Finnish Economy: Reforming For Export-Led Growth‏

We now expect Finnish GDP to fall 0.7% in 2013 but we maintain our forecast of 1.5% growth in 2014. Finnish GDP increased by 0.2% q/q in Q2 13, according to preliminary data. Thus, after four quarters of decline, the Finnish economy seems to have reached a bottom.

We do not see growth in domestic demand yet, but positive signs in the global and European economy should lift export expectations. Household purchasing power is flat as a result of tax hikes and expected moderate wage agreement. Surveys point to exceptionally weak expectations in retail trade and construction. Manufacturing capex is also weak. The public sector is being forced to cut deficits and only a marginal amount of stimulus is aimed at construction.

Exports have suffered long-term damage from the descent of Nokia and forestry industries. Exports have also suffered from a high share of investment goods, which are in short demand at the moment, and poor price competitiveness caused by wage increases between 2008 and 2012. If pent-up investment demand is released in Europe and Finland regains competitiveness through wage moderation, exports could grow relatively fast in the medium term.

Despite the poor economic performance in recent quarters, employment has remained fairly stable, corporate bankruptcies low, housing market calm and banking system solid. Household and corporate balance sheets continue to be healthy, and very low interest rates help a lot. Most Finnish housing loans are linked to euribor rates.

The new structural reforms announced at the end of August (see note: Focus on structural reforms) take Finland a long way towards more sustainable public finances. The reforms, once they get concrete content and political acceptance, have the potential to generate positive effects in the medium and long term. There exists a risk that debt to GDP ratio could exceed 60% already in 2014 but forthcoming revision of national accounts (ESA 2010) has the potential to lift reported GDP and mitigate the risk.

To Read the Entire Report Please Click on the pdf File Below.