Tag Archives: domestic demand

The Finnish economy in 2014 – an overview

This post is in a way an update of this post, but with a different focus and hopefully a bit more structured approach. The post is timely, in that the interim budget negotiations are about to start and various politicians have started marking their positions. I apologize that most links are in Finnish only.

By way of an introduction, I wish to refer to a currently ongoing debate, in which the Finnish mainstream economists argue that Finland has clearly structural problems, and that therefor (logically) the welfare state should be reduced. Nonetheless, professor Pertti Haaparanta has convincingly argued that the problems of the Finnish economy are not structural, or “at least misleading: business cycle problems that are not corrected create structural problems.” He refers among other things to hysteresis. One particular  good argument is what he writes (my translation):

Also Sweden has suffered more [from the crisis] than OECD countries on average, although less than Finland. This is in itself already sufficient reason to doubt the claim that Finland has big structural problems regarding the labour supply, that Sweden is claimed to have solved.

This claim is especially suspicious because the decline of potential production was timed in all countries at the start of the financial crises, which everywhere led to a decline of private and unfortunately also almost everywhere of public demand. How can this be, if Finland has some particular structural problem? And even though the crisis might have revealed some particular structural problem of the Finnish economy – as has been claimed – without the crisis it wouldn’t have been noticed, so…??

The current economic debate in Finland is thus clearly ideological (as it is almost anywhere). This being said, the state of the Finnish economy is quite horrid. First I show the development of GDP since 2000 (figure source: Tilastokeskus). It shows both the old and new methodologies of counting GDP.

GDP (volume change). Blue is EKT95 and Red is the new EKT2010

GDP (volume change). Blue is EKT95 and Red is the new EKT2010 (Source: Tilastokeskus)

This does not look good. And with the Ukraine crisis and the related economic sanctions, it may press Finnish GDP further down, as Russia is still an important trade partner for Finland, especially regarding energy resources:

Source: ULJAS/Tulli.fi

Source: ULJAS/Tulli.fi

The core of the ECB strategy is combating inflation. We know that it is not really succeeding at achieving its near-2% goal, but how is inflation developing in Finland? Well, since mid-2011 there has been a strong downward trend:

CPI (Blue) and HICP (Red) Source: Tilastokeskus

CPI (Blue) and HICP (Red) Source: Tilastokeskus

The question is always, what causes this drop in prices. On the one hand, Statistics Finland reports that industrial producer prices have declined (especially in export sectors, broadly since 2011) but on the other hand service sector producer prices have risen continuously since 2010. One the biggest factors in price increase is rents (both so-called social rental levels and private sector, but real estate has declined in value – more about housing etc below.)

Unemployment is high in Finland. Although the problems in Finland are not likely structural, Finland does have a fairly high level of structural unemployment, which dates back to the economic crisis in the 1990s. But this is how the unemployment level has developed (Source: Tilastokeskus):

Unemployment rate (Green) and Trend (Blue)

Unemployment rate (Green) and Trend (Blue) (Source: Tilastokeskus)

 

Obvi0usly, in this figure nothing like a recovery can be observed. With the ongoing structural changes in the Finnish forest industries and the implosion of Nokia it is not quite likely that this trend is coming down soon. The Finnish ministry of Employment and the Economy has its own methodologies and statistics, and focuses on people who actually look for work. The picture can’t be copied here but I suggest to take a look. Line (1) shows unemployed people looking for work and line (2) shows the number of open positions (through mediation of the Employment Office). In my view, this is a quite depressing figure.

I have previously argued, that Finland did fairly well as long as domestic demand kept up. How has this developed in the meantime? OECD.Stat gives this development:

Domestic Demand (P3-P5). Source: OECD.Stat

Domestic Demand (P3-P5). Source: OECD.Stat

 

 

 

 

 

This graph shows that at least using this measure domestic demand is perhaps slowly decling or has been at most flat since 2011. This may be somewhat explained by the Finnish system of unemployment benefits – the labour unions manage the unemployment funds, and union members get up to 500 days a certain percentage of their last salary. Thus, unemployment does not immediately mean a crisis in household expenditures. But on the other hand, under current circumstances it is not likely that domestic demand would soon increase. Most likely the growth of domestic demand from 2009 to 2011 was due to availability of credit at low interest rates. This may be reflected in increases in private indebtedness as well (see below).

