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Country Commercial Guides
FY 2000: Finland
CHAPTER II: ECONOMIC TRENDS AND OUTLOOK
Major Trends and Outlook
The Finnish economy has continued its recovery from the devastating 1990-93 recession; in early 1997 GDP returned to pre-1990 levels.
From June 1991 to September 1992 the Finnmark was pegged to the European Currency Unit, the ECU. The fluctuation margins and the midpoint were set so as to correspond to the fluctuation margins and midpoint of the old currency index. In September 1992, the Bank of Finland decided to abandon the limits of the fluctuation range and allow the Finnmark to float. Finland joined the Exchange Rate Mechanism (ERM) of the European Monetary System in October 1996, at the central rate of 1 ECU = FIM 5.80661 (currently 1 ECU = USD 1.0221). As of January 1, 1999, 11 EU member countries including Finland joined the third stage of the EMU. This third and final stage of EMU commenced with the irrevocable locking of the exchange rates of the eleven currencies participating in the Euro area and with the conduct of a single monetary policy under the responsibility of the ECB. The Finnmark was pegged to the Euro at 5.9457.
Economic growth in Finland has shifted from export led growth to domestic demand led growth. EU and EFTA countries continued to absorb the bulk of Finnish merchandise exports. In 1997 their average share was 57 percent. Over the same period, Finland's exports to other European countries (including Russia) accounted for 16 percent, East Asian countries 11 percent, and the USA 7 percent. Overall, exports grew 13 percent in 1998. Growth in exports were sluggish during the first half of 1999 largely due to a slowdown in growth of world trade, economic difficulties in Russia and Asia and partly owning to the capacity constraints faced by the export industry. Strong growth in the electronics industry is expected to make overall merchandise exports grow relative to last year. The volume of exports is forecasted to grow by 3.5 percent in 1999 with export prices 2.5 percent lower than last year.
The regional distribution of Finland's imports has been quite similar to that of exports with the EU and EFTA countries accounting for 64 percent and other European countries for 12 percent. Imports from outside Europe are primarily from Asia and the USA with less than one percent coming from Africa. In 1997, the value of imports began to reflect the strong economic growth of the Finnish economy increasing volumes by 10.5 percent. This growth continued during 1998 where the value of imports increased by 12 percent during the first six months compared to the same period the previous year. Growth in 1998 was estimated at 9.5 percent and the projected growth for 1999 6 percent. Imports for the first three months of 1999 were lower than the same period last year. Overall growth in imports is forecasted to decrease by 4.5 percent for the year.
In 1997, the volume of exports in the forest industry increased by 15.5 percent. But with volatile export prices, the actual price level remained about one percent lower than the year before. Export growth is estimated at 5 percent in 1998 and 1.5 percent in 1999. In 1997, the forestry industry accounted for 30.7 percent, metal and engineering industry 50.9 percent and other goods 18.4 percent of all exported goods.
In 1998, the share of paper industry exports was 23.7%, share of machinery and metal production 20.7%, and the share of electrical equipment and electronics 25.6%. Raw materials accounted for 50.2% of total merchandise imports, energy 1.9%, investment goods 36.4%, consumer goods 5.3% and other goods 6.2%.
GDP in 1998 was FIM 675.7 (USD 127) billion and growth rate during the first part of 1999 was in the range of 4 percent per annum. With signs of other sectors excluding electronics are recovering, GDP for 1999 is forecasted at 3.6 percent, in year 2000 3.3 percent and year 2001 3.4 percent.
In spite of the continued economic growth, wage developments have remained restrained. In 1999, the index of wage and salary earnings is projected to rise by an average of 2.7 percent from 1998. With the number of hours worked continuing to rise, the wage bill is set to increase by 6 percent. However, should the salary negotiations during autumn 1999 lead to a moderate settlement, price rises are expected to remain below 2 percent.
