Finland is facing its own economic crisis

On Friday I discussed a problem in the southern reaches of the Euro area as the Greek tragedy continues to unfold. Today my attention goes to the northern nordic reaches of Finland which is posing its own series of problems. It has come up before in passing via the travails of the phone company Nokia and my articles are read there and get used. Sadly the trail then runs very cold as Finnish is pretty much unpenetrable to an outsider! However if we return to the economic situation it was one which was lauded by many as this from the Atlantic as recently as July 2013.

My cousin is a recent immigrant, and while she was learning the language and training for jobs, the state gave her €700 a month to live on.

They had another kid six years ago, and though they both work, they’ll collect 100 euros a month from the government until the day she turns 17.

Indeed even the unemployed had little to worry about.

Can’t get a job? Not to worry. Unemployment insurance in Finland lasts for 500 days, after which you can collect a means-tested Labor Market Subsidy for an essentially indefinite period of time.

It is not my purpose to challenge the welfare model outright in Finland simply to point out that such lauding invariably comes at the top of the cycle and that we know what happens next.

Finland’s economy

If we only skip forwards to February 2014 the OECD tried also to laud the Finnish economic model but found itself having to admit this.

More recently, however, competitiveness has deteriorated and output has fallen, as electronics and forestry collapsed.

Okay so what does that mean?

It went through a double dip and output is still about 6% below its late 2007 peak . More recently, GDP has expanded weakly since the second quarter of 2013 and the recovery is expected to be slow.

Not quite what you expect is it? A casual observer might consider Finland to be part of the Germanic bloc which marches on in economic terms whereas in fact the credit crunch performance belies its geography and is much more southern than northern.There have been two major drivers of the present malaise.

The electronics sector has collapsed, falling from 6% of total value added in 2007 to little more than 1% recently, led by Nokia’s tumble in the mobile phone market. The erosion of wood and paper production has been more gradual, but of almost similar magnitude.

Also there is something of a time-bomb awaiting it.

Population is ageing more rapidly in Finland than in most OECD countries. The old-age dependency ratio has risen steadily over the past four decades and is projected to go up even faster between now and 2060.

This poses a list of issues for the Finnish economic and social model going forwards and one of them has been ticking away for some time.

The ratio of pension expenditure to GDP rose by around 3.5 percentage points between 1980 and 2009 to more than 9% of GDP, reflecting a rising old-age dependency ratio and the maturation of the earnings-related pension system.

There are familiar issues here of the current generation retiring earlier when it is plain that subsequent generations will have to face higher retirement ages unless a positive Black Swan event occurs. Of course this theme exists for so much of what we consider to be  the first world but Finland has added some icing to this cake via its generous social system and a weak age structure in economic terms.

Housing Risks

At a time of ultra-low interest-rates  where Euro area membership gives Finland an official deposit rate of -0.2% one might wonder about household borrowing and especially the housing market.

In May 2012 more than half of first-time
buyers had a loan-to-value ratio (LTV) in excess of 90% and more than 40% had a LTV over 100% (FINFSA,
2012)………. The government is reducing allowances for mortgage interest tax deduction, making borrowing less attractive.

Ah! Low, no and indeed negative deposits with tax subsidies and now negative interest-rates. What could go wrong?!

Simple bad luck

If we wonder what happened next? Well of events in a big neighbour reminded us of this.

As a small open economy, Finland is vulnerable to faltering global demand, but also to a slowdown in particular in Russia or other Nordic countries.

Accordingly a Russian bear with a sore head was pretty much exactly what Finland did not need as 2014 developed.

Where are we now?

Sadly the economic boost expected from a lower oil price and indeed a lower overall value of the Euro has not yet arrived in Finland. Last Wednesday Finland Statistics told us this.

Seasonally adjusted output fell by 0.7 per cent in February from the month before. Adjusted for working days, output was 0.5 per cent lower than in February 2014.

As someone who doubts the reliability of quarterly GDP data and therefore even more so for monthly I note with a wry smile that January was revised downwards by 0.6%.If we look at the overall pattern we see that the credit crunch hit Finland hard. If we use 2010 as a benchmark of 100 it is ominous to see September 2008 at 108.91 but that does not fully prepare us for the shock of May 2009 being at 95.42. Whilst we have the issue of monthly estimates a 12% drop is the most severe I can think of as an initial credit crunch output shock. There was then better news for a couple of years returning to 102 in late 2011 but since then matters have deteriorated down to the 97.96 of February.

So we had a sharp shock followed by six years of only marginally better than flat-lining.Indeed the industrial sector has seen another dip.

Industrial output decreased by 5.1 per cent year-on-year in February.

This was a widespread job and yes the electronics sector (Nokia) and forestry both fell too by 5.6% and 5.3% respectively.

