By Eljas Repo, February 2010
Despite tumultuous times in the global economy, Finnish prospects are good, writes Eljas Repo, editor-in-chief of Arvopaperi, Finland’s leading magazine for stock market investors.
Viewed in the light of historical statistics, 2009 can be seen as a major shock to Finland. Gross domestic product fell by 7.5 percent. The last time such a sharp plunge was recorded in the space of a single year was 1918, when Finland was in the midst of a civil war.
In early 2010, it’s difficult to find evidence of this economic calamity on the streets of Helsinki. The comparison with the Civil War period seems remote, and talk of depression exaggerated. Finland’s economy bounced back last autumn, indications of which include a stock market climb of 34 percent, and an all-time high in recorded house prices.
The global economy slid into recession when the financial crisis paralysed the banking system and then international trade. The severity of the contraction of Finnish GDP results from a GDP portfolio heavily weighted towards exports.
A market of five million inhabitants is an insufficient base for a highly industrialised country like Finland, which is why this country’s dependence on exports is greater than average. Of Finland’s 185-billion-euro GDP, exports account for 47 percent.
Finland’s principal export products are sensitive to economic fluctuations. Paper manufacturing goods, basic industry and electronics make up two-thirds. A stall in trade with Russia also contributed to Finland’s worsening export figures. This resulted from a decline in Russia’s own economy, and, more importantly, problems with the Russian payment system. Finns did not dare to sell to Russia on credit.
The global economy took an upward turn in autumn 2009, reviving Finnish exports in the process. In addition to a revitalised global economy, household demand will stimulate Finnish economic growth this year. In 2010, Finland’s economy will grow more quickly than the eurozone average – so Finnish economists predict, at least.
“Although the actual recession only lasted a few months, its strength was formidable,” notes chief economist Timo Tyrväinen of Aktia Bank. “The plummet was steeper, but fortunately shorter-lived than at the beginning of the 1990s.”
“Of course, we’re starting from a lower level, but if 2009 was surprisingly bad, this year our prospects are tilted in a more positive direction,” comments Nordea Bank’s chief economist Martti Nyberg.
Tyrväinen predicts that Finnish GDP will grow by 2.0 percent next year and the year after that. Nyberg’s Nordea is more optimistic, tipping growth of 2.7 and 2.5 percent respectively.
The depression of the 1990s was a punishing ordeal for Finland. GDP contracted for three consecutive years, and the unemployment rate verged on 20 percent. The country had its own currency at the time, the Finnish markka, which fell victim to currency speculation and caused interest rates to shoot up. Economic depression and high interest rates always spell major bankruptcies. This is evident today in Iceland and the Baltic countries. For Finland, it was self-evident that with accession to the EU, the country would also join the economic and monetary union (EMU). Finland adopted the euro in 2002.
Sweden and Denmark opted out of the euro, and both countries now enjoy the advantage of a separate currency that has weakened against the euro. The euro has remained strong against the Swedish krona, the Danish krone, the pound sterling and the rouble, slowing the eurozone’s revival and Finland’s along with it. Over the long term, differences between the currencies are expected to even out. In Finland, however, it has been noted that Swedish heavy industry has recovered more quickly than its Finnish counterpart.
All sorts of forecasts exist for the world economy. Some insist the end is nigh, while others are breezily optimistic. The International Monetary Fund (IMF), whose forecasts tend towards the conservative, estimates that the global economy will grow by 3.9 percent this year. The locomotives of growth are China, India and the developing world. Recovery in Western countries, particularly in Europe, will be slower. The IMF predicts growth of only one percent for Europe.
World trade is rebounding much more strongly than it would seem on the basis of GDP growth figures. Finland benefits more than the average from this upturn, especially given that key export markets, such as Russia, are recovering comparatively briskly.
From Finland’s perspective, the worst news has come from unemployment figures. According to Statistics Finland, the unemployment rate in December was 7.9 percent, 1.8 percent higher than the previous year.
Unemployment isn’t really visible in Helsinki, something also reflected in the statistics. The unemployment rate was lowest in the region of Southern Finland at 6.3 percent, and highest in the Eastern Finland region at 10.6 percent. Climbing Finnish unemployment has left the Helsinki region unscathed, but has struck much more severely in the industrial strongholds of northern and eastern Finland.
Finland’s aggregate unemployment rate is lower than the EU average. Finnish unemployment is predicted to peak this year, with Nordea Bank tipping a high of 9.9 percent.
Growing unemployment and slowing wage and salary rises will keep household spending power in check. As a result, revival of consumer spending will be comparatively sluggish. The labour market situation is not projected to improve until 2011, at which point Finnish consumer spending may also begin to grow.
Easing interest rates in central banks around the world was especially welcome to Finnish mortgage holders. In Finland, mortgages are tied to short-term Euribor rates of one to 12 months. Statistics reveal that Finland’s mortgage stock is the most heavily skewed towards short-term reference rates in Europe, and that mortgages tied to long-term rates are rare in Finland.
The Bank of Finland compiles statistics on the average interest rate for mortgages. At the end of 2009, it was 2.17 percent.
House prices are also a measure of consumer confidence. In Finland, house prices fell by five percent, but turned upwards in summer 2009. According to statistics, house prices in Finland at the turn of the year were higher than ever before. This is not purely the result of consumer confidence – low interest rates have also played a role.
Fortunately for Finland, the public accounts were in excellent shape when the financial crisis struck. Debt as a proportion of GDP was under 40 percent. In 2008, Finland collected more tax revenue than it spent. The state’s accounts were in surplus by a full 4.5 percent. These figures placed Finland at the head of the eurozone.
As a consequence of 2009, Finland’s tax revenues dwindled and the public accounts fell into deficit. The state was once again forced to take on more debt. Finland is considered to have good prospects for pulling clear of fiscal deficit, which has been reflected in the pricing of Finnish government bonds on the bond markets. During January, Finnish government bonds even attracted a slightly lower rate than bonds issued by the government of Germany, traditionally Europe’s fiscal goliath. The markets are cruel to countries in debt. One example of this is the pricing of government notes issued by Greece and Ireland, which include substantial risk premiums.
“Countries such as Finland and Sweden will be able to pay back the debt acquired while in recession on the back of much lower economic growth rates than heavily indebted countries like Greece and Ireland. With growth of three percent, for example, Finland and Sweden would be able to pay down their debts, while Greece and Ireland would not even be able to cover the interest,” Nordea Bank’s Nyberg points out.
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