PRESS RELEASE
11 June 2008

Until now, the Finnish economy has surpassed the average figures in Europe, but the peak of the economic cycle has been passed, and Finland is gradually sliding from economic boom to stagnation. Tapiola Bank lowers the economic growth forecast for 2009 to 1.7 percent.

– The slackening global economical growth seems to affect Finland more than expected but with a longer delay, Tapiola Group Senior Economist Jari Järvinen calculates. According to Järvinen, the rapid turn down calls for tax relieves already for next year.

Inflation increases in Finland this year, but the recession brings down the inflation to an average of 2.3 percentage year 2009.

– The increasing inflation is a consequence of the higher energy, raw material and food prices throughout the world. It is not a result of national demand, and therefore it does not indicate economical overheating, Järvinen says.

The global economic growth will decelerate significantly during the forecast period and we will see several years of slow growth. The greatest single risk is the US economy; US private consumption and investments havae made up one third of the global financial growth during the past years. If the US suffers a consumer-based recession, it will have a negative effect on the foreign trade, financial and commodity market as well as different confidence indicators throughout the world.

Central banks to keep present interest rates levels

The oil price bubble is also fuelling the increasing inflation. Tapiola Bank estimates that the bubble will probably burst within two years, and the oil price may swiftly drop 50 percent from the current price.

The simultaneously accelerating inflation and slackening growth is a difficult combination for the central banks. ECB and FED will probably keep the interest rates at the present level.

– ECB has no need to raise the interest rate due to the fact that the resent raise of short-term and long-term interest rates as well as the strengthened euro correspond to three 0.25 percentage raisings of the interest rate. The markets have raised the interest rates on behalf of ECB, Järvinen states. However, the downswing, FED’s earlier interest rate droppings, the strong euro and the strict monetary economy in the euro area forces ECB to lower the interest rates, possibly already before the end of the year.

For investors the situation is uncomfortable since the short-term interest rates are high in the euro area.

– Shares seem cheap, but when considering the risk, the prices are quite high. In the current situation investors have every reason to be careful, Järvinen emphasizes.

Dwelling Costs Increase in Finland

The dwelling cots have hiked up the consumer prices the most. Also in the future, dwelling prices will rise broadly, and mortgage managing expenses will increase. The increasing costs will also raise the rents. Dwelling prices are not expected to decrease.

– The housing trade shows now signs of significant slackening, and we are not expecting large changes in the average price level, albeit the longer dwelling sales periods. Properly priced dwellings sells well, says Real Estate Investment Director Vesa Immonen at Tapiola Real Estate Ltd.

The complete review of business conditions can be found at Tapiolas website www.sijoitustalous.fi (in Finnish). The next review of business conditions is published in December 2008.

Tapiola bank’s review of business conditions 1/2008, estimate for 2008-2009

• The global economy is slackening in the beginning of the year, and the retardation is expected to continue also towards the end of the year. The outlook is undermined by the weak housing market in the US, the credit crisis and the high oil price. However, the economic growth in the developing economies has still been strong which reacts against a heavy decrease in the industrialized countries.

• The global economic growth is diverging between the industrialized countries and developing economies. However, the developing economies are not immune to demand crisis in the Western Countries. A depression in the US economy would also slacken the growth of the developing economies albeit they have gained in strength during the past years.

• In the US the dwelling prices have continued to fall which has had a negative impact on the private consumption. Japan is again picking up growth since the focus is shifting from export to domestic consumption. The growth in the euro area has been strong but the worsening external operational environment raises questions on the growth sustainability.

• The economic outlook for Finland conforms to the slow down of the general economic activities in the industrialized countries. So far the economic growth in Finland seems to react on the worsening global economic situation calmer than the euro area economies in average, but the risk of a rapid recession has increased significantly.

• FED’s interest rate lowering cycle is coming to an end. The weak housing market has a significant impact on the economy, and in general decreased housing assets have been followed by serious problems in the real economy. On the other hand, decelerating growth does not automatically decrease the inflation, since the globalisation has shifted the inflation dynamics. Consequently the growth can decelerate without affecting the inflation. There is a risk that the FED causes medium-term inflation problems when dealing with short-term problems.

• The ECB is preparing to cut the interest rate at the end of the year. The raise of short-term interest rates sprung from the credit crisis and accelerating inflation in combination with the stronger euro has made the euro area monetary situation stricter, and the present monetary situation in general is clearly slackening the growth. The dim economic outlook requires a leaner financial economy and therefore the ECB is forced to cut the key interest rate to 3.25-3.75 percent. Interest rate cuts do not necessarily result in lower interest rates or weaken the euro but curbs a stronger euro and increasing interest rates.

• There is still pressure for a weaker dollar due to both economic-minded and structural reasons. However, a free fall is not expected since a controlled weakening of the dollar is in the benefit of the financiers of the debt-led growth. The FED’s decrease of interest rates, decelerating growth and reduced difference between the interest rates will weaken the dollar until the ECB starts to decrease its interest rates.

• The oil price is a bubble. The bubble will probably burst within the following two years, and the oil price may swiftly drop 50 percent from the current price. In the long term, there is still a significant pressure for an increased oil price.

• The credit crisis in combination with the accelerating inflation will keep the money market interest rates exceptionally high for sometime in comparison with the key interest rates of the central banks. Since money market interest rates are applied as key interest rates in Finland, the increased financing costs will deteriorate the investment capacity of private households and companies with high credit rating. The increase of interest payable has already resulted in longer dwelling sales periods, increased number of dwellings for sale and fewer loans.

• In the short-term the rise in energy, food and dwelling prices as well as the increased productivity will exceed the salary increments and accelerate the inflation. In the future, the calmer housing market, the expected interest rate cuts and the unwinding of danger money regarding the money market interest rates will ease the inflation pressure. Regarding inflation development, the most significant risk is the impact the recent significant growth in energy and food prices as well as the expensive wage settlements have on the future inflation expectations.

• The increased inflation is reducing the purchasing power of Finnish households. At the same time, the increased financing expenses decimate the companies’ and households’ investment possibilities. The strong increase in reference rates is already slackening the growth of households' outstanding debts. In the corporate sector, the salary and raw material increments in combination with the weaker demand shrink the profit margins.

• From a Finnish perspective, the greatest single risk is still an unexpected and intense stagnation of the US economic growth. Bad news from the US would affect the Finnish economy through slower export, weaker finance and commodity markets and decreased economic confidence indicators.

• The long-term outlook for the Finnish economy is still significantly weaker than the short-term outlook. Measures regarding ageing, long-term unemployment, Asian competition and the high income tax must be taken now and not later on.

• For employees and entrepreneurs the uncertain growth and increased interest rates may decrease consumption and postpone investment decisions.

• The next review of business conditions is published in December 2008.

Further information

Review of business conditions:

Jari Järvinen, Senior Economist, Tapiola Group, tel. (09) 453 2049, forename.surname@tapiola.fi

Housing and real estate market:

Vesa Immonen, Real Estate Investment Director, Tapiola Real Estate, tel. (09) 453 3412, forname.surname@tapiola.fi