Like in so many places information on the services sector is more opaque however in the quarter to January it rose by 0.8% to offset the production decline above. Having raised the housing issue this did not escape my attention.

 real estate activities (grew) by 6.8 per cent from one year ago.

Trade Problems

These are symbolised by the latest numbers.

The current account showed a deficit of EUR 0.5 billion in February.

In essence we see a very similar timetable here. Pre credit crunch saw many years of surpluses followed by a lurch downwards and then a recovery but in late 2011 it was deficit time and that remains the state of play. A little care is needed however as the reduction in exports due to the problems with forestry and at Nokia is the same problem as above not necessarily a new one, although it adds to it. But it is an issue that worries the Bank of Finland.

Since the onset of the international
financial crisis, Finnish exports have declined
by approximately one fifth, which is more
than in any other advanced economy.


The moral of this particular tale is that there are troubles for the Euro area at its northern as well as its southern borders. There is an irony in this as Finland has often pushed for a hard bargain in its involvement in the bailout of Greece including a demand for collateral. From the Financial Times in May 2013.

the Finnish agreed to forgo the income they’d otherwise have got back from EFSF operations in return for their guarantee.

However we find that Finland may be facing an adjustment similar to that imposed on Greece.

Price competitiveness has also eroded, as unit labour costs have increased faster than in many other European countries since 2000.

Actually much of that has happened since 2007 and it amounts to around 10%. Taking a prescription you have suggested for others will be no fun at all.Also the social model so praised by the Atlantic will be under pressure from the lack of economic growth and the fact that the unemployment rate is now 9.1% and has risen from 8.4% over the year to February. A clear lesson from this is to be afraid if your economic model becomes internationally fashionable!

One would hope that the lower Euro and oil price will provide a boost although it is a complex mix as a higher oil price would provide a boost via the Russian economy. But there is a long road ahead for the Finnish economy and the long road has an uphill struggle due to this.

In 2014, altogether 57,232 children were born, which was 902 fewer than in the year before. Last time the number of births was lower in 2003, when 56,630 children were born. The number of births has now decreased for the fourth year in succession.

In a land which loves heavy metal let us consider if the Finns will take the advice of Metallica?

Life’s for my own, to live my own way
Life’s for my own, to live my own way
Life’s for my own, to live my own way


11 thoughts on “Finland is facing its own economic crisis

  1. Lordi Shaun!

    What a mess these Finns are in. t The mortgage situation must be a big concern long term. With aging/falling population, who is coming along to take up the slack in the market. To paraphrase the old Monty Python song:

    Finland Finland Finland
    It’s not the country for me,
    Pony trekking or camping,
    With a high LTV…

    Economically, perhaps Michael Palin got it half right when he wrote his Finalnd song in about 1980:

    You’re so near to Russia
    So far from Japan
    Quite a long way from Cairo
    Lots of miles from Vietnam
    You’re so sadly neglected
    And often ignored
    A poor second to Belgium
    When going abroad

    • Nice song, Andy. I noticed the Finnish men’s hockey team in the video, but why were there no references to Paavo Nurmi, Lasse Viren and the other awesome Finnish distance runners?

  2. Great column as usual, Shaun.
    Statistics Finland publishes quarterly indices of consumer prices for owner-occupied housing (OOH) based on the net acquisitions approach, like the ONS. Perhaps the market has heated up in 2015, but the 2014Q4 estimates published earlier this month certainly don’t suggest that there is a housing bubble in progress.
    The OOH series rose by 1.8% annually in 2014Q4, with a quarterly increase of 0.3%. Its new dwellings component as up by 1.0% annually, with a 0.1% quarterly decrease.

    • Hi Andrew

      So no or very little housing inflation. Except there is a catch which is that the way that the Finnish economy declined it seems likely that house price falls were required. The last OECD house price to rent report had Finland around 30% expensive compared to the long-term average.

      It will be interesting to see how this plays out with a flatlining economy combined with housing policy that could not be much more expansionary with -0.2% interest-rates and a ten year yield at a QE driven 0.14%!

  3. Finland home to the Okiluoto nuclear plant, which remains in construction and will be at least 10 years behind schedule. By some estimates this plant, which is yet to produce a single kWh of power is already more expensive that the Large Hadron Collider.

    The costs of this ongoing debacle may or may not show up in Finnish economic statistics but it must surely be dragging down agregate economic performance.

    Problems of a similar nature may show up at Hinckley Point in the UK in due course. A number of serious commentators argue that the specifications of these plants make them unconstrutable – and the Finnish experience seems to support that view.

  4. On topic of lauding economies, until recently Australia was lauded and if we look back a decade we’d see Germany criticized as the sick man of Europe

    • Hi ExpatInBG

      Yes such things are very like one of the themes from King Lear. You need to go to the bottom of the wheel of fortune before you can rise again and vice versa. Nice of the media to give us so many clues on the exact timing though!

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