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Friday, February 14, 2014

What’s wrong with Finland?

That seems a strange question to ask. The country is a paid-up member of the eurozone core and is one of the few countries in the world to have a triple A credit rating from all three top agencies (S&P, Moody's & Fitch) and a stable outlook from all.

However, as the chart to the left shows (taken from the most recent Finnish Central Bank Macroeconomic bulletin) and today’s GDP data confirm (the Finnish economy contracted by 0.8% in Q4 2013) suggests all might not be well.

GDP growth has stagnated and is now teetering on the edge of slipping into its third recession in six years. But what has been causing this? The chart below on the right provides some insight.

The first point to note is the collapse in the electrical and electronics industry. This has been largely down to the struggles of Nokia. Formerly a dominant player in the telecoms market the firm has failed to adapt to the changing nature of the market, in particular the smart phone phenomenon, and has seen its market share, profits and share value eroded. The sector has also suffered knock on effects of the reduced global demand in the wake of the financial crisis, the threat of low cost emerging markets and the struggling domestic demand due to falling confidence.

Similarly the large metals industry has also been hit by the global downturn and has struggled with price competitiveness. In particular the ship building industry would have been doubly hit by the struggles in global trade and is yet to truly recover.

It was previously said that Finland lived off its forests. This is no longer true, or at least it is no longer able to fully. The forest industry and the related wood, textiles and paper industry have struggled with changing technologies. Demand for paper and related products has fallen substantially as digital replacements grow and environmental concerns take hold. Again cheap emerging market products may also threaten in this area.

The combination of all this has been falling employment and an accompanied fall in domestic demand, keeping downward pressure on the economy. At the same time Finland is also beginning to run into the same demographic problem facing much of the developed world – the decline of the working age population and the increase in the number of dependants.

It’s clear that Finland remains a very strong and healthy economy. However, it is clearly undergoing some serious structural changes and may continue to post low growth figures for some time to come. Fortunately, public debt remains low at around 59% of GDP, while the deficit continues to be under control at 2.4% of GDP, and unemployment remains at just 8.1% despite recent increases. This should give the country plenty of space to conduct the structural changes needed.

That said, the case of Finland provides further evidence (as we have pointed out for Germany) that the peripheral eurozone countries aren’t the only ones undergoing significant changes.


Rik said...

1. Finland like the UK had simply bad luck in this crisis. In the way that they were in manufacturing (generally better than services or even worse banking like the UK), but in the wrong parts thereof. Like Germany had simply the luck of being in the right parts.
It looks however questionable if the sectors it is in are likely to do a mean reverse (iso create a constant slump). Tbo I wouldnot feel very comfortable on that.
In other words they would be well advised to look for new opportunities as well.
Basically going more Swedish or German go for real hitec stuff (not mass market stuff like Nokia&Co) and more in niches (which will also create a better spreading of the risk). Stuff with longer term pricing power. They have the population (education) to do that. And could use their current base as a starter.

2. Aging is a big issue. If your workforce goes from 50% of your population to 30%. You need 67% growth per capita just to compensate that on the income side. Over say 30-50 year simply means at least 1% of your growth will be necessary to compensate the losses in labourforce. Which is simply roughly half the pre-crisis structural growth. Which as many expect/predict will be considerably lower in the 'new normal'.
At the costside with nearly half the medical cost happening in the last 2-3 years and rapidly rising pension costs the gap is likley equal.
So likely Finland will move into a situation where de facto there is no real growth (as in increase of spending power of the working population), as the little that is there will have to be spend on unfunded pensions and healthcare.
You can see on the graph that it will be hitting in now.

Also very little reserve in unemployment. 8% nowadays simply means that more than half of that is simply not fit for any labourmarket purpose. So may be only 2 or 3% can be used. That willnot do the job.

3. Positive is the limited amount of (potential) passenger immigrants compared to other countries (like France) plus a lot relatively low risk immigration (Baltics and Poles) that form the present workforce. One would expect that these groups could integrate well in say 1 or 2 decades and not remain structurally underqualified and underskilled like many large groups in effectively most other countries. In France they follow the Malwoman doctrine pick a semi-illiterate let him cost 50000 Euro anually (at least for the half or less of some groups that actually work, like with political refugees) and voila your aging problem is solved. I would strongly advise Finland not to bet on that.
In other words they only have 2 of the 3 most likely major drags on future growth the average Western European country has.

3. Immigration. Unlike most other countries the Finns might even boost things via mass immigration. By simply focussing completely on sources of immigrants that have a much higher potential than the average bottom half in the rest of Western Europe. And the sources Poland, the Baltics and may be lateron Russians (well educated part) might be available as these countries are basically neighbouring countries with themselves a combination of poverty/low incomes and other structural issues.
Might create a plus there (not unrealistic at least).
But overal at the end of day aging is a huge negative.
They might have to compete with Germany for these workers however.

Rik said...


