Varma - Annual Report 2012

Economic operating environment

The crisis that afflicted the euro area and the financial markets entered a subdued phase in 2012. The situation was eased as a consequence of the notable monetary policies implemented by the European Central Bank and other central banks. Towards the end of the year, the credit flow to certain troubled countries improved. The euro-area financial system remains fragile, and efforts to create a "roadmap" to a banking union have been started in order to avert future structural problems in the banking sector.

Within the euro area, however, there continues to be a wide gap between the weak and strong member states. The central banks' measures have bought time for structural renewal in the member countries. The scope for recovery has been exhausted in most countries, and public finances will have to be tightened even in strong EU countries. In order to secure a sustainable base for economic growth and to use that growth to remedy the debt burdens of troubled countries, it is clear that the financial system needs to be in a healthy state. The most important engine of growth for the global economy remains the emerging economies. They, too, have experienced a slowdown in economic growth due to their dependency on exports. The positive global economic risks relate to the pick-up in economic activity in the US and China.

The trend in the investment markets and the situation in the real economy were notably different. The central banks' measures boosted investors' risk appetite, and share prices strengthened towards the end of the year. The falling interest rate level and the narrowing risk margins on corporate bonds for their part improved returns on fixed-income investments. Stricter regulations present profitability-related challenges in the banking sector, which could restrict lending and raise borrowing costs.

Varma focussed on successful investment activities in a challenging market environment, and stresses strong solvency, pro-active investment risk management, and continuous improvement of the company's operations.

The real economy suffered a setback in Finland and in the euro area, and diminishing demand in the global economy strongly affected export volumes. Investments directed at Finland and Finnish investments in companies' production capacity were at a modest level. Consumer confidence weakened, but demand in Finland remained reasonable. Finnish companies announced massive job cuts and temporary lay-offs during the year. Unemployment, however, did not increase as much as the slowdown in economic growth would have suggested. This can be attributed to the changing age structure of the population and the downward trend in workforce numbers.

The opportunities and threats facing the Finnish economy relate to its dependency on exports. Strong export competitiveness is essential to the growth of Finland's small and open national economy and crucial in terms of the possibility to finance national welfare on the whole. As business and trade structures shift, Finland must secure new competitive advantages. The price competitiveness of Finland's exports has weakened. What is notable is the extent to which it has weakened in relation to its significant competitor countries, Germany and Sweden. Finland has also lost its share in the export markets.


The structural challenges for the Finnish economy are the sharp growth in public spending caused by the ageing of the population, the dwindling workforce, and especially the declining industrial activity in our country. The prevailing financial crisis is speeding up the economic structural changes in a manner that is difficult to control. The muted growth in demand for exports and fading investments, together with the reduced availability of workforce are chipping away at potential economic growth. Finland's competitiveness and economic growth require an improvement in productivity, especially in the area of public services.