Finland: Risk Assessment
Country Risk Rating
Business Climate Rating
- Prudent economic policies
- Skilled workforce and favorable business climate
- Cutting-edge industries
- High standard of living
- Highly vulnerability to the international situation
- Industrial crisis 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
Dynamic Activity Sustained by Domestic Demand and Exports
In 2018, activity will slow down slightly, although growth will remain above potential. Private investment, although more moderate in 2018, will remain one of the main contributors to growth, due to low interest rates, coupled with dynamic domestic and external demand. Higher capacity utilization rate in the forestry and metallurgical industry would foster investment in these sectors. Investment in research and development will also be more dynamic following several years of decline due to the deterioration of mobile telephone services. Residential construction will support activity, due to strong housing demand, particularly in the Helsinki area. In addition, the expansion of tourism will continue, driven by a growing influx from Russia and Asia, attracted by preserved natural sites and the northern lights.
Exports will continue to benefit from the Competitiveness Pact, which reduced unit labor costs by 3.7% in 2017, although wages are expected to rise again in 2018. In addition, strong demand in the main partner countries (Sweden, the United States and Germany), as well as the economic recovery in Russia, would favor Finnish exports. The dynamism of orders in the shipbuilding industry and the completion in 2017 of the country’s largest wood processing plant (paper, resin, bioenergy, etc.), will also support exports. Thus, the contribution of trade to growth will be positive in 2018.
Household consumption will be more dynamic, driven by a slight rise in wages, in a context of moderate inflation, and by decreased unemployment (7.3% in October 2017). Low interest rates will also favor consumption, even if the weight of the debt (129% of disposable income) will still weigh on the financial situation of households.
Conservative Fiscal Policy and Small Current Account Surplus
The government’s priority in 2018 will remain the reduction of unemployment and the control of public spending, although many efforts have already been made in these areas. In addition, the government should continue lowering income tax (mainly for low income), which was the counterpart of the austerity measures of the Competitiveness Pact. The latter includes the extension of the annual working time, a transfer of part of the employer’s contributions to the employee contributions and a wage freeze. The 2018 budget also provides for an increase in retirement pensions, as well as an increase in social transfers for the elderly and single-parent families. In addition, public investment will remain small, except for public transport. In addition, the country would progress in its decentralization process, giving more powers to the regions. The increase in expenses would nevertheless be offset by the increase in revenues, due to the favorable economic situation and the increase in property tax. Thus, the budget deficit would always remain below 3% and public debt will approach the threshold provided for by the European Stability and Growth Pact (60% of GDP). Nevertheless, in the absence of structural reforms, the rapid ageing of the population would threaten the social security system and the control of public accounts.
The current account balance will remain positive in 2018 owing to the maintenance of a small trade surplus linked to export growth. Nevertheless, the increase in imports would halt the improvement observed in the current account, due to a more dynamic domestic demand and a moderate increase in oil prices (2nd import station).
A Government Majority that is Small but Benefiting from the Dynamism of the Economy
In June 2017, the election of Jussi Halla-aho as the leader of the Finns Party (extreme right), resulted in the exclusion of this party from the government coalition, because it was considered too strict on immigration issues. The defection of more than half of the members of his party (19 out of 36) has formed a new coalition government, led by the Centre Party, also consisting of the National Coalition Party (center-right) and the blue Reform Party, which was born from the split of the Finns Party. The ministerial posts remained unchanged as all the members of the Finns Party government had already joined the Blue Reform. In addition, the new coalition government seems more fragile since it has a smaller majority than the previous government (106 seats out of 200, instead of 124). However, the good economic performance should allow the government to remain in place until the next parliamentary elections in April 2019.
The business environment remains very favorable as the country ranks 13th out of 190 in the 2018 Doing Business report published by the World Bank, with particularly remarkable performance in insolvency settlement. In addition, the dynamism of activity has contributed to the reduction in the number of business bankruptcies since 2016.