Finland: Slowdown ahead after strong Q1

For the export-dependent Finnish economy, the downbeat outlook for the world economy and especially the euro zone will contribute to 2012 being a weak year. After ending 2011 on a weak note, first quarter GDP growth came in surprisingly strong, but looking at the details it seems like things will be worse ahead. In the first quarter of 2012, exports grew and household consumption was boosted by car sales (high in March due to impending tax increases in April). Although domestic fundamentals are relatively strong, consumption will grow at a slower pace over the year. Monthly data for April show a clear slowdown, both on an annual and monthly basis. Leading indicators for manufacturing and construction are falling (Chart 2). The confidence indicator for manufacturing industry has been below zero since July 2011, and production fell in the first quarter of 2012 compared with the same period last year. On a year-on-year basis, exports have also been weak so far this year (Chart 3). Taken together, the strong first quarter will push up growth in 2012 even though we expect it to be weak for the rest of the year. We are revising our GDP forecast upward to 1.2% 2012 (from 0.7% in Mays Nordic Outlook), with 2013 unchanged at 1.7%.

THURSDAY 14 JUNE 2012 Daniel Bergvall Economic Research +46 8 763 85 94

Key data Percentage change

2010 2011 2012 2013 GDP Unemployment* Inflation 3.7 8.4 1.7 2.9 7.8 3.3 -0,5 1.2 7.8 2.5 -1.0 1,7 7.9 2.1 -0.5

Government fiscal balance** -2.5

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

Economic Insights

LABOUR MARKET RESILIENT SO FAR, CONSUMERS GETTING MORE WORRIED Capital spending is still rising, albeit at a slower pace than last year. The first quarter showed fixed investments increasing both in annual and quarterly terms (0.3 q/q, 1.5% y/y). Despite weakness in manufacturing, capacity utilisation is still on the rise (graph 4) and bank lending does not indicate an imminent slowdown. Unemployment has edged up somewhat in recent months (from 7.5% in January to 7.7% in April). Meanwhile the number of vacancies is still on the rise (Chart 5). We expect no significant increase in unemployment, and as annual average the figure is expected to stay at the same level in 2012 as 2013. With the jobless rate rising only slowly, consumer confidence and consumption will be relatively stable, although developments elsewhere in the euro zone are a significant cause for concern (Chart 6). Inflation has been stickier than expected, but lower inflation in 2012 than in 2011 is still boosting real household income (Chart 7). Still, household confidence has fallen to levels that suggest slower consumption growth. We still believe that domestic demand will be the main growth driver 2012. Inflation is expected to continue falling in 2012, although increases in excise duties and adjustments to valueadded tax will make the process more drawn-out. HICP inflation was 3.2 per cent in November last year, down from 3.7 per cent in mid-2011. We expect HICP inflation to average just below 2 per cent in 2012. Relatively low government debt has boosted financial market confidence. The government deficit for 2011 turned out better than expected at -0.5% of GDP. Yields on government bonds are at historical lows, at present around 1.7%, although higher than in such countries as Germany and Sweden.