Finnish economy among the best in euro zone
Forecasting institutions are predicting four per cent economic growth in Finland next year. If the forecast proves accurate, the GDP will grow at double the rate of the euro zone. Having been declared the most competitive country in the world in a survey by the World Economic Forum, Finland seems to be doing well.
The thanks for the sound state of the economy go to the Finnish consumer. A favourable trend in wages coupled with low interest rates has fed private consumption. Finns’ purchasing power was particularly important just after the start of the new millennium, when the crash in world trade put a dent in Finnish exports.
So far, there is no sign that Finns are about to stop spending money. Surveys indicate that consumer confidence remains good despite skyrocketing oil prices and assorted global threats. Consistent growth in private consumption will continue to support the Finnish economy.
The recovery of world trade from the slump at the start of the millennium has been very good tidings for exporters. Last year, Finland’s exports grew by as much as six per cent, and although the growth rate has since slowed down, exports were still doing better than expected in the first half of 2005. Industrial action in the domestic paper industry in early summer did take a sizeable chunk out of total exports for the year, but growth in sales abroad is predicted again for next year.
“The 3% annual growth that the Finnish economy has experienced over the last few years is a fine achievement, when compared with the modest figures for the euro area as a whole,” said Erkki Liikanen, Governor of the Bank of Finland, when presenting the bank's economic forecast at the beginning of October.
Finnish economic policy deserves part of the credit for the good economic growth. Finland is one of few European countries where the public sector has remained in surplus over the past few years. This sign of economic discipline has been duly noted on the financial markets: the rate of interest on Finnish government bonds has gone down a few basis points below its German counterpart. Tongue in cheek, one might say that in autumn 2005 the market in general considers it more likely that the German state will go bust rather than the Finnish one.
In the past, it was almost impossible to imagine a situation where the Finnish state would be able to obtain money more cheaply than Germany; after all, Germany has been considered the benchmark of the European bond market, with an interest level that provides the basis for the pricing of other countries’ government bonds.
Success — an illusion?
Complacency does not fit in easily with the Finnish personality. On the whole, the Finns are a minor key nation. Throughout the history of Finnish popular music, the biggest hits have usually been in a minor, rather than a major, key. Finnish bands that achieve international stardom, such as Nightwish and HIM, climb the charts clad all in black and with a heavy metal sound.
An element of similar gloom can be found behind the success of the Finnish economy. The first spectre is that the four per cent growth forecast for next year is, in part, an illusion.
The strikes that put a stop to paper production and exports in early summer 2005 will shave about one percentage point off this year’s economic growth and, correspondingly, there will be that much extra growth next year since the figures for comparison will be exceptionally low. If this illusion is eliminated, the ‘actual’ economic growth for next year will fall to about three per cent — which admittedly still clearly exceeds the growth rate in the euro zone and corresponds to Finland’s long-term growth trend.
Fluctuations in certain key sectors inevitably have an impact on the growth figures for a small, export-dependent open economy like Finland. The paper mill strikes were an exceptional phenomenon, but on a more regular basis there are jumps and slumps in the Finnish growth figures caused by the other eyetooth of exporting industry, the mobile communications sector with Nokia at its core.
The worldwide success of the Nokia sector speeded up Finland’s economic growth enormously at the end of the 1990s, but today, economists are having considerable difficulty in estimating how the production fluctuations of Nokia from one country to another will be reflected in the development of the national economy. The Nokia sector accounts for seven per cent of Finland’s GDP, and its strong fluctuations sometimes rock economic development quite noticeably. This was last experienced in 2001-2002, when the mobile communications industry went up and down within a space of months by double-figure percentages , something that was seen in GDP growth figures in the form of sudden fluctuations of 1.5-2.5 percentage points.
Whether Nokia will give Finland’s economic growth a boost or a knock next year is as difficult to predict as movements in the share price of this mobile communications giant. It seems fairly certain, however, that even unfavourable production trends at Nokia will not change the favourable basic pattern of economic growth.
When one tries to look even further into the future of the Finnish economy, the crystal ball grows ever murkier. Uncertainty is caused particularly by the still poor rate of investment. Economists have warned that penny-pinching in the renewal of machinery and equipment will slow down growth in productivity and erode the economy’s room for growth. Failure to break free of old structures will inevitably be penalised in fiercely competitive export markets.
When Finns downplay success or recite forecast figures, they no doubt believe they are telling the truth. Finns are an honest people. The Economist noted recently that Finland took second place in the latest survey of corruption by ‘Transparency International’ - the international NGO devoted to combating corruption - that covered 158 countries. Chad brought up the rear while Iceland took the top slot.
Eljas Repo and Tommi Melender