Private consumption was up 4.5 percent in 1998 and is forecasted to grow by 3.8 percent in 1999, 3.4 percent in 2000, and 3.2 percent in 2001. Consumer confidence remains high overall.
An income policy agreement was contracted on December 12, 1997 by the Finnish central labor market organizations, which covers all wage and salary earners and is effective until January 15, 2000. The cost effect of the pay increases included in the agreement will be, on average, 2.6 percent as calculated from the beginning of 1998, including a general increase of 1.7 percent, an amount equal to 0.5 percent of the wage bill in each branch to be used to correct distortions within the branches with a high incidence of female and low-paid employees.
Global economic growth is anticipated to recover next year meaning that Finnish exports can be expected to increase considerably faster than this year if cost developments remain restrained. The domestic economic fundamentals also indicate continued growth with low interest rates perking increases in demand. The growth rate in both private investment and private consumption is forecasted to remain unchanged in year 2000.
Fuelled by low interest rates, the growth in lending and economic growth in general is creating a sharp increase in employment. The unemployment rate is expected to be 9.3 percent in 2000.
Central government finances are forecasted to go into surplus, but the rate of growth depends on the type of changes in taxation during the autumn of 1999. Local government finances are expected to record a FIM 2 billion (USD 377 million) surplus in year 2000, as growth in tax receipts accelerate. The financial surplus in the social security funds are predicted to reach FIM 26 (USD 4.9) billion in 2000, 3.5 percent of GDP.
Principal Growth Sectors
Manufacturing: Output in the manufacturing industry continued to be boosted by the manufacturing of electrical equipment. Output grew by over 46 percent in March 1999. The growing domestic demand and brisk construction activity are the main factors contributing to the growth. The capacity utilization rate was 91 percent during the spring of 1998. Operating profits in the manufacturing industry stood at 12.6 percent in 1998, but is forecasted to decrease in 1999 due to lower exports. Overall growth in the manufacturing industry is estimated to decelerate to 4 percent in 1999.
Metal and engineering industry output increased during 1999 and is expected to grow by 6.5 percent. Production in electronics and electrical engineering industries recorded a growth of 29 percent during the first part of 1998 with the telecommunication sector having a record growth of 45 percent. Global success in telecommunications warrants growth in demand, but capacity limits and shortages of skilled labor are gradually beginning to set limits on the growth potential in Finland.
Output in base metals increased by 6.5 percent in 1998 and the expansion in the capacity is expected to allow for more growth during 1999. However, profitability on basic metals is expected to fall due to low price levels. The production of machinery, metal products and transport equipment increased by 6.2 percent in March 1999, however overall growth is expected to be low. The stock orders in the ship-building industry remains good, though capacity will not be able to sustain further rapid growth in 1999.
The output in the agriculture and forestry industry grew during the beginning of 1999 due to an 11 percent increase in commercial fellings. Output in the forest industry grew 5 percent in 1998 and is anticipated to grow by 3 percent in 1999. In the paper production industry, the capacity utilization rate rose to 99 percent in the first part of 1998 as output grew by 9 percent. A number of stoppages occurred during the summer of 1998 in the pulp and fine paper production in order to retain the existing price levels. With brisk construction activities perking domestic demand, output in the wood products industry increased by 7 percent. Construction activities are anticipated to grow by 5 percent in 1999 with the main focus of new building.
Agriculture: During 1998, Finland faced its worst crop failure in a decade. It is estimated that 442,000 hectares suffered from crop damage. The losses were the greatest in the production of cereals, oil seed, potatoes and hay. In the livestock sector, such losses translated into mainly increased production costs. Dairy farm income -- the backbone of Finnish agriculture -- declined by 9 percent in 1998, in pig farms and cereals farms, the decrease was much bigger. However, the compromise outcome of Agenda 2000 negotiated by the European Ministers of Agriculture in March 1999, contained some favorable elements with respect to Finland. Of special importance was drying aid for grains and oilseeds, and aid for grass silage. The delay of the price cut of milk reform until 2003, makes the situation easier now, although there might be problems later on if the compensation does not cover losses caused by the price cuts. The final decision on beef is acceptable. In addition, Finland considered it very important that both the scheme of degressive aids and the scheme of shared financing of the aids were rejected.
