Finland: GDP fell in Q2, weak second half of 2012

Weak global demand is taking its toll on Finnish growth (Chart 1). In the first quarter of 2012 GDP grew by 0.9%, followed by a fall of 1.1% in the second quarter. With continued international weakness and our outlook for major export markets (Sweden, Germany, Russia) revised downward, it will be a close call whether Finland manages to avoid a new recession (two consecutive quarters of falling GDP) or not. In the second quarter exports, household consumption and capital spending all fell compared to the first quarter. Weak household consumption was expected, as the first quarter was boosted by unusually high new car registrations due to tax changes. During the past year, Finnish exports have performed worse than Germany and Sweden. Leading indicators have weakened for most sectors of the economy in recent months (Chart 2) and performance during the second half of the year will remain weak. Manufacturing output has basically been unchanged for a year, and given the weak international trend it is difficult to find a trigger for a near term increase (Chart 3). Although a weak trend during the rest of 2012 was already in the pipeline according to the August Nordic Outlook, performance since then has been weaker than expected. We are revising our GDP forecast to 0.3% in 2012, 1.3% in 2013 and 2.0% in 2014.
Key data Percentage change

FRIDAY 19 OCTOBER 2012 Daniel Bergvall Economic Research +46 8 763 85 94

2011 2012 2013 2014 GDP Unemployment* Inflation 2.7 7.8 3.3 0.3 7.8 3.2 -0,8 1.3 8.3 2.3 -0.5 2.0 8.3 2.1 -0.2

Government fiscal balance** -0.5

Source: SEB

* Per cent of labour force, ** Per cent of GDP

Economic Insights

LABOUR MARKET WEAKENING, CONSUMERS GETTING MORE WORRIED Capital spending fell in the second quarter (Chart 4). Capacity utilisation is still at a high level, and bank lending to both companies and households is rising at a steady pace. Investments are expected to start rising again in the second half of the year, although at a slow pace. Domestic demand has been less resilient than we had expected. Consumer confidence has fallen and so has consumption (Chart 5). Retail sales have improved somewhat compared to the poor second quarter and are again rising, albeit at a slow pace. We expect moderate growth in household consumption ahead. In recent months, unemployment has been on the upside of our forecast (Chart 6), reaching 8.0% in August, up from 7.6 per cent in June, after showing resilience during the first half of the year. A continued increase in unemployment will put pressure on household consumption. Vacancies are dropping, but not alarmingly so. Unemployment will rise by an additional 0.5 percentage point during the autumn and winter before levelling off and then slowly falling again late next year. Inflation has been stickier than expected and is edging upward (Chart 7). In September inflation stood at 3.4%, reducing the purchasing power of households. HICP inflation is expected to average 3.2% in 2012. Wages and salaries are increasing faster than in 2011, but real disposable income is rising only slowly. Still, wage increases will give a much needed boost to household income and consumption. Relatively low government debt has boosted financial market confidence. The government budget balance never went below the EUs -3% of GDP limit during the crises and came in at -0.5% of GDP in 2011. Government debt is below 50% of GDP. The government deficit will increases somewhat this year due to a weaker economy, but will not drop below -1% of GDP. Although rising somewhat in recent months, yields on government bonds are at low levels in a historical perspective, but higher than in countries like Sweden and Germany. Despite euro zone worries, Finnish sovereign bonds are viewed as a safe investment and the country is still AAA-rated.