Finland expected to withstand slowdown better than rest of Europe

Nordea forecast nevertheless predicts slower growth

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Nordea, the largest bank in the Nordic region, predicts that Finland will narrowly avert a recession in the next couple of years.
      Nevertheless, the forecast published by bank economists on Tuesday predicts that growth will be clearly below the long-term average already in the second half of this year, and that actual recovery will not begin until 2010.
      “Finland will undoubtedly go down to lower figures than when the high-tech bubble broke at the beginning of the millennium. However, in Finland we are not talking about a recession, even though we are walking close to the abyss”, said Nordea head economist Leena Mörttinen on Tuesday.
     
A recession is defined as a period of six months of negative growth - that is, if GDP were to be reduced for two consecutive quarters.
      Nordea does not see this happening. “Technically, Finland will not go into recession, even though things will feel quite unpleasant”, .Mörttinen says.
      Nordea predicts economic growth of 2.3 per cent this year. Next year’s forecast is between 1.7 and 1.3 per cent.
     
Growth in the world economy next year will slow down to 2.7%, according to the Nordea forecast. The bank predicts that growth in the United States, the euro zone, and Japan will be less than one per cent next year.
      According to the Nordea forecast, the euro zone as a whole is following the United States into recession, with inflation as the main culprit.
      “The main causes for the rise in prices have been oil and food. While fear of the cumulative effects of the spike in inflation live in the minds of the central banks, interest rates have risen”, Mörttinen says.
      However, Nordea does not see a likelihood of accelerating inflation. She believes that prices of oil and other raw materials will decline at a moderate pace, which will lead to an easing of inflation.
      Hence the European Central Bank will be able to think about lower interest rates.
      “We expect the ECB to lower interest rates by a total of one percentage point in 2009", Mörttinen says.
     
Interest rates on home loans should ease somewhat if the Nordea forecast holds.
      Nordea economist Reijo Heiskanen predicts that the “extra” percentage point contained in housing loan interest rates will disappear at the end of the year.
      The extra percentage point stems from the crisis on the money market, in which economic uncertainty and the lack of trust between banks are keeping the price of credit at a high level.
      “When common sense wins out in the market, there will be no uncertainty premium. We believe that this will happen at the turn of the year.”
      According to the Nordea forecast published on Tuesday, interest rates will decline significantly at this point. By mid-2009 at the latest, the current rates of more than five per cent will go down to four per cent.
      At the same time, the rise in the price of homes will stop growing, and even turn down.
      “According to our forecast, prices of homes will go down somewhere between zero and five per cent in the next year. This stems from the slower growth in new housing loans”, Heiskanen says.
      He says that changes in housing prices in Finland will be “significantly more moderate” than in the other Nordic Countries.


Previously in HS International Edition:
  PDF file: Nordea: EconoConsumers believe Finnish economy will take turn for worse (28.3.2008)
  Consumers believe Finnish economy will take turn for worse (28.3.2008)

Links:
  PDF file: Nordea: Economic Outlook (Nordic economies) September 2008 (Finland: pp. 11-13)

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