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Global Economic Outlook
Finland: Q2 2010 Outlook
By Mikko Forss
- Finland is slowly recovering from an exceptionally deep downturn.
- Sluggish external demand will act as a drag on growth.
- The progress of Finland’s large manufacturing sector is a source of uncertainty.
Outlook Update: Weak Growth, But Evidence that Demand is Improving
Finland’s growth will be weaker than growth in the Nordics as a region, which RGE expects to be 1.3% in 2010. The global downturn hit the economy exceptionally hard. The decline in Finland’s GDP in 2009 (-7.8%) was the largest among the Nordics and, among EU members, only the three Baltic economies contracted by more. Finland emerged from recession in Q3 2009, but flat growth in Q4 and recent data imply that the economy will contract in Q1 2010. Nevertheless, we have revised our forecast slightly upward from our Q1 2010 outlook, as we now see more evidence of an improvement in external demand and private consumption. Growth remains well below potential, and RGE expects the economy to expand by 0.9% in 2010. We expect inflation to average 1.1% this year.
Growth Dynamics: Exports Hold Back the Economy
Our survey of 14 different institutions’ recent forecasts for Finland reveals that estimates for GDP growth in 2010 range from 0.4% to 3.2%, with only three of the forecasts above 2.0%. Our growth projection remains below consensus due to our expectation of a weak recovery in external demand, with fixed investment continuing to decline. According to an investment survey by the Confederation of Finnish Businesses, fixed investment in the manufacturing industry will contract by around 5% in 2010. In February, industrial output was 25% lower than in mid-2008, and fell by 1.9% y/y. However, new manufacturing orders increased 11.7% in the same month, and we expect that businesses will be more confident that they can increase their inventories.
Despite some improvement in the outlook, there are few signs of strong growth. Almost two-thirds of Finland’s exports go to EU, where growth is expected to be sluggish in 2010. Growth in Russia and Germany—the most important trade partner in recent years—is more export-led. Further drag on growth is the fact that Finnish exports are geared toward intermediate and investment goods, the demand for which tends to be slow to recover as overcapacity reduces the need for investment. Indicator of monthly output fell by 0.3% m/m in January, also indicating weak recovery in early 2010.
Private spending fell by over 2.0% in 2009. However, consumer confidence has rebounded as in the other Nordic economies and belief in Finland’s economy—quite surprisingly—is stronger than for over 15 years. We expect a decrease in the savings rate, which moved to positive territory in 2009 (to 2.5%), and private consumption to increase by over 1% in 2010.
Figure 1: Manufacturing Developments
Source: Statistics Finland.
Risks: Recovery in Manufacturing a Source of Uncertainty
RGE’s expects a U-shaped recovery in advanced economies so the materialization of a more V-shaped recovery poses an upside risk to our forecast. Finland is more dependent on manufacturing than other Nordic countries, and the future of these industries is a cause of concern. The large forest products company Stora Enso is closing mills in Finland and shifting production to lower-cost countries, which suggests a more permanent drop in Finnish forest product exports. Generous wage increases, negotiated before the downturn, have weighed on Finland’s competitiveness, together with a strong euro. While temporary relief is likely regarding these factors, a long-term decline in competitiveness is a considerable risk. Finland’s exports contracted by 24.3% in 2009, almost double the drop seen in Sweden, which has a broadly similar export structure to that of Finland.
Figure 2: Finnish Export Volumes in Comparison
As in Norway and Sweden, house prices have recovered fast—prices of dwellings in old blocks of flats and in terraced houses increased by 7.9% y/y in Q4 2009. Population ageing poses another risk and will burden the economy over the next 20 years. Ageing is expected to be faster in Finland than in any other EU member state, and age-related costs for government as a share of GDP are forecast to grow by 3.5 percentage points in the decade to 2020.
Policy Implications: Expansionary Fiscal Policy Coming to an End
A deep recession is also visible in public finances: the surplus of 4.2% of GDP in 2008 turned into a deficit of 2.2% of GDP in 2009. Although the decline was large in comparison with the rest of Europe, the deficit remained below the EU’s stability and Growth Pact reference values, reflecting Finland’s strong starting position. However, Finland looks set to breach the 3% of GDP deficit rule this year. Overall, fiscal policy will be neutral or slightly expansionary in 2010. The decline in GDP elevated the public debt-to-GDP ratio to 44% in 2009, almost 10 percentage points higher than a year earlier. The Ministry of Finance expects public debt to stand at 60% of GDP in 2015. As for monetary policy, Finland is the sole eurozone member among the Nordic countries and therefore lacks an independent monetary policy.