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Finland's star fades as economy sputters

Source: Reuters - Thu 26th Nov 2009

Once a top European performer, Finland has posted some of the continent's worst economic data this year and, barring the emergence of a breakthrough industry, faces years of slow growth as its population ages.

Economists say the Nordic country's weak outlook stems from factors including the lack of a successor to the once-robust mobile phone sector; an ageing population; the slowing electronics, forestry and capital goods industries; and a relatively small services sector.

"With a rising industry to feed productivity like Nokia did in the past, things could look different, but at the moment there is no such field in sight" said Bank of Finland economist Timo Hirvonen.

The Paris-based Organisation for Economic Co-operation and Development, in a forecast released on Thursday, also pointed to "significant labour market rigidities" in Finland, saying these would fuel rising unemployment.

"Forthcoming wage negotiations should align outcomes more closely to productivity within firms" it said.

Underlining the gloom, a survey from the Ministry of Employment and the Economy (TEM) on Thursday showed Finnish electronics and engineering firms expect only modest growth until 2011.


While signs of recovery spark elsewhere in Europe, export-dependent Finland has yet to see the light after being hit hard in 2009 as ailing demand has sapped sectors from electronics to pulp and paper to steel. 

Unlike in Sweden, where the weaker crown has eased the pain of some companies, euro-zone member Finland has had no such luck.

Gross domestic product contracted a record 11.6 percent year-on-year in September, marking the twelfth straight month of contraction, and industry output has fallen over 20 percent on an annual basis for eight of the past nine months.

The Finance Ministry expects GDP to bounce a scant 0.3 percent in 2010 after a six percent drop in 2009, with Minister Jyrki Katainen saying this month growth should settle at around two percent per year once the economy stabilises.

But the numbers, including forecasts for unemployment to top 10 percent next year, are a far cry from the figures of the late 1990s as Nokia soared to the top of the mobile phone market, or even the 4.9 percent GDP rise notched in 2006.

Mika Kuismanen, director of the forecast unit at the Finance Ministry, said the ministry's long-term growth forecast for the Nordic country was just below three percent.

"But it will take years for Finland to reach this level" he said.


Economists pointed to Finland's ageing population, among the fastest in Europe, as the biggest worry in coming years.

"The threat of the ageing population is enormous - it's a time bomb, bound to hit us at some point" said Pasi Sorjonen at the Research Institute of the Finnish Economy, adding only immigration could change the demographic trend. 

"When we reach growth (again), we face... swelling public expenditure as retirements increase and more people exit work life than enter it" he said.

The Finance Ministry's Kuismanen said a retirement rush was expected to start next year and run for the following five years, denting productivity.

Finland's four-party government has stressed for many months the need for Finns to consider longer working careers.

Economists said that in the near term, Finland's fate would be tied to that of the export market. Exports last year made up close to 50 percent of Finland's GDP.

"It's a simple picture: we will remain very dependent on international trade also in the future" Kuismanen said.

"Any structural change could hardly be so quick that we could see a compensating contribution from services or private consumption in such a short time" he said.

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