TALLINN UNIVERSITY OF TECHNOLOGY
School of Business and Governance
Department of Economics and Finance
Elise Huolman
THE IMPACT OF FINANCIAL CRISIS ON CONSUMERS, EMPIRICAL PART
Research Paper in the Core study
Supervisor: Tatjana Põlajeva
Tallinn 2017
I declare I have written the research paper independently.
All works and major viewpoints of the other authors, data from other sources of literature and
elsewhere used for writing this paper have been referenced.
Elise Huolman _____________________
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Student’s code: 131013TVTB
Student’s e-mail address: elise.huolman@gmail.com
Supervisor Tatjana Põlajeva
The paper conforms to the requirements set for the research papers
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Table of Contents
ABSTRACT
INTRODUCTION 1
1. DOWNTURNS AS A PHENOMENA 3
2. THE EFFECTS OF RECESSION CAUSED BY FINANCIAL CRISIS 5
2.1 The performance of Finnish economy 5
2.2 Unemployment 6
2.3 Income 10
2.4 Consumption 10
2.5 Wealth 12
2.6 Confidence in an economy 14
CONCLUSIONS 16
REFERENCES 18
Abstract
The title is: The impact of Finacial crisis on consumers, empirical part
Finland is particularly sensitive to economic fluctuations. Exports have a significant role in economic growth and industrial products are large part of Finnish exports. When eco-nomic growth declines, recessions effects to Finnish economy widely. Financial crisis had a large impact on consumer behaviour and their well-being in Finland.
The objective of this paper is to analyse the financial effects of the 2000s global finan-cial crisis to consumers. The analysis is done through five different indicators that affect to consumer well-being. These indicators are income, wealth, consumption, confidence in econ-omy and unemployment.
The research methods in this research paper are mostly qualitative and quantitative. Also literature review is used as well as previous studies and findings will also be used to en-rich the empirical part. Different graphs and figures are used in order to enrich the analysis of these five different indicators.
Research paper will be divided into four different chapters. The first chapter is the in-troduction, which introduces the topic, points out the objective of the paper and tells the struc-ture of the research paper. The second chapter introduces financial crisis in 2000-century in general and how it affected to Finnish consumer. The third chapter introduces five indicators that affect to consumer well-being during economic downturn and recession. It also introduc-es how these economic indicators change during economic downturn and how it affects to consumer behaviour and their well-being. . Final chapter is conclusion, which points out the main findings.
Key words: economic downturns, consumer well-being, financial crisis, economics
Introduction
Finland is particularly sensitive to economic fluctuations. Exports have a significant role in economic growth and industrial products are large part of Finnish exports. When eco-nomic growth declines, recessions effects to Finnish economy widely. Thereby global finan-cial crisis had a large effect to Finnish economy and it effected to consumer behaviour as well. In this research paper, the effects of financial crisis to consumers in 2008 will be ana-lysed.
The largest downturns in Finnish economy were depression in 1990 century and glob-al financial crisis in 2008. These two phenomena has effected deeply to Finnish financial sta-bility as well as making it hard for the economic operators to be confident about the future. This research paper concentrates on economic downturn that was caused by financial crisis in 2008 century.
Financial crisis has an effect both to companies and to consumers. For consumers, the effect is mainly indirect and comes through the effects that companies experience. For indi-viduals, poor economic situation can cause lower income, decline in asset values and wealth and increase in unemployment. The worsening economic situation increases uncertainty, and as a result, goals and expectations relating to consumer economy deteriorates.
The objective of this paper is to analyse the financial effects of the 2000s global finan-cial crisis to Finnish consumers. In addition, it points out the effects to Finnish consumers’ well-being. Furthermore, the aim is to find out through which factors does economic down-turns affect to consumers and how different economic indicators change during downturn.
