Finland: Economy at full speed towards potential – Danske Bank

Finnish economy steamed ahead stronger than expected in Q1 17. GDP rose 2.7% y/y after rising 1.4% in FY 2016 as noted by Pasi Kuoppamäki, Chief Economist at Danske Bank.

Key Quotes

“Leading indicators continue to be elevated. We have revised our forecast higher and expect Finnish GDP to grow 2.8% in 2017 and slow down to 1.5% in 2018. Consumption continues brisk growth while manufacturing exports and investment also add to rising GDP. Finnish GDP is still well below its previous peak and the economy is cruising towards potential output. Future growth depends on structural reforms and labour participation, which is well below other Nordic countries.”

“The main risks are related to the global outlook. Domestic risk are partly political. The Finns Party, one of the coalition government parties, will elect a new chairman and under new leadership cooperation with other ruling parties may become more strained.”

“Private consumption continues to grow 2% in 2017. Rising inflation and low wage growth challenge purchasing power, but better employment, high confidence, an income tax cut and cheap debt have kept consumption on a growth track.”

“Housing market is divided geographically and by type of housing. A demographic shift towards smaller families and migration to growth centres has increased demand for small apartments. Strong demand has raised prices and fuelled a construction boom in Helsinki and a few other towns, while dwelling prices are falling in some parts of the country.”

“Exports of goods and services rose 8.8% in Q1 and business surveys imply growing order books. The outlook is better thanks to growth in export markets, especially Russia, improving price competitiveness, several large ship orders and new production facilities in forest and automotive industries. Growing demand, higher confidence and low interest rates have boosted manufacturing investment too.”

“The government budget for 2017 does not include major cuts to expenditure and income taxation was lowered, which implies a bigger deficit while the economy grows. Therefore, cyclically adjusted, the budget could be characterised as expansionary. Higher GDP growth improves public finances, but structural reforms are still needed to manage the needs of an ageing population and to boost potential growth. The bond yield spread to Germany remains narrow and there is no imminent pressure to change Finland’s AA+/Aa1 sovereign credit ratings.”