4. EuroZone imho will also remain a huge permanent drag on growth if the structural issues are not properly solved (and in a way that would not require massive Finnish transfers to keep the thing up).
An unlikely combination anyway imho. And even structurally solving the set up failures alone is highly unlikely.

Imho countries like Finland (or Holland) should investigate whether leaving as the first ones would not be much more beneficial for them (a bit more objective than the Wilders study). The first (rich) one out likely can avoid ending up in a breaking up of the thing when somewhere politics goes total populist which is a considerable risk by itself. But even a massive move towards Euro-sceptism might do that job. Few parties will go on a suicide mission to rescue the Euro at the end of the day (and likely still fail).

Finland (as well as Holland) have no devaluation issue and could relatively easy peg susequently their new whatever to the Euro with some extra features it would create a much better situation (limited disadvantages (basically exchange risks and costs can nearly completely be excluded with some relatively simple measures) but a lot less risk and massive risk on top of that.

Anyway the most likely solution to really stabilise things longer term is transfers to the South. And as we have seen in above calculations a thing the North cannot afford themselves. And similar for all the Northern ones. Which in itself makes the likelyhood of a breakup even bigger, if not now further up on the road.
My idea is that most of the structural issues will not be solved even if the thing can be rescued this time. So another crisis is very likely to happen somewhere.
Even this one is highly doubtful. Effectively 5 years down the road things have stabilsed themselves but hardly anything has really been solved. Banks still a huge mess trend getting worse. Unemployment in the South etc.

And anyway binding yourself to economies that basically should for competitiveness reasons alone already have been written off is hardly a clever idea.
Anyway the transfers also in a new crisis are again likely North to South. Unlikely that Finland ends up as a receiver. If it would require a transfer itself there will hardly be anybody left to do that anyway.
Same roughly for Austria. Lux is way too small and banking dependent nearly impossible to do.
Germany is in another position. If it goes the EZ and with it the Euro is history as a world currency anyway and as on of the pillars of European integration as well. There might be something with the name Euro left but it will only serve to write off the surplus debt of the South (via massive scale devluation). Not something you want to be in for a country that has its own affairs in order (relatively at least) like Finland.
Looks like worthwile to look at especially when things are still relatively stable like now. Holland going out with a fight would likley be the end of the thing. Finland going out with a fight would be highly risky. In oter words all parties when things are quiet would benefit from an as friendly as possible exit. Which means the EU means Euro will unlikely be very relevant. And likley as with the Swiss, Europe is in no position to make this a fight (highlighting the fact that the EZ is close to collapse). For other reasons but nevertheless.

Jesper said...

It is gutsy to foresee a shortage of a resource during a time of almost unprecedented surplus :-)
Is the theory predicting a shortage of workers better or worse than the Malthusian population theory regarding food shortage?

Models extrapolating far into the future tend to do what most unverifiable models do - lose accuracy and lose validity.

Maybe the theory has merit but as long as there are badly run countries there'll be people willing to relocate to better run countries. That situation will not change and should, if managed properly, more than likely resolve the 'demographic problem'.

But I suppose that by presenting a problem it is more likely that a special interest group can get a favoured policy approved - just present the policy as a solution to the invented problem.
Marketing 101: if you create the problem/market then you can sell your solution.

I'm guessing that the proposed solution will not be based on 'Logans run' so if the number of dependents can't be reduced then the solution will be to increase inward migration. Even though we have record unemployment today, this solution has to be irrevocably implemented today...

Seems like a solution coming out of fear more than anything else. Technological advances and reallocation of resources helped with the Malthusian problem, they might also work for the perceived problem of expected shortage of workers sometime eventually in the future.

christina speight said...

Of course Finland is finding itself uncompetitive -- IT'S IN THE EURO - THAT'S THE CAUSE, WITH THE SOLUTION ABSOLUTELY OBVIOUS


Anonymous said...

As soon as Finland escapes the EUSSR, it will pick up again, economically.

christhai said...

Thank you Rik and anonymous and the author of this article on Finland.

Underwriting the whole economic argument is the Finnish dislike and distrust of the EU.

The Pro-EU population in Finland is shrinking at a much faster rate than many of the other EU subject countries.

It will be very interesting to see the return in the EU Elections in 92 days time.

kushal kumar said...

CONCLUSION :- " Downward trend in world economy is likely to be in mild form during
November, 2014 to April, 2015, to grow somewhat intense during May, 2015
to October, 2015, becomes harsh during November, 2015 to July, 2016.
Such areas of life as minerals and metals, foodcrops, energy resources , defence and security of nations are likely to bear the brunt of these trends.
Collective wisdom in decision making, communication systems, aviation industry, and the cinema , music and TV industries are also , in addition, likely to be touched by these trends.
Countries or regions whose names begin with the letters B , E , EU, N, O, P, U or V may need to implement multilevel approach to challenges during this period".

This is the substance or salient feature of my article - " Stressful times ahead for world economy in 2015 and 2016"- published online on June 2, this year at Astrologyweekly.com