Finland: Weak outlook for 2013

After growing in the first quarter 2012, recession hit Finland with GDP falling in the second and third quarter by 1.1 and 0.1% q/q respectively (Chart 1). Data for different parts of the economy points at a weak fourth quarter. For the full year 2012, GDP is expected to have fallen slightly compared to 2011. The drop in GDP in the third quarter was broad based and indicators have continued to weaken (Chart 2). We revise our forecast slightly downward compared to Nordic Outlook November. GDP is expected to grow by 0.4% 2013 and 1.8% 2014. With world growth below trend in the near term exports will continue to be a drag on the economy. The confidence in industry is negative and on a falling trend, although still far from the levels that we saw during 2009. We expect industrial production and exports to be weak in the near future. The downturn in exports is to some extent dampened by a relatively better development in Russia (3rd largest export market). Exports are expected to have been roughly unchanged in 2012 compared to 2011 and will start growing again at a slow pace in 2013 (Chart 3). Foreign trade will have a negative contribution to growth 2013 and 2014 as imports increase faster than exports.
Key data Percentage change

THURSDAY 10 JANUARY 2013 Daniel Bergvall Economic Research +46 8 763 85 94

2011 2012 2013 2014 GDP Unemployment* Inflation 2.7 7.8 3.3 -0.1 7.8 3.2 -1.0 0.4 8.3 2.3 -1.0 1.8 8.1 2.1 -0.8

Government fiscal balance** -0.6

* Per cent of labour force, ** Per cent of GDP Source: SEB

Economic Insights

LABOUR MARKET WEAKENING, CONSUMERS GETTING MORE WORRIED Capital spending was largely unchanged 2012 and falling capacity utilisation in combination with falling sentiment industry point at continued weak investments in the near term. Still, lending to households and non-financial institutions are increasing by 5.0 and 7.4% y/y late last year does not point at a collapse. We expect investments to start increasing in the second half of this year by roughly 1.5% for the full year. Domestic demand has been fairly resilient given weak international development. Consumer confidence is at a low level but has stabilised above zero and improved in November and December 2012. Household real income will get a needed boost from falling inflation. Household consumption grew during the first 3 quarters 2012 compared to the same period the year before by 2% (Chart 5). The consumption development last year was jumpy though due to tax changes. Consumption will continue to grow supporting growth, but at a weak pace, just below 1% in 2013. External weakness is now a mounting pressure on the labour market. After showing resilience in the early part of 2012, unemployment is increasing and the number of vacancies is falling. In November 2012 unemployment reached 8.0%, up from 7.5 per cent in February. Also employment and hours worked was weak in November. The upcoming wage negotiations will be held in an environment with a lot of pressure to keep wage increases low. We expect unemployment to continue increasing to around 8.5% in mid 2013 before slowly falling. Inflation has held up more than expected, but is now falling. It reached 3.2% in November 2012 after peaking at 3.5% in October. HICP inflation is expected to fall during 2012 and as annual average end up at 2.3% and 2.1% respectively 2013 and 2014. Fiscal policy will be contractive as the government tries to improve the budget balance. This contributes to weak growth, but sends at the same time the signal to investors that the government deficit or debt will be kept at low levels. Relatively low government deficit and debt has boosted financial market confidence. Government debt is below 50% of GDP and the government deficit is expected to stay at close to 1% of GDP 2013 and 2014. Government bond yields have increased during the start of this year, in line with Germany and Sweden. The spread to Germany for 10-year government bonds was at the end of 2012 roughly 20 basis points after falling during the year.