Private consumption in Finland has been surprisingly strong given the prolonged weakness in the economy. Private consumption expanded 1.4% in 2015, while economic growth as a whole grew just 0.5%. Consumers are being underpinned by low or negative interest rates and negative inflation, according to Danske Bank. Consumer prices dropped 0.2% on average last year. Especially, gasoline and food prices dropped. Moreover, there were two one-off events that underpinned private consumption in 2015.
Consumers’ ability and willingness to consumer will be limited due to several factors from now on, noted Danske Bank. There is a rise in unemployment, and it is likely to increase to 9.6% in 2016 and decline slightly to 9.4% in 2017 if economic rebound continues, added Danske Bank. Also, pension and real wage growth will be weak. The Finnish government intends to boost the country’s competitiveness by lowering unit labor costs. The unions are attempting to negotiate a ‘Competitive package’ that will boost competitiveness without lowering current benefits too much. The outcome for the talks of competitive package is ambiguous; however, it is highly possible that wage growth will be very moderate, noted Danske Bank.
Finnish inflation is expected to come back to positive territory, albeit very modestly to +0.4% in 2016, said Danske Bank. Therefore, declining prices will no longer help consumers. Moreover, positive impact from wrecking fees and interest-only periods will fade in 2016.
“Taking into account these factors, we expect growth in private consumption to be very moderate: 0.6% this year and 0.5% in 2017. However, low interest rates and moderate inflation should help to sustain activity from dropping”, adds Danske Bank.
