Finnish Economy: Headwinds Increasing‏

A new quarterly survey published today by the Confederation of Finnish Industries shows that business confidence indicators declined markedly in October. The poor economic outlook is most visible in the manufacturing sector where the confidence indicator regarding the next six months sunk to -32 (-3 in July). Confidence also fell in the construction sector, to -48 (-27 in July), and in services, to -14 (-6 in July).

Worrisome development in company orders underlines the subdued economic outlook in Finland. Headwinds from Europe have reached the open and export-oriented Finland. New orders in the manufacturing sector decreased and the order book is currently slightly below the long-term average. New orders for metal engineering companies suffer from a lack of investment in export markets.

Construction companies expect orders to remain relatively stable after a decline in Q3, although they expect selling prices to decline. On the other hand, construction companies do not have large stocks of unsold apartments in their inventories. In our view, there is currently no significant housing bubble, due partly to constrained supply.

Businesses forecast that employment continues to decline in the following six months. This brings an added worry, as the news media has already been filled with details of a considerable number of layoffs. So far, the unemployment rate has stayed surprisingly low despite the structural changes in the forest and electrotechnical (namely Nokia) industries. In our view, the unemployment rate is likely to move above 8% this winter.

These new survey figures do bring slight downside risk to our current economic forecasts for Finland. However, there is no imminent reason to alter our general view of an economy currently at a standstill with sluggish growth at best in 2013.

The government has based its budget on an assumption of 1% GDP growth in both 2012 and 2013, which could turn out to be too optimistic. There is no immediate pressure to alter the budget but households are likely to be under pressure in 2013, when VAT and a few other taxes are raised at the same time as unemployment is rising.

The revenue hungry government also has plans for new rules on loan-to-value ratios in housing loans. The FSA has already recommended that banks grant mortgages for only 90% of a home's purchase price. Together with a proposed bank tax (tax rate 0.125% on RWA) and higher transfer tax on property, the proposal risks having a negative impact on the housing market. Low interest rates and a lack of housing supply, however, continue to support the price level.

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