One issue which has been current in economics blogs is that international capital is searching either safe havens or yield. Finland has been for many years on top of various innovation- and competitiveness indexes, but is that reflected in Foreign Direct Investment? This table from the Bank of Finland gives us the following graph:

Foreign Direct Investment in Finland, EUR million

Foreign Direct Investment in Finland, EUR million

 

 

 

 

 

 

 

 

From this graph it would seem that Finland has only recently become less interesting as a country to invest. By far most FDI comes from Europe, with Sweden and the Netherlands the biggest investors from Europe. Investment is needed to create new jobs, so this would seem to be a fairly positive situation, as Finland has a highly educated workforce, good infrastructure etc.

So, on these macro-level variables, Finland is not doing very well in terms of GDP and Unemployment but FDI and domestic demand seem to hold up fairly well. The big question is of course, how the Russian sanctions and possible counter-sanctions are going to affect the Finnish economy. In the post that I referred to above it can be read that the trade balance of Finland is well, nearly in balance. This is perhaps a function of increasing imports and declining exports – after all, the whole labour market debate is centered around the primacy of Finland as an export-oriented economy.

To return to domestic demand, it is instructive to show this graph (through Revalvaatio.org):

Indebtedness of households. Mortgages (light blue), Consumption credit (red), other loans (dark blue), interest costs (yellow)

Indebtedness of households. Mortgages (light blue), Consumption credit (red), other loans (dark blue), interest costs (yellow)

 

 

 

 

 

 

 

 

 

 

Here we can see that consumption credit has expanded somewhat, but the main driver of Finnish private indebtedness is the mortgage. Elsewhere I have argued (in Finnish) that it is possible that Finland has seen a real estate bubble, which by now has burst – there are many indications for this, as in the country side prices are declining rapidly and houses stand for sale quite long. Another indicator is that even though housing prices are down, rents are up, which may be a way of recuperating (future) losses. Either way, Finland’s household sector debt is quite high and their financial assets are seen to be contracting. This is not yet a problem, but with rising unemployment and declining housing prices it could become a problem, since if you are unemployed somewhere and are unable to sell your house, you are literally stuck because it is often necessary to move near a job. And since the places with Nokia -related industry are not doing well, this is likely to become a problem.

On the other hand, public debt is still relatively modest. The expectation is that it will cross the 60% -limit next year but it is still nothing to panic about.

Private sector debt is high, but this is not necessarily a problem either. The problem is that Finnish companies are faced with reduced aggregate demand and therefore don’t invest, or worse make many people redundant. This realization means that the current trend in labour market relations, extreme wage moderation, is misguided. It is true that Finnish labour costs are higher than Germany’s. But Finland can never become a low-wage-high-productivity-export-led economy like Germany. This is an issue which demands another post, but Finland really should focus on the domestic demand and high quality export goods and services (which it does, with examples of KONE or METSO or Pöyry).

All in all, the big risk for Finland lies in the combination of a big correction in the housing market prices, a continuing economic crisis with consequences in unemployment and finally as a result of both AND the Ukraine situation a crash in domestic demand. But Finland is certainly no Greece or Spain – the economic fundamentals, innovation and capacity to attract investment seem to be all right. This crisis can be prolonged with the wrong policies (another blast from the past regarding the 1990s crisis and its prelude), and there should be more focus on the issues which are in my view more relevant for the future of the Finnish economy. As I have written somewhere sometime last year, a good start would be for the unions to demand higher wages, before Finnish households become trapped with deflation. Wage moderation may appeal to a moral sense of ‘we all have to suffer’ but it is not exactly good for domestic demand.

 

 

 

 

[Updated] Finnish Finance Ministry once more adjusts forecasts for 2014

I almost would put this under the heading of ‘I told you so’ but I am not so happy about this, because this will mean only more unemployment and suffering for Finland.

So in short: the Finance Ministry publishes twice a year a forecast on economic indicators. The latest forecast is much more downbeat than the last. In the previous forecast (of September) forecast a decline in GDP of  0,5 %, whereas now it forecasts 1,2%% decline. For 2014 it forecast earlier a growth of 1,2% and now 0,8%. (news from Taloussanomat here).

