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Fast Comment FinlandFinnish GDP growth decelerated more than expected in Q1

  1. GDP grew by 0.2 percent q-o-q and 1.2 percent y-o-y in Q1 2019
  2. Domestic demand weakened considerably
  3. Conclusion: a very weak GDP report
GDP grew by 0.2 percent q-o-q and 1.2 percent y-o-y in Q1 2019
The preliminary data for Q1 2019 GDP showed that growth in the Finnish economy slowed more than expected and what was suggested by the recently published GDP indicator. According to Statistics Finland, the Finnish GDP grew by 0.2 percent q-o-q/1.2 percent y-o-y in Q1. The q-o-q GDP growth in Q4 2018 was revised downward to 0.5 percent (previously: 0.7 percent). Year-on-year growth in Q4 2018 remained at 2.2 percent.
Domestic demand weakened considerably
The biggest surprise in the Q1 GDP data was that domestic demand weakened considerably. The volume of private consumption decreased by 1.2 percent from the previous quarter and by 0.6 percent from twelve months back. This was unexpected as the conditions for the household spending are still supportive with employment growth remaining robust. Instead, the government consumption expenditures expanded by 2.7 percent q-o-q and 3.8 percent y-o-y. Gross fixed capital formation decreased by 0.3 percent q-o-q, but increased 0.2 percent in y-o-y terms. Within investments, the volume of construction investments grew by 0.2 percent q-o-q/0.9 percent y-o-y and the volume of investments in machinery and equipment decreased by 1.9 percent q-o-q/0.5 percent y-o-y. While domestic demand was anemic in Q1, foreign trade made a substantial positive contribution to GDP growth. The volume of exports expanded by 3.0 percent q-o-q, while the y-o-y growth rate was 3.8 percent. Instead, the volume of imports contracted markedly - by 5.7 percent q-o-q and by 1.9 percent in y-o-y terms.
Conclusion: a very weak GDP report
The Finnish GDP growth slowed more than expected in Q1 2019. The preliminary GDP growth rate of 1.2 percent in year-on-year terms was the weakest since Q4 2015. The most surprising was the composition of demand aggregates, in particular the considerable weakening in private consumption and the more notable plunge in imports. Thus, it seems that domestic demand have come to a sudden standstill. In addition, the Finnish exports managed to perform remarkable well in an environment where the global demand and manufacturing confidence have considerably weakened. Net exports contributed 2.4 percentage points to the annual GDP growth in Q1. However, there were massive increases in inventories in H2 2018, and the robust export growth in the beginning of year 2019 may be attributed to that. As there remains several challenges in global trade and subdued growth outlook in Europe, it is not realistic to expect that net exports continues to be a similar growth engine in the coming quarters. We have been more pessimistic than consensus about the outlook of the Finnish economy. In April, we forecasted a 1.5 percent GDP growth for 2019 and expected growth to decelerate further in 2020-21. We have expected Finnish consumers to somewhat underpin the Finnish GDP growth this year but the Q1 data casts some doubts to this assumption. We see investment and net export growth to be muted in the coming quarters. With soft Q1 GDP figures and unless we see a rebound in the coming quarters, it is possible that the pace of Finnish GDP growth might slow down even somewhat more than we have forecasted.

 





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Janne Ronkanen

Senior Economist

Finland

jaro06@handelsbanken.se

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