Low interest rate level keeps consumer demand from falling

The low interest rate policy of the European Central Bank (ECB) has helped maintain a fairly high level of consumer demand in Finland.
      According to a survey published on Monday by the Federation of Finnish Commerce, retail sales increased in the first quarter of the year by 4.2 per cent. Growth was lower in the second quarter, but the overall trend was still positive.
      The federation expects growth for the whole year to be between 1 and 1.5 per cent. Next year, growth is expected to come to a standstill.
      “Low interest rates have encouraged people to consume and to take on debt”, says Jaana Kurjenoja, head economist at the Federation of Finnish Commerce.
     
The ECB’s interest rate is at an exceptionally low level, 0.75 per cent, and the economic crisis is adding pressure for further cuts. Analysts expect the rate to fall to 0.5 per cent in the autumn.
      The low interest rate means that those paying back home loans will have more money to spend on other consumption.
      Kurjenoja says that cheap money can bring some surprises in the autumn, in the form of higher-than-expected growth in retail sales.
      He says that the ECB interest rates have a direct link with consumer behaviour.
     
Two fifths of commerce involves retail sales.
      The biggest sector is wholesaling, comprising 58 per cent of the total.
      Wholesale sales are a better reflection of the economic health of the nation than retail sales. Kurjenoja predicts that growth in wholesale sales will come to an end this year
      Feelings among small businesses are reflected well in sales figures for delivery vans. This year van sales are declining, as business owners delay buying vehicles as they wait for times to get better.
     
Commerce is a big employer, but it is not an engine of the national economy. If industry has a shortage of orders, it is soon reflected in the wholesale and retail sectors.
      The overall view among wholesalers and retailers of economic prospects for the immediate future is pessimistic. Low expectations have led to cuts in personnel. In April-June 8,000 jobs were cut in the retail sector, and no improvements are expected next year.
      The expectations also affect investments. Last year investments in the commerce sector grew by seven per cent, but this year’s figures are likely to fall below the 2011 level.
     
In the view of Juhani Pekkala, the chairman of the Federation of Finnish Commerce, tax increases would further weaken the vitality of commerce.
      He is calling for the cancellation of plans to raise the value added tax rate of 23 per cent by one percentage point.
     


Previously in HS International Edition:
  Retail and wholesale sector expects years of slow growth (11.8.2011)

See also:
  Finance Ministry forecasts slow economic growth (20.6.2012)
  Bank of Finland: excessively large home loans need to be moderated (9.5.2012)
  IMF urges Finland to prepare better for bad times (12.6.2012)

Links:
  Federation of Finnish Commerce