Overall economic growth was strong in 1998. The growth was driven mainly by domestic consumption, which increased by approximately 3%, while exports decreased. Domestic consumption is expected to stay at the same level in 1999 and 2000.
Services: Value added in private services has grown by one fifth during the past four years; in 1997 production increased by a good 4 percent, but in some sectors, such as commerce and financial intermediation, output still falls short of the level of early this decade. The service sector is altogether estimated to grow by over 10 percent in 1999.
Output in trade and commerce grew by 5.5 percent last year, and sales figures in the first half of this year have also been high. Purchases in cars, household appliances, computers and furniture are particularly widespread. With household purchasing power increasing, sales volumes in the retail trade are set to increase considerably during 1999, and growth in industrial output will ensure the wholesale trade of machinery and equipment. Brisk construction of single-family houses and other construction in turn promises to increase construction materials acquisitions.
Hotel and catering services saw a 5 percent rise in 1997 compared to the year before, and with the increase in household purchasing power, hotel and catering services are set to continue growing during 1999. With EU presidency in Finland in 1999, international tourism is estimated to increase, although the number of Finns travelling abroad is also expected to rise.
Output in transport and communications was up by as much as 9.5 percent in 1997. Demand in transport services by land, water and air alike was robust in 1997, but is expected to level off during 1999. Growth in passenger traffic and tourism is also expected to continue, owing among others to sea cruises and package tours to countries in the south.
In other private services growth was recorded in activities serving businesses, where there was a one tenth increase in activities, with developments for both this and next year promising to remain strong. Growth areas range from computer services, construction technology and other planning services, to advertising and security services. The pick-up in demand for loans and the rise in share prices, in turn, fuels activities in financial intermediation.
Government Role in the Economy
During the severe recession of the early 1990s, the Finnish government's financial position deteriorated rapidly. The government became deeply indebted because, as tax revenues fell, transfer payments under the country's extensive social welfare programs rose dramatically. At the same time, the government was forced to bail out several major banks whose failure would have prompted a collapse of the banking system. Since then, the major aim of the government's fiscal policy has been to curb the growth of indebtedness. At the end of 1998, the public (EMU) debt was 49.8 percent of GDP.
The SDP - Conservative government, which began in March 1995 and after the elections in 1999 is still in power, will continue to work to improve the government's financial situation. The government has promised decisive action to increase employment, hoping to reduce unemployment to 9.3 percent by the year 2000. The government adopted a package of measures aimed at cutting the number of jobless over the next few years. The program for employment aims to deepen the process of gradual re-employment, cut the tax wedge by reducing unemployment insurance, social security and pension contributions with a view to stimulating purchasing power and increasing demand for labor. The program also aims to create the basis for a stronger labor market by reforming working life, improving vocational training, introducing work sharing, encouraging private sector growth, and stimulating the housing and building industry.
The Finnish government has traditionally played a large role in the economy. In the decades since World War II, state-owned companies have held a dominant position in Finland's national economy. Since 1993 the state of Finland reduced its ownership in 13 state companies. In 1997 the Finnish state reduced its holding in 4 state-owned companies, Kemijoki (energy), Rautaruukki (metal & engineering), Enso (forest) and Sisu (transport equipment). The state continued its privatization program by privatizing tele-operations.
The basic strategy for the privatization process has been to treat each company as an individual case and act in a practical way, on market terms. The program's aim is to reduce the government's stake through stock transactions rather than by selling off companies to individual investors. Recent examples include the IPO of Sonera (former Telecom Finland) and HPY and the selling of Enso to Stora. In virtually every case, however, the Finnish government has retained significant minority stakes in privatized companies. The government has restructured some of these companies to make them more attractive to investors.
