Finland's GDP Hits Bottom

Finland's GDP increased by 0.2% q/q in Q2 13 according to preliminary data. Working day adjusted GDP contracted by 1.2% y/y. Thus, after four consecutive quarters of decline, the Finnish economy seems to have reached a bottom.

The sequential figure was well in line with our expectations (0.3%), but the year-on-year fall disappointed because history was revised down. There is now a downside risk to our full-year forecast of -0.4%, even if the economy starts to grow slowly.

Demand continues to be weak across the board. Manufacturing expectations are weak and orders are not growing. Household purchasing power is flat due to tax hikes and expected moderate wage agreement. Surveys point to exceptionally weak expectations in retail trade and construction. Manufacturing capex is also weak. The public sector is being forced to cut deficits and only a marginal amount of stimulus is aimed at construction. We do not see growth in domestic demand but positive signs in the global and European economy should lift export expectations.

Exports have suffered long-term damage from the descent of Nokia and forestry industries. Exports have also suffered from a high share of investment goods, which are in short demand at the moment, and poor price competitiveness caused by wage increases between 2008 and 2012. If pent-up investment demand is released in Europe and Finland regains competitiveness through wage moderation, exports could grow again in the medium term.

Despite the poor economic performance in recent quarters, employment has remained fairly stable, corporate bankruptcies low, housing market calm and banking system solid. Household and corporate balance sheets continue to be healthy and very low interest rates help a lot. Most Finnish housing loans are linked to euribor rates.

The new structural reforms announced last week take Finland a long way towards more sustainable public finances. The reforms, once they get concrete content and political acceptance, have the potential to generate positive effects in the medium and long term. Meanwhile, positive cyclical developments in the global economy should help exports and bring GDP to a mildly positive trend in the latter part of 2013.

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