Main research questions:
1. How the 2000s global financial crisis has effected to Finnish consumers’ well-being.
2. Through which indicators does economic downturns affect to consumers
As a macro-economic phenomenon, economic downturn affects both on macro- and microeconomic level to national economy. Therefore, economic downturn has different ef-fects for different economic operators. This research paper focuses on the impact of down-turns to Finnish consumers and their well-being. Consumers are defined to be all Finnish households, regardless of demographic (such as age, sex, income) or psychographic factors (such as personality, values). By consumer well-being it is meant by economic well-being and the analysis therefore do not take into account all well-being elements, such as the amount of leisure time. The factors that affect to consumers’ economic well-being include income, as-sets, unemployment, consumption and consumers’ confidence in the economy. In this paper, the effects of downturns are reflected to these factors mentioned above. Five different indica-tors that affect to consumer well-being in economic downturn or financial crisis are analysed through different graphs and figures. These indicators include income, wealth, unemploy-ment, and consumption and consumer confidence in the economy.
The research methods include both qualitative and quantitative features. In addition literature review and scientific articles are used. Previous studies and findings will also be used to enrich the research. Different qualitative indicators are used to describe the change in consumer well-being due to financial crisis. These different indicators are income, wealth, unemployment, consumption, and consumer confidence in the economy. The collections of statistics of Finland, such as graphs are also used to enrich the analysis. Furthermore, qualita-tive research methods are also used.
Research paper will be divided into four different chapters. The first chapter is the in-troduction which introduces the topic, points out the objective of the paper and tells the struc-ture of the research paper. The second chapter introduces financial crisis in 2000-century in general and how it affected to Finnish consumer. The third chapter introduces five indicators that affect to consumer well-being during economic downturn and recession. It also introduc-es how these economic indicators change during economic downturn and how it affects to consumer behaviour and their well-being. . Final chapter is conclusion which points out the main findings.
1. DOWNTURNS AS A PHENOMENA
As usually before recession, strong economic growth preceded the financial crisis in Finland. In years 2004-2008, the average growth rate of gross domestic product was 4 per-cent per year. Exports were plentiful and private investment grew considerably, as well as as-set prices were raising rapidly. There was not full employment, however the unemployment rate decreased in 2004-2008 from 9 percent to 4 percent. Thus the signs of overheating were observed in Finnish economy prior to the financial crisis. (Freystätter & Mattila 2011)
The global financial crisis has its roots in the US financial markets credit crisis. It be-gan in 2007 with a crisis in the subprime mortgage market in the USA and in autumn 2008, it developed into a global banking crisis. The collapse of US investment bank Lehman Brothers is considered to be one of the most important factors that made the financial crisis impact globally. Hereby In September 2008, the economy of United States, as well as the whole global economy began to decline. Even before Lehman Brothers collapse, there were the bursting of the US housing bubble, which caused the values of securities tied to US real es-tate pricing to collapse, damaging financial institutions globally (Korkman 2015; 171, 181). Soon the panic in financial markets began to spread and caused a partial loss of confidence in financial markets. Effects spread to the real economy, and developed a full-fledged worldwide financial crisis. (Haavio, Kontulainen & Korte’s 2009)
Due to globalization, the importance of international trade has grown around the world and economies have become increasingly open. To Finland, the effects of the financial crisis spread mainly through international trade. Naturally, the economic crisis is affecting through demand factors: the economic downturn reduced demand and caused a decline in exports. In addition, the financial market crisis impacted enterprises need of short-term financing and to the whole international payment transactions. As the financing of enterprises started to de-cline and financing costs begin to increase, the foreign trade began to suffer. Lack of trust be-tween banks also prevented the transmission of international payments (Haavio et al. 2009) . Thus two major mechanisms that caused recession were the fall in demand in export markets and problems with the financial markets.
In Finland, the effects of the financial crisis escalated into a recession and the state of the economy began to decline quickly. Exports and private investment fell rapidly and the GDP began to drop. The Finnish financial markets and the availability of financing became more difficult and financing conditions were tightened. (Freystätter & Mattila 2011)
Liikanen, (2009) identified three different explanations for the financial crisis the first explanations based on global imbalances in the current account. International financial defi-cits and surpluses led to the investments to flow to the United States, which financial system was trusted. Because of the oversupply of the assets, risks were not considered enough and there were born practises that led to the failure of the financial system. Also one reason of the crisis was the low interest in United States, which lasted for too long. Too low interest rates led to hot housing market in the United States. Third explanation is the structural problems in the financial system and financial innovation. Regulatory Control and – control and also were able to deceive financial sector companies own lack of risk management and internal controls contributed to risk taking. This creates a situation in which the financial risks were underesti-mated significantly.