Balance of Payment Situation
With the onset of Stage Three of EMU on January 1, 1999, Finland«s national balance of payments lost its importance for monetary and exchange rate policy. In the future, the European Central Bank will aggregate all of the EMU member states' balance of payments and report them quarterly. Only the current account for the whole euro area can effect the euro«s exchange rate against the major currencies. Despite the slowdown in the rate of growth of exports towards the end of 1998, the surplus on the current account was FIM 37.3 billion representing 5.6 percent of total output. The current surplus resulted in a further decline in the level of Finland«s external debt, which totaled FIM 175 (USD 33) billion at the end of 1998. The surplus in the current account is forecasted to remain at a strong 4.7 percent of GDP in 1999.
The surplus on the trade account amounted to FIM 56.9 (USD 10.7) billion in 1998, an increase of FIM 5 billion (USD 943 million) from the previous year despite the slowdown in exports. The major reason for the slowdown in export growth was slacking demand and global oversupply of manufactured goods. Investment income account weakened to some extent despite the decrease in interest payments on interest-bearing external debt. The deterioration in the account was due to an increase in dividend payments on shares held by nonresidents.
The financial health of Finnish companies has improved substantially in the last three years. As a result of the exceptionally deep recession, households and enterprises have become increasingly cautious in their behavior. The savings rate of households is high, as they pay off their debts and housing investment remains low. The savings rate for the economy as a whole exceeds the investment rate, which is reflected in the wide current account surplus.
The financial deficit (net lending) in central government finances diminished by almost FIM 15 (USD 2.8) billion in 1998 on the year before, and was recorded at 1.5 percent of GDP. These auspicious developments are mainly the result of a major tax accrual, but expenditure growth has also been rather moderate owing both to consolidation measures and a favorable economic cycle. Central government debt stood at FIM 420 (USD 79) at the end of 1998, which is slightly more than 62 percent relative to GDP.
Central government tax receipts are anticipated to grow by about 5 percent in 1999; with earned income and private consumption increasing, taxes levied on earnings and production activities will grow. Corporate taxes are not expected to grow much. Income from state property suggests a decrease of about one-fifth owing to the fall in interest rates and a decline in dividend income. All in all, central government income is forecast to grow by 3.5 percent this year.
Central government expenditure is set to remain restrained. The remaining phases in the savings programs will continue to cut expenditure somewhat, and cyclical effects are also favorable as unemployment expenses decline. The decade-long rise in interest payments will now take a downward turn. Central government total expenditure is expected to slightly decrease. Notwithstanding the distinct slowdown in income growth, the financial position in central government will continue to improve, and net borrowing relative to GDP will fall to 1/2 percent. The central government debt ratio to GDP is forecast at a 60 percent level.
General government finances went into a financial surplus in 1998. The financial policy continued to be restrictive. This year public sector finances are also expected to show a clear surplus, actually slightly stronger than earlier predicted. This is largely due to continued robust domestic demand. The general government EMU debt was just below 50 percent of GDP last year, and the debt ratio is set to continue decreasing for the remainder of 1999.
Capital outflows exceeded inflows by FIM 8.0 (USD 1.5) billion in the first quarter of 1999 with Finnish companies exporting FIM 10.7 (USD 2) billion worth of capital in net terms.
Foreign direct investment by Finnish companies has expanded at an accelerating pace over the last few years. The figures for the first quarter of 1999 were FIM 17.8 (USD 3.3) billion outward and FIM 5.2 billion (USD 981 million) inward. FIM 14.5 (USD 2.7) billion worth of outward investment was accounted for by intergroup loans and trade credits. The Merita Nordbanken and StoraEnso mergers explain the exceptionally large figures for direct investment and inward portfolio investment in 1998. Capital outflows related to direct investment amounted to almost FIM 50 (USD 9.4) billion, three times larger than in 1997.
