HS Business & Finance 10.10.2000 - Recession time again, or not?

By Marjut Tervola

First the stock market went down. Then gas prices went through the roof. And the signs continue like products off an assembly line: the housing market takes a hit, rising interest rates start to bite into borrowing, the motor trade posts sharply lower sales figures for September, and saving is back in fashion again.

Quite a lot has happened since the heady days of spring. Statistics Finland's latest questionnaire study on the public's views of the economy, national and personal, revealed that consumer confidence in the Finnish economy has fallen to its lowest level since 1996.

Should we be getting worried? The housing and car markets have traditionally been seen as litmus indicators for the economy. When households lose the urge to consume, the consequences can be grave.

In order for the economy to continue to grow, people have to go out and buy more and more. Private consumption has a greater weight than exports in determining economic growth.

So, is the recession around the corner?

Not yet at least, is the reassuring response of Markku Kotilainen, Head of the Forecasting Group at the Research Institute of the Finnish Economy (ETLA). He regards the slowing of the trade in motors and apartments as individual cases, and argues that it is not possible to draw far-reaching conclusions from them. All the same, it is worth keeping one's ears pricked.

"The motor trade has been affected by a number of factors that are pretty much exclusive to this sector, such as the increase in fuel costs and the possible reduction in vehicle tax on the horizon. Coupled with the rise in interest rates, they have caused people to put off their buying decisions", says Kotilainen.

ETLA's growth forecast for this year is 6%. For 2001, too, the Research Institute is predicting a promising figure of around 4.6%. And they are sticking to this, at least for the time being.

Kotilainen also feels that it would be premature to start revising downwards the forecasts for domestic consumption. In the first half of the year consumption was cantering along at as much as 4.5% growth on the year.

Meanwhile, over at

the Government Institute for Economic Research (VATT), Research Director Jaakko Kiander takes a more cautious view of the economic outlook. "The fact that the housing sector has gone off the boil and prices have started to turn downwards will lead before very long to a slowing on the construction front. The recent signs of the development of the economy suggest that the growth in domestic consumption next year will not match that in 2000", estimates Kiander.

He, too, feels it is too early to speak of a recessionary trend. Nevertheless he thinks we could drift in that direction if oil prices remain high throughout next year. "Growth can slow down, but it is not a question of a collapse. Naturally any lessening of momentum in growth is not good news for employment", says Kiander.

The views of a third pundit

are much the same. Vesa Vihriälä heads the Pellervo Economic Research Institute (PTT), and he believes that economic growth is slowing, but in a predictable fashion. Vihriälä even finds a positive side to the cooling of the housing market and the reduced enthusuaism for consumption.

"Perhaps this will still the cries of overheating that we have been hearing for three straight summers. Personally I still do not regard the economy as in an overheated state, although to be fair the inflation problem this summer has been rather different from that in previous years", comments Vihriälä.

Consumers are now

in a pivotal position. If the pessimism noted among them spreads, the reduction in purchasing power will start to have an impact on production and on employment. Vihriälä, Kotilainen and Kiander alike have faith in the economic condition of Finnish households.

"Just as long as the outlook remains positive in Finland's most important export areas, there is no great cause for alarm. Households right now are not very heavily burdened with debt", notes Kotilainen. "Next year, too, their prospects for consumption will remain good", he continues. "The promised reductions in direct taxation will have a positive effect on purchasing power. Then on top of that we will have wage increases from the upcoming round of negotiations. Taken overall, the households' views of their own personal economic outlook are holding up well."

Would it then be fair to say

that consumers' recent behaviour on the housing and motor trade fronts is an example of over-reaction?

"Yes, in part", claims Kotilainen. According to Tarja Heinonen, chief economist for Leonia Bank, Finns may have taken an overly gloomy view of the steadying of the economic growth curve.

"We still have the traumatic events of the beginning of the 1990s fresh in the memory. What people often forget is that more often than not the changes in economic cycles do not come as abruptly or as radically as that. What we experienced in the early ‘90s was an exceptionally dramatic slump."

Helsingin Sanomat / First published in print 5.10.2000