This is not good news although for 2015 the ministry is more upbeat, counting on a revival of industry exports. But this bit caught my attention (my translation):

According to the Ministry of Finance the weak development of the Finnish economy has been wide-spread: private consumption and investment declined significantly. The pull to growth has mainly come from public consumption and public investment. It has helped also that imports were slightly smaller than exports.

How can this be a surprise still? For years all kinds of economists have said that the problem is of weak aggregate demand and yes, of course public consumption and public investment will then help to pull the economy forward (see some links in this post). I also have written that for Finland the domestic demand is more important than exports.

I hope that certain parties in the current Finnish government will begin to see the light finally, otherwise they will be in for a rough ride in the next elections.

Update 20.12.2013:

I am wondering what the ultra-modest wage increases next year will do for a) inflation and b) purchasing power (which are kind of the same thing). I have some fear that inflation in Finland, given rising unemployment and declining growth will decline. Hopefully not to deflation levels.

 

Nordea: “Economic rebound escapes again”

This is a translation of this news item on Finnish Yle News. It is almost an exact example of the ‘jobs recovery is always two years in the future’ -thesis.

Nordea revised its forecast for Finnish economic growth downwards – “the recovery of the economy escapes again”

According to the latest forecast by Nordea the Finnish economy shrinks this year by one percent, while a previous forecast projected half a percent. Also Nordea’s economic growth forecast for 2014-2015 is revised downwards.

Nordea has revised its forecast for Finnish economic growth for the near future. According to the latest forecast by Nordea the Finnish economy shrinks this year by one percent, while a previous forecast projected half a percent. The forecast for next year by Nordea is growth of 0,8 percent and 2 percent for 2015.

The previous estimates for next year were 1,5% and for 2015 2,3% growth.

Nordea’s economist Pasi Sorjonen says, that the recovery of the Finnish economy is dependent on a rebound in exports. The domestic demand doesn’t feed economic growth, because the weakening of employment is slowing down domestic demand.

Nordea expects exports to pick up next year.

In its overview, Nordea writes about the employment developments that employment weakens until next Summer. Nordea forecasts a rise in unemployment to 8,4%.

An unemployment rate that increases to just over 8% nonetheless gives a too rosy picture of the situation according to Nordea: in the labour market a part of the unemployed is completely out of the work force – in other words: even though the number of unemployed grows, this doesn’t show in statistics.

In Nordea’s overview the Finnish government’s structural reform package is criticized as well. Nordea’s chief economist Aki Kangasharju says, that the structural reform package is not concrete enough to solve the problems of the Finnish economy.

“Too much depends on how smoothly the next steps in the preparations will be.” says Kangasharju.

I have an issue with the statement that the Finnish economy is so dependent on export picking up. I have shown this picture before, but it is still useful.

Source: OECD

Source: OECD (series from 1999 to 2012)

 

 

 

 

 

 

 

 

 

 

There may be many ways to determine how important a sector is for economic growth (I am not an economist) but in the picture above, I don’t think you can say that domestic demand has not been a driver of economic growth, also not given this picture. It is quite possible, as the Bank of Finland has said, domestic demand is not anymore a major driver of economic growth (probably because of private households trying to repair their balance sheets, i.e. consumption is reduced). So Nordea has a large part of the decling growth covered, but perhaps gets it backwards – why is domestic demand/consumption declining? Shouldn’t the Finnish government do more to stimulate domestic demand rather than hope for a revival in exports?

 

Finland: focus on bolstering domestic demand rathar than international competitiveness

Thanks to this strategic analysis of Greece, I have learnt to use a new (for me) statistics database – OECD.Stat and more specifically the STAN database. I started wondering how the same graphs look for Finland that Papadimitriou et al produce for Greece. Obviously, the data is only until 2012 (or 2009), and according to all kinds of sources the Finnish economy has definitely soured.

First, here is the GDP development since 2000. I used the output approach; I do not know exactly what are the positive and negative aspects of the other two approaches. (I apologize for the picture quality)

Source: OECD.Stat

Source: OECD.Stat

As you can see, there is a decline in GDP in 2008-2009, just like in most parts of the Western world. And also here, GDP continued growing, but at a lower level than before 2008, suggesting that also in Finland there is an output gap.

