Finnish economy still struggling

Finland's third-quarter GDP decreased by 0.5% from the previous quarter, according to Statistics Finland's preliminary estimate. Compared with the third quarter of 2014, GDP adjusted for working days contracted by 0.2%. Second-quarter GDP was revised higher to 0.4% q/q growth (was 0.2%) and 0.7% y/y (was 0.1%). Third-quarter GDP was better than the advance estimate of a 0.8% y/y contraction but stayed in the same category, with Greece well behind other EU countries. Year-to-date GDP from the first three quarters shows modest growth of 0.1% y/y, which is close to our full-year forecast of 0.0%.

The volume of exports decreased by 0.7% q/q and 3.4% y/y. Export industries continued to suffer from recession in Russia and focus on investment goods, which have faced anaemic demand. However, the weak euro and growth in the EU and US economies should boost exports in 2016.

The biggest surprise was private consumption, which grew by 0.8% q/q and 1.4% y/y. In particular, services and durable goods rose, which may have been boosted by a temporary car wrecking fee. Consumer confidence has weakened in Q4 and the outlook for purchasing power is dull, implying weaker private consumption in 2016.

Investments in residential buildings diminished by 3.0% y/y but we expect some growth in 2016. Investment in machinery, equipment and transport equipment contracted by 5.2% y/y. Given continued uncertainty about economic reforms and excess capacity in a manufacturing sector facing flat export demand, we are unlikely to see a strong rebound in investment in 2016.

The poor economic performance comes at a bad time because the Finnish government is implementing austerity measures and structural reforms, which may further weaken growth in the short run. Finland is set to breach both the 60% debt-to-GDP and 3% deficit limits this year but the EU commission has already stated that it still see Finland complying with the Stability and Growth Pact. Swift adoption and implementation of reforms is key from both the commission's and the rating agencies' perspective.

The government led by Prime Minister Juha Sipilä aims to adjust public finances by a total of EUR10bn (5% per GDP) over four years through a combination of expenditure cuts (EUR4bn), structural reforms (EUR4bn) and growth enhancing investments (EUR2bn). The government has also announced wide-reaching labour market reforms, which would produce an internal devaluation by lowering unit labour costs by 5%.

"Labour measures have met strong opposition from labour unions and strikes are ahead. The labour market atmosphere is very heated at the moment, after talks to reach a centralised wage agreement failed. Further ahead in 2017 and beyond, we could see stronger growth, assuming continued wage moderation and improving global economy", says Danske Bank.