Finland: Risk Assessment
Country Risk Rating
Business Climate Rating
- Prudent economic policy overall
- Skilled workforce and favorable business climate
- High standard of living
- Economic growth not dependent on foreign tourists
- Highly vulnerable to international economic conditions (goods & services exports = 37% of GDP)
- Crisis in the important Finnish electronic sector, as well as in the metals sector, and loss of competitiveness
- Dependence of the Finnish banking sector on the Swedish and Danish financial sectors, despite the return of a major institution in 2017
- Aging population (in 2020, 21% of the population are pensioners)
Slow recovery after a mild recession
A slow economic recovery is expected in 2021 after the Finish economy went into a recession in 2020 because of the global COVID-19 pandemic. After COVID-19 hit Finland in early 2020, the government reacted fast with restrictive measures from mid-March to early-May. Public life came to a standstill, the Helsinki-Uusimaa region was quarantined for three weeks, gatherings were limited to 10 people and borders were closed. However, shops remained open. These measures helped to contain the number of COVID-19 cases at a very modest level. The second wave in the early autumn of 2020 turned out stronger but was still bearable. The restrictive measures entailed an economic contraction, but it was noticeably weaker than in other European countries. In the first half of 2020, GDP dropped only by 3.8% in yearly comparison (EU: -24.5% YoY). In addition to the mild development of the pandemic and the relatively milder restrictions, industrial production did not plummet as factories did not close. The backlog of orders before the COVID-19 outbreak was higher, as the Finish industry focuses more on investment goods with longer production times. Furthermore, Finland is less dependent on tourism than other European countries (indeed, the tourism balance is negative). Moreover, the recession in 2020 was cushioned somewhat by the additional financial support measures that had a total value of approximately EUR 17 billion or 7.1% of GDP, mainly in the form of support to the health care system, deferrals of tax and pension payments, grants to SMEs, as well as the expansion of parental allowances and the unemployment insurance.
The economy has been recovering since mid-2020 but at a slow pace. This dynamic should remain through 2021, provided that no strong restrictive measures are reintroduced. The main dynamic should come from private consumption (51% of GDP), generally supported by high welfare state expenditures (24% of GDP). The unemployment rate, which increased significantly in spring 2020 despite the extensive use of furlough, should return to more moderate levels in 2021 and support - alongside a modest wage growth and a low inflation rate - private consumption. Some of the fiscal measures adopted in 2020, such as public investment projects amounting to EUR 1 billion, should foster economic recovery in 2021. Conversely, private investment expenditures should remain subdued as long as global economic uncertainty remains. The outlook for exports remains highly dependent on the industrial situation in Germany, Sweden, the United States, and China, as Finland mainly exports investment goods. Services exports, mainly ICT and business services, should remain strong. Additional support should come from the ECB, which should extend its asset purchase programs (APP with the normal EUR 20 billion per month and PEPP by an additional volume of around EUR 680 billion) until the end of 2021, together with another extension of its targeted long-term refinancing operations (T-LTROs).
Public debt surges
Finland’s current account deficit will probably increase moderately in 2021, as the surplus of the goods-trade balance will shrink due to reduced demand for investment goods. Despite still robust services exports, the services trade balance should remain structurally negative (due to Finnish tourists abroad) and, combined with the high foreign direct investments, be the main reason for the persisting current account deficit. The general government budget deficit, which surged in 2020, should decrease somewhat but remain above the Maastricht target of 3% in 2021. This should lead to a record general government debt of above 70% of GDP.
COVID-19 led to a confidence boost for the government
Social Democrat (SDP) PM Sanna Marin is leading a center-left coalition with four other parties – the Centre Party (KESK), the Green League (VIHR, environmentalist), the Left Alliance (VAS), and the Swedish People’s Party (SFP, center). The government, especially the SDP, gained a lot of support as 79% of the population were satisfied with the government’s handling of the COVID-19 crisis in the spring and summer of 2020. The SDP is now clearly leading In polls, while the right-wing populist Finns Party, the biggest opposition party in parliament, lost the extra support gained between the last election in spring 2019 and early 2020. The government’s position in the negotiations on the EU Recovery Fund could be another reason behind this development, as PM Marin was part of “the frugal five” (an alliance supporting a frugal and strict fiscal policy in the EU). Thanks to the latest boost in support, the government coalition, and PM Marin are expected to last until the next parliamentary elections in 2023.