2. THE EFFECTS OF RECESSION CAUSED BY FINANCIAL CRISIS
In this chapter, the effect of financial crisis to consumers is viewed through different economic indicators and it is intended to find out how consumers’ well-being changed be-cause of the recession that followed financial crisis in 2000 century.
2.1 The performance of Finnish economy
Figure 1. The yearly change of GDP in %
Source: (Official Statistics of Finland, 2017b)
The yearly change of GDP is presented in Figure 1. The development of GDP, which measures the performance of national economy, gives a general picture of the economy and its situation during recession. In this research paper, the change in GDP is measured annually. As it can be seen from Figure 1, strong economic growth preceded financial crisis, and the GDP development was at its highest during years 2006-2007. Due to the financial crisis, GDP fell in 2009. The fall was as high as 8,3 percent that is the largest fall in Finnish history. Compared to other European countries, the fall exceeded 15 other countries in European Un-ion (Hjerpe, 2010). Recession followed financial crisis and Finnish economy declined con-siderably in short-term. Usually the decline in economy lasts several years, however Finnish economy turned to growth in 2010. This accelerated increase in exports (Freystätter & Mattila 2011). Even though Finnish economy turned into growth in 2010, it started to decline imme-diately in 2011. This is because of economic downturn as well as financial problems in the European Union. In 2015-2016 we can see a small increase in GDP and from this we can in-terpret that Finnish economy is turning to growth again. However, GDP has not risen yet to the same level it was before financial crisis.
2.2 Unemployment
In this research paper the unemployment statistics are based on labour force survey done by Finnish Statistics. It collects statistical data on the participation in work, employ-ment, unemployment and activity of persons outside the labour force among the population aged between 15 and 74. The Labour Force Survey data collection is based on a random sam-ple drawn twice a year from the Statistics Finland population database. (Labour Force Survey, 2017)
Figure 2. Unemployment rate % in Finland 2006-2016
Source: (Official Statistics of Finland, 2017d)
Unemployment rate % is illustrated in Figure 2. Before the financial crisis in 2008, unemployment was slowly recovering from the depression in 1990 century. As it can be seen from the Figure 2, there was a decrease in unemployment rate prior to the financial crisis, however in 2009 unemployment rate increased to 8,8 percent. Thus unemployment increased by 2 percent and the amount of people unemployed was 222 000, increasing by 42 000 per-sons from 2008. After financial crisis, the unemployment rate increased in 2009-2011. How-ever in 2012, unemployment rate began to decrease slightly. Thus compared to decrease in GDP, increase in unemployment was rather small. Remarkable is that unemployment rate started to increase again in 2013 and it continued to increase until 2015. The reason for this is that Finland faced new recession in 2013. However, we can interpret from the figure above that Finland is starting to recover from recession as unemployment decreased by 0,2 percent in 2016. In 2017 it decreased even more.
After financial crisis, the unemployment rate was highest in 2011, exceeding to 9,3 percent. Compared to other 28 countries in European Union, unemployment rate was about 1,2 percent lower in Finland. When reviewing different sectors and genders, Men experienced the highest rates of unemployment in industrial and business sectors. In contrast, women ex-perienced highest unemployment rate in service and business sectors (Myrskylä 2010, 43). In 2011 when unemployment rate was at its highest after financial crisis, there were 1,5 percent more men unemployed than woman (OSF 2016d). The reason for this is that men work in sec-tors that are more cyclical sensitive. Furthermore, in 2008, there was 50 percent risk for men to be unemployed.
The unemployment rate before financial crisis was already quite high in Finland. After financial crisis, the decrease in unemployment rate was slow and it decrease for only one year in 2012. In 2013, unemployment rate started to increase again because of new recession in Finland. However in 2016 and 2017, the unemployment rate started to decrease again and we can interpret that Finland is beginning to recover from recession.