So, very roughly, what do exports, imports and domestic demand look like in this context? In this post I showed that the trade balance worsened, which can also be seen here. In addition, I showed that domest demand as approximated by retail development showed resilience, and in fact, it seems quite clear from the graph below (disregarding any finesse) that domestic demand is what has kept the Finnish economy afloat:

Source: OECD

Source: OECD

Although the quality of the graph leaves to be desired, the worsening trade balance can be observed. Also of note is the slow growth and small size of service exports. But perhaps most significantly, next to the possible flattening of imports and exports, is the growth of domestic demand, which in absolute value terms and in growth rate is much bigger than exports and imports. It is thus not wrong to say that thus far, growth of domestic demand has kept the Finnish economy afloat. Furthermore, leaving out a host of issues, the focus on international competitiveness is partly misguided, because it seems that this is not where GDP growth comes from (because the trade balance is well, nearly in balance.)

But what is the export of Finland? There is/was Nokia, there are successful companies like Kone and METSO (at least regarding the mining machinery division), chemical companies, smaller companies like Fiskars (of the scissors and knives). The OECD STAN database has a separation of export of goods by technological content. You can see this for Finland below. Compared to the study on Greece, I left out agriculture and ICT manufactures; the latter is included in the high-tech exports, as far as I could see from the database.

Source: OECD

Source: OECD

So even though Nokia and other ICT manufacture has always been seen as a major factor in Finnish exports, in terms of value this did not show. The category with the highest growth until 2008 was the Medium-high tech manufacture, as well as the medium-low technology manufacture. Companies like Kone and METSO as well as chemical industry fit the bill for medium-high technology manufacture (all these categories are based on R&D intensity).

The decline in low technology manufacture is perhaps best expressed by the decline of the traditional pulp and paper industry in Finland. It is a shame the dataset ends in 2009 (due to changes in categorization valid from 2010).

What does this look like for imports?

Source: OECD

Source: OECD

Most of Finland’s imports were in the category medium-high technology manufactures. This category also has seen the sharpest drop. The other import categories are surprisingly close to each other in terms of value. So the bottom line regarding the trade balance might be: both imports and exports fell starting 2008, but most of the decline seems to relate to the medium-high technology manufacture.

As a final statement I would like to say that from these statements it really seems that the focus on international competitiveness is a bit overblown. Yes, exports are important and there are very many top quality manufacturers in Finland. But in the current situation, with European and global demand weak (and perhaps getting weaker again), it seems that it is more important to bolster domestic demand. This means more than wage moderation – because demand isn’t going to come back with that.

So my personal advice for the current labour market negotiations is: focus on domestic demand and purchasing power, not primarily on international competitiveness. There are many more people working in non-export sectors than in the export-sectors and it is high time taking their purchasing power into account; however illogical that may seem to those steeped in neoliberal competitive markets-thought.

UPDATED: Four Finnish guides to end the recession in Finland (in the context of the Eurocrisis)

This is a translation of my Finnish article of yesterday, explicitly meant for an international audience. Finland is still in some way one of the main architects of the austerity policies in Europe, and although the Finnish economy is not doing well, there doesn’t seem to be a change of course in the making, perhaps for much the same reasons as in Germany, but with an added dimension: the continuing decline of the Finnish economy helps the opposition Center Party and True Finn parties, both of which have rather confused ideas on the eurocrisis and a host of other issues. Although I don’t agree with the reasons, the True Finns want to do away with the euro (and a lot more of EU parts), which does not seem such a bad idea – apart from the fact that it would likely bring these two aformentioned right and center right parties to power. I haven’t dared to write this down on my blog before but in terms of politics the current government’s strategy re: the eurocrisis is very likely to bring about a backlash in the next elections, in which at least the Social Democrats (as represented by Jutta Urpilainen, Finance Minister) will take a very big hit, because the Euro isn’t saved by these policies and neither is the Finnish tax-payer spared (even though there is ‘collateral’).

To provide a bit of context: the three economists mentioned are, Seija Ilmakunnas, Olli Koski and Simo Pinomaa. Seija Ilmakunnas is with the Labour Institute for Economic Research. The institute missing here is ETLA (the Research Institute of the Finnish Economy). The latter two economists are from the Confederation of Finnish Trade Unions and the Confederation of Finnish Industries respectively. This means, although they are economists, they do at the same time represent labour market actors/lobbying organizations. The two organizations are (still) the key actors in Finnish industrial relations, but on many issues they have increasingly different views.