In 1997, the major immediate host countries for Finnish direct foreign investment were Sweden (FIM 7.5 - USD 1.5 billion), the Netherlands (FIM 5.8 - FIM 1.1 billion), and the US (FIM 4.6 billion - USD 902 million). Finnish companies repatriated FIM 3.9 billion (USD 765 million) in dividends, FIM 1.5 billion (USD 294 million) in interest and remitted to them FIM 0.6 billion (USD 118 million)in interest from their foreign subsidiaries and associates.
In 1997 foreign companies invested equity capital in their Finnish subsidiaries and associates in the amount of FIM 11 (USD 2.2) billion in net terms, up from FIM 5.1 (USD 1.1) billion in 1996. The major immediate investor countries were Sweden (FIM 2.3 billion - USD 450 million in 1997) and the Netherlands (FIM 1.7 billion - USD 333 million in 1997). Dividend and interest payments to foreign investors amounted to FIM 2.9 billion (USD 569 million) and FIM 0.4 billion (USD 784 million) respectively in 1997. Retained earnings of foreign owned enterprises in Finland amounted to 3.6 billion (USD 706 million) in 1997.
Investment outflows continue to exceed direct investment in Finland. Some tax changes, the promotion of Finland as a gateway for Russian markets and Finnish membership in the EU may encourage foreigners to invest more in Finland, but their main emphasis is expected to remain on share and bond investments.
Infrastructure
Finland has a well-developed infrastructure. Finland's transportation system is based on an efficient rail and road network, supported by a wide network of freight forwarders and trucking companies. Finland's domestic distribution system for goods and services is efficient. Finland has more than 50 ports and loading places. Twenty-three seaports are open year round. Finnish ports, 15 of which deal with transit traffic through Finland, can handle a wide range of shipments and goods. The ports on the Gulf of Finland handle about 50 percent of all general seaborne cargo traffic. The ports near the Russian border (Hamina, Kotka and Mustola) concentrate on forest industry goods, bulk cargo and free zone activities. Ports are secure and automated; loading and unloading operations are consistently quick and trouble free.
The well-functioning transportation system and the fact that Finland's rail gauge is the same as Russia's make the country a good transshipment point for Russian trade. Among other projects, Finland is developing the "gateway" concept further by maintaining and extending a highway in southern Finland that would reach the Russian border at the southern Vaalimaa crossing point. The E18 road is part of the European Union Trans European Road Network system, connecting EU-member Nordic capitals with efficient roads.
Finland's international telecom set-up began to admit limited competition in 1993, with further deregulation on July 1, 1994. On the domestic telecommunications front, competition entered the picture at the beginning of 1994. In the next few years, the sectors of telecommunications and information technology will continue to grow rapidly. Finland«s telecommunications environment is one of the most advanced in Europe and the growth of international business in telecommunications is of significant importance to the Finnish economy.
Access to telecommunications networks and information services by operators in electronic commerce is currently being planned as is the availability of efficient cryptographic products in national and international communications and in electronic commerce.
Finland was the first country to grant licenses for third generation mobile networks. Four telecommunications companies received a license to construct a 3G mobile network. Operations will be launched by January 1, 2002 at the latest.
During the next few years, a major change in mass media will be digital radio and television transmissions. A test network for digital radio transmissions will be built in the areas of Helsinki, Lahti and Tampere. The Ministry of Transport and Communications declared the licenses for digital radio and television broadcasting operations open for application in December 1998, which attracted a lot of interest. Digital television transmissions should start in 2000.
The Finnish government and private sector have advanced IT systems with well-trained staff. In general, IT managers are confident that year 2000 problems are being effectively addressed. Few (if any) serious problems are anticipated.
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Note* International Copyright, United States Government, 1998 (or other year of first publication). All rights under foreign copyright laws are reserved. All portions of this publication are protected against any type or form of reproduction, communications to the public and the preparation of adaptations, arrangement and alterations outside the United States. U. S. copyright is not asserted under the U.S. Copyright Law, Title17, United States Code.