Figure 3. Workforce in Finland 2006-2017, in 1000 persons
Source: (Official Statistics of Finland 2017d)
Figure 3 demonstrates the workforce in Finland, which means the sum of employed and unemployed people. We can see from the graph that there was a decline in workforce af-ter financial crisis. Thus as the unemployment rate decreased, workforce turned into decline as well. We can interpret, that the decline in workforce is due to the fact that people started to study because of the lack of labour supply. In addition the decline in workforce can be due to the aging of large generation and their retirement.
Okun’s law is known from the relationship between the change unemployment rate and GDP growth. Figure 4 outlines the relationship between output growth and change in un-employment rate
Figure 4. Change in GDP and unemployment rate
Source: (Official Statistics of Finland, 2017b and 2017d)
Strong change in unemployment rate can be seen in 2009 as recession after financial crisis increased unemployment rate. However, unemployment rate increased rather little com-pared to decrease in economic growth. GDP decreased about 8,3 percent and unemployment increased by 1,8 percent.
The unemployment rate sensitivity to changes in GDP has decreased according to Bank of Finland. This is because of aging population and changes in economic institutions and structures. We can see from the graph above that unemployment rate does not react strongly to changes in GDP. This is due to the aging population and slowdown in productivi-ty. The Okun’s coefficient can therefore be said to have decreased in the case of Finland. (Suomen pankki 2012)
2.3 Income
Figure 5. Available revenue, at 2010 prices
Source: (Official Statistics of Finland 2017b)
When financial crisis occurred, household earnings did not decline, however they con-tinued to grow steadily. Figure 5 demonsrates the available revenue for households. The small drop in revenues can be seen in 2013-2014 when new recession hit Finland. Wages are largest earnings for households, as well as the most volatile to economic fluctuations. Due to the re-cession that followed financial crisis, wages decreased by 1,7 percent in years 2009 and 2010. However in 2011, they turned into slight increase. According to research done by Inkinen and Kuivanen, low income household experienced the effects of financial crisis stronger than high income households. However, households who earned higher income experienced larger wage decrease (2011).
2.4 Consumption
In Finland, private consumption accounts for about half of GDP. Due to this, it is extremely important to review household consumption and changes in household consumption when analysing economic downturns. Although Finland has traditionally been dependent on ex-ports, domestic and private sector demand is still important part of economic growth. In addi-tion, consumption has an important role in well-being of consumers.
Figure 6. Change in household consumption, in % (2007-2016)
Source: (Official Statistics of Finland, 2017b)
Figure 6 illustrates the change in household consumption. After financial crisis, the consumption decreased only for one year in 2009. The decrease in consumption was very high compared to the fact that household earnings did not decrease in financial crisis. Due to this, decreased in consumption has to be explained with other factors. In chapter 2.6, confi-dence in economy is introduced and this may have affected to the consumption of consumers.
Figure 7. Household savings and debt
Source: Official Statistics of Finland (2017d and 2017g)
Figure 7 represents the houselhold saving and debt rate. We can see that households started to save a bit after financial crisis. The rise in the savings rate reflects well to the fact that consumers started to prepare more for the future and be more careful. In addition, con-sumer spending also decreased which correlates with the increase in savings.
Consumer debt started to increase already in 2006 and it has increased ever since. This can be explained by low loan interest rate in 2000-century and easier for consumers to get loan. Due to this consumer debt has not decreased.
2.5 Wealth
It is difficult to analyse the impact of financial crisis on household wealth, because comprehensive surveys on household wealth are conducted in Finland only every four years. However, we can look at the wealth development through price development because the sin-gle largest household asset is a real estate wealth in Finland. Hence housing price develop-ment has great significance to homeowners and the development of the prices is monitored.
Figure 8. Housing price index
Source: Official Statistics of Finland (2017g)
There was only a slight drop in prices between 2008 and 2009 when the financial cri-sis was also beginning to weigh the Finnish economy downward. After 2009, prices began to recover and started to increase slightly. The reason for this can be that before financial crisis, the house prices in Finland increased steadily and there were not housing bubble like in the US. Thus we can interpret that financial crisis did not have a large effect on Finnish housing market or wealth of households.
