Finnish economy trying to find the lost grip

The world economy offers in many ways a helping hand to Finland. The global recovery is well underway, the euro is weaker now, and both interest rates and the price of crude oil are record low. Unfortunately, the Finnish economy does not get a decent grip of that friendly hand. Therefore, the engines of economic growth are largely missing and the outlook for the next couple of years remains weak.

Finns have been waiting for a long time for exports to finally pick up. Against all expectations that has not happened, and gradually one begin to understand why not. The current global recovery, unlike the previous ones, is fuelled by consumption and not by the rise of world trade, the industrial sector and its investment.

Under these circumstances the structure of Finnish goods exports is unfavourable. Half of goods exports consist of all kinds of intermediate goods and another 30% of investment goods. The demand for these items picks up only following an industrial recovery in Europe and the subsequent rise in investment.

From the Finnish perspective, the euro has weakened only relative to a small number of key currencies and appreciated against some of them. The net effect on exports is probably negligible.

In the absence of economic growth, the prospects are not good for investment and the labour market. Indeed, employment is expected to deteriorate further and unemployment to rise. Forthcoming wage negotiations are likely to end up with unusually low wage increases. Thus, household sector purchasing power is not going to improve much in real terms, especially as the government is going to cut a wide range of transfers and benefits. Only very modest private consumption growth is therefore in the cards for the next couple of years. 

Low interest rates certainly support the consumer. Gasoline prices, on the other hand, react sluggishly to the drop in the crude oil price. Measured in euros, Brent is now roughly 50% cheaper than in midsummer 2014, while gasoline prices have barely fallen more than 10% due to a considerably large fixed tax levied on gasoline.

"Private sector investment is at a 15-year low in real terms and there is no sudden improvement in sight. Not surprisingly, exports are a good leading indicator for domestic machinery investment, and with exports struggling machinery investment is unlikely to increase for another year. After a long decline the outlook for construction is somewhat brighter, although the difficult labour market probably still keeps a lid on demand", says Nordea Bank.