The context for the original article in the Finnish daily Helsingin Sanomat was that The Bank of Finland quite sharply revised its forecast downwards for 20132-2015. I would say, not a big surprise, but it rekindled the public debate about the Eurocrisis and the recession in Finland.

So, here is the translated article:

‘Four guides to end the recession’

In today’s Helsingin Sanomat there was an article named ‘Four guides to the recession.’ Four economists ponder what to do. The best guides is in my opinion that of Seija Ilmakunnas. Less great or bad guides (in that order) are by Olli Koski and Simo Pinomaa. I think the guides by these representatives of SAK and EK are less usefull because they are too political (i.e. also with a view to the collective bargaining rounds in Autumn). But at least Olli Koski does have some constructive ideas.

1. The first guide has been removed by request.

2. Seija Ilmakunnas

She has good ideas how to use stimulus funds. She also looks at the long term – what could be Finland’s important sectors. As she says, those cannot be determined ‘by decree’ but they have to develop organically through thorough fundamental research. Ilmakunnas takes the Finnish Cleantech-industry as a good example of this.

According to her, further economic integration is the natural course regarding the European Union, but I don’t see this as a realistic possibility in the (near) future. As long as the ideology of austerity reigns at the Commission and in Germany (and Finland and the Netherlands), no sensible economic policy regarding the longer term can be expected.

3. Olli Koski

Labour market politics is a stronger presence with this SAK-representative and the next EK-representative. The article begins with criticism against EK, which reduces his space for real arguments regarding the recession. He prefers a centralized incomes agreement (naturally). This is fine, of course, but it does not fundamentally relate to the eurocrisis, nor do I think it is realistic, because also SAK’s labour unions might have different wishes (exposed vs sheltered sectors).

Koski,  emphasises the importance of domestic demand, and is of course completely right that fiscal policy should not be tightened anymore. He also has sensible ideas where to use stimulus, but the use of stimulus funds for infrastructure and rent-apartments could probably also be used sensibly by  hiring more teachers, kindergarten personnel and nurses (or preferably making their positions more secure).

4. Simo Pinomaa

The representative of EK is in the last position here, because nearly all his comments show that he has not yet realized the Reinhart-Rogoff and Alesina-Ardagna have been thoroughly debunked. His central themes are ‘austerity’, ‘zero or negative wage-growth’, ‘budget deficit’. On the positive side he does acknowledge it would be a bad idea to tighten fiscal policy even more. But nonetheless he worries about debt in particular.

He also worries about Finnish competitiveness and argues for wage restraint, budget cuts etc. As a representative of EK I would most certainly demand the same, but it is politics rather than sensible economic policy.

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I cannot indicate what the relative weight of these opinions is on Finnish politics/Finnish government. This is especially difficult since Finland has again a kind of rainbow coalition in which liberals, social democrats, greens, socialists and christian parties are all together. But the prime minister is from a pro-business party and the finance minister, although a Social Democrat, represents a rather tough line in economic thinking. I guess we have to see how it will play out.

Finnish Consumer and Business Confidence very low – bad news!

According to the Finnish news service YLE, both consumer and business confidence is slipping. The trend regarding consumers is monitored through the ‘consumer barometer’ (in Finnish) and although it is obviously a sample of the wider population, it might be representative enough. The news explicitly states that the consumer confidence is at the lower levels of longer period (though not as low as in 2009).

Regarding business confidence, the Finnish employers federation EK reports that business confidence is very low, and especially in construction it is plunging (is this related to the possibility of a Finnish housing bubble?). I don’t know the construction of the confidence indicator EK uses but it is bad news.

It is bad news because as I aimed to indicate here, the Finnish economy was to some extent supported by fairly solid domestic demand. But if both consumer and business confidence go the way of the Titanic, then it is unlikely that the Finnish economy will rebound anytime soon because these ‘moods’ affect investment as well – in all likelihood.

Pro-growth union action

“IG Metall Wins 5.6 Percent Pay Increase in Bavaria – Bloomberg” http://feedly.com/k/14kRiOl

Finnish unions should aim for significant increases in order to safeguard domestic demand.