2.6 Confidence in an economy
Figure 8. Consumer confidence indicator and expectations concerning one’s own and Fin-land’s economy
Source: (Findikaattori, 2017)
Consumers’ confidence in the economy is measured by consumer confidence indica-tor. In this research paper, consumer’s confidence survey is used, which data are based on Statistics Finland Consumer Survey. Consumers’ confidence indicator includes confidence and expectations one’s own and Finland’s economy. The higher the indicator number is, more confident to the economic situation consumer is. In Figure 6, consumer confidence is measured monthly. (Findikaattori 2017)
Before financial crisis, consumer confidence in all three components of the consumer confidence indicator started to decline already in the end of 2007. The largest decline was at the end of 2008. Consumers’ confidence to the Finland’s economy was gloomiest and that component experienced largest decline. However, consumers still experienced some optimism to their own economy and even though that component of consumer confidence also declined, the decline was not so large compared to other components. This is because consumers con-tinued to assess their own financial situation and saving possibilities as good.
Consumers’ opinions and views were affected by US housing market as well as general speculation. According to Finnish statistics, consumer confidence indicator started to decline in 2007 because of increasing interest rates, accelerated inflation and employee redundancies. After these factors US subprime crisis came into pictures. (2009). Consumer confidence start-ed to increase quickly in 2009, however in 2010 it turned down again.
CONCLUSIONS
In this research paper, the effects of financial crisis to consumer well-being were dis-cussed and analysed. This paper intended to get an overall picture of economic fluctuations and how economic downturns affect to consumer well-being. Also, it aimed to find out through which factors economic downturns affects to consumers. Five different economic fac-tors and indicators were introduced and the changes in these indicators during economic downturn were analysed. In addition, this research paper introduced the financial crisis in 2008 century and how it affected to the global economy in general as well as how it triggered recession in Finland and affected to Finnish consumer’s well-being.
The empirical part looked through different economic indicators, how financial crisis affected to consumer well-being. Financial crisis affected negatively to consumers and con-sumers well-being declined. After financial crisis, the decline in GDP was rapid and strong in short-term and one year decline in production ate the growth in three previous years. The lev-el of GDP has not increased to the same level it was before financial crisis; however we can see some improvements in years 2016 and 2017.
The market is functional and effective way of organizing the economy, but especially financial market has a tendency to drift to crisis. Financial crises affect economic activity and they can trigger depression in the national economy. A characteristic feature of recession that is caused by financial crisis is that its duration is longer and there is a larger decrease in the production and higher overall economic losses. Finland is particularly sensitive to economic fluctuations as exports have a significant role in economic growth. This research paper gives general picture how financial crisis affected to Finnish consumers and their well-being. It is limited to Finnish consumers.
Before financial crisis, the unemployment rate was about 6 percent. Because of the fi-nancial crisis the unemployment rate increased noticeably in 2009. However if the increase of unemployment rate is compared to decrease in GDP, the increase in unemployment was rather small. Due to this we can interpret with Okun’s law that unemployment rate was not very flexible.
Financial crisis did not have a large effect on consumers’ income: it experienced a small decline in 2009 however after that consumer income has increased steadily. In addition, consumer wealth did not have a large effect in financial crisis. This is because before financial crisis, the house prices in Finland increased steadily and there were not housing bubble like in the US.
Consumers’ confidence to economy started to decline before financial crisis. The larg-est decline was in 2008, however confidence started to increase quickly already in the end of 2008. Declining consumer confidence affected to the consumption as well. In 2009 consump-tion declined considerably and consumers begun to safe and prepare for the future. Consum-ers’ debt started to increase already in 2006 and continued its trend after financial crisis. This is because of low interest rates in 2000 century as well as it was easier to get loan.
Recession occurred after financial crisis and as Finland slowly started to recover from recession, however due to European Union debt crisis and economic problems, new recession came to Finland in 2013. Because of this, Finland’s economy has not recovered yet from fi-nancial crisis, even though small indicators of economic recovery can be seen.
Thus from the results we can interpret that Financial Crisis had negative effect on con-sumers well-being in Finland. The Financial crisis came to Finland as an external shock and its effects were at its largest one year after financial crisis. Finnish economy started to recover quickly from the recession caused by financial crisis, however the economy has still not re-covered entirely because of other external shocks that occurred after financial crisis.
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