Danske Research Team
Danske Bank A/S
We have revised our forecast down and expect Finnish GDP to grow by 0.5% in 2015. The Finnish economy would have grown in 2014 without Russian sanctions and related uncertainty. We continue to expect modest growth in exports on the back of growth in western markets, despite weak Russian demand.
Outlook for domestic demand continues to be dull. Household purchasing power is weakening, due to unemployment, tax hikes and a moderate wage agreement. Cheap petroleum is a rare positive factor. Surveys point to weak expectations in retail trade and especially in construction. Manufacturing CAPEX is also weak. We expect the growth in exports to fuel domestic demand too into modest growth in 2016. It is likely that GDP will not exceed the Q4 07 peak before 10 years has passed.
Thanks to manageable debt levels and low interest rates, the horrific GDP figures have not translated into a full-scale depression with mass unemployment, bankruptcies and credit losses. Loan performance has started to deteriorate recently, but from a very strong position. Finnish banks passed the ECB stress test with ease.
Housing market outlook is weak, but there is no severe deterioration in sight. Cautious supply of new housing and low interest rates are helping to keep housing prices relatively stable in 2015.
Fiscal policy is tight in 2015, expenditure cuts are ahead and municipal income tax is rising. The next parliamentary elections are in April 2015, which means that big policy changes will take time. The new government should implement structural reforms, which are very important for the future outlook. Potential growth could get stuck close to 1%, if public sector, labour market and pension reforms are neglected.
Despite rising debt levels, a downgrade by S&P, weak growth outlook and the slow pace of reforms, Finland continues to enjoy one of the lowest risk premiums compared to Germany. Relative to other euro countries Finnish public finances are still among the best, even if they are now lagging other Nordic countries.
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