Oct. 7 (Bloomberg) -- Finland’s efforts to protect its stable AAA pedigree aren’t helping its consumers.
Households in the highest-rated euro nation are looking for ways to cut costs on the most basic of staples such as milk and bread after struggling through their second recession since Europe’s crisis hit four years ago.
Finland’s plight shows that euro-zone governments going out of their way to comply with the bloc’s budget rules aren’t being spared economic pain. Prime Minister Jyrki Katainen has defended tight fiscal policy as his country’s ticket to low interest rates and sustainable growth. Yet the measures agreed on by his six-party coalition have so far led to a shrinking workforce while food prices are rising at almost double the average pace in the European Union.
“Consumer willingness to spend and buy houses has been wiped out by fiscal policy,” Tuulia Asplund, a Helsinki-based economist at Svenska Handelsbanken AB, said in a phone interview. “Interest rates may be low, but demand for home loans is plummeting, retail sales volumes are still contracting and registrations of new cars is shrinking. Tax increases and other austerity measures are behind this.”
Finland’s government has refused to repeat the stimulus program that helped the Nordic economy climb out of its 2009 recession, arguing to do so would result in a loss of credibility on international bond markets. Finland boasts the smallest 10-year yield spread relative to Germany of any euro member. The spread, at 23.8, was the widest in more than a week today.
Yet the austerity policies Katainen’s coalition committed to after coming to power in 2011 are showing signs of backfiring. The government estimates public debt will next year breach the EU’s 60 percent limit of gross domestic product for the first time amid sluggish GDP growth.
The development is reshaping Finland’s retail landscape. German budget supermarket chain, Lidl, says it’s seen customer levels grow.
“In a recession, people are more careful with their money,” Lauri Sipponen, managing director for Lidl in Finland, said in an interview. “Our growth stems from increased footfall at our stores.”
Though Finland’s retail market is still dominated by cooperative S Group and Kesko Oyj, with a combined market share of more than 80 percent, consumers are turning their backs on the pricier brands that those companies sell.
“Money doesn’t grow on trees,” said Anneli Vetri, a 48-year-old Helsinki resident. She shops at Lidl because “it’s cheaper, and price is really important,” she said.
Finnish food prices will rise 6 percent this year from 2012, Helsinki-based PTT research institute forecast on Oct. 1. That compares with the EU average of 3.4 percent, PTT said. Much of this year’s inflation follows Katainen’s decision to raise taxes on consumer goods, a measure his government says is necessary to tackle its fifth consecutive budget deficit.
Taxes account for more than 40 percent of food prices in Finland, according to the Finnish Grocery Trade Association. The volume of grocery sales fell in 2012 for the third time in 35 years, the organization said. The only other times volumes declined was during the recessions of 1993 and 2009, it said.
The country’s housing market is one of the riskiest in western Europe after three decades of rising property prices left homes at least 20 percent overpriced, according to Marco Wagner, an economist at Commerzbank AG in Frankfurt. About 31 percent of Finns think now is not the time to buy a home, compared with 26 percent last year, OP-Pohjola Group said today, citing a survey.
Finland’s economy will grow 1.2 percent next year after contracting 0.5 percent in 2013 and 0.8 percent in 2012, the Finance Ministry forecast on Sept. 16. Households’ disposable incomes won’t grow through next year, the ministry estimates.
Meanwhile, Finns are honing their bargain-hunting skills to adapt to their deteriorating economic reality.
Marjaana Jokela, a 35-year-old who works for the municipal social services unit, said she saves as much as 25 percent on her grocery bill by shopping at Lidl instead of Finland’s other retailers. “I tend to buy cold cuts and cheese there a couple of times a month, and sometimes vegetables too, when they’re cheaper.”
Lidl has increased its share of the Finnish retail market to 5.5 percent in 2012 from 3.7 percent in 2005. The chain, which entered Finland 11 years ago with 10 stores, has since expanded its presence there to 140 outlets.
“Our concept has developed massively,” Sipponen said. “We’re putting a lot of effort to expanding our store network.”
Other companies are also learning they need to adapt to the shift in consumer behavior. HKScan Oyj, Finland’s biggest publicly traded meat producer, said consumption of cheaper meat products has increased significantly relative to products made of higher-grade meat in its home markets, especially Finland.
Sales at Kesko, Finland’s answer to Sainsbury, fell 3.5 percent in the year through August in its home market.
Increases in income taxes and levies on consumption have reduced spending power while Finns are focused on saving what income they have in case they get hit by unemployment, according to Juhani Pekkala, managing director of the Federation of Finnish Commerce. Joblessness rose to 7.1 percent in August from 6.6 percent in July, even as 60,000 people dropped out of the labor force, Statistics Finland said Sept. 24.
“Keeping the AAA and balancing the budget have featured so strongly on the agenda,” Asplund at Handelsbanken said. “Poverty is a strong word, but consumer sentiment has been squashed by a number of the fiscal policy decisions taken.”
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