business cycle.

    Public finances will remain in surplus

    The favourable trend in the job markets created 45 000 new jobs this year. However, because of the weakening demand conditions, employment growth will stagnate in the last quarter of 2008, and employment is expected to even slightly decline next year. Unemployment is not expected to rapidly worsen, however. The first large cohorts born in the aftermath of World War II are gradually starting to retire, which will help the labour market to adjust to the worsening business cycle.

    The strong economic growth of recent years has created large surpluses in public finances. The surpluses in the public economy even allow large cuts in income tax for the next year. The planned tax cuts will boost demand and help the Finnish economy to survive the global economic slowdown. The balances of the public economy are still expected to remain in surplus in 2009. The tax cuts will not only mean a temporary fiscal boost, but lower tax rates on wages will also improve the balance of public finances in the long term. Lower income taxes tend to stimulate the demand for labour, which increases the number of contributors to the work pension system.

    For further information:
    Research Director Raija Volk, tel. +358 9 34 888 417, E-mail: raija.volk@ptt.fi

     Key forecast variables

     

    2007

    Bill. €

    2007
    change in
    volume %

    20081
    change in
    volume %

    20091
    change in
    volume %

    Gross domestic product,
    in purchasers’ value

    179,7

    4,5

    2,5

    0,9

    Imports, goods and services

    73,1

    6,6

    2,7

    0,3

    Exports, goods and services

    82,2

    8,2

    3,4

    -0,2

    Consumption:

    128,7

    2,7

    2,4

    2,1

    - private

    90,6

    3,2

    3,0

    2,5

    - public

    38,2

    1,3

    1,2

    1,2

    Investment:

    36,5

    8,5

    1,2

    -1,8

    - private

    31,9

    8,5

    1,1

    -2,1

    - public

    4,6

    9,4

    2,0

    0,0

    Stockbuilding and
    statistical discrepancy2

    5,3

    -4,9

    0,0

    0,0

    Inflation, change in consumer price index, %

    2,5

    4,2

    2,7

    Unemployment rate, %

    6,9

    6,2

    6,2

    Employment rate, %3

    69,9

    70,7

    70,3

    Central government net lending, % of GDP

    2,1

    1,9

    0,6

    Local government net lending % of GDP

    -0,1

    0,1

    0,0

    General government net lending, % of GDP

    5,3

    5,2

    3,5

    Current balance, bill. €

    5,3

    4,3

    4,0

    1 PTT projection
    2 Contribution to GDP growth, percentage points
    3 Employment per 15- to 64-year-old
     

     

     

    Economist Janne Huovari, tel. +358 9-3488 8421, E-mail: janne.huovari@ptt.fi
    Economist Petri Mäki-Fränti, tel. +358 99-3488 8420, E-mail: petri.maki-franti@ptt.fi
    Managing Director Pasi Holm, tel. +358 9 34 888 400, E-mail: pasi.holm@ptt.fi