Finland: Round one victory over coronavirus

The Finnish economy survived the coronavirus crisis in the first half of the year better than expected. During the summer, domestic demand recovered rapidly from the sudden halt in the spring. The economic stress test continues, however. The uncertainty caused by a second wave of infections threatens to slow down the recovery, and the outlook for the export market is weak.

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Nordea Economic Outlook September 2020 coverThe coronavirus has dominated people’s lives and the economy’s development this year. The statistics for the first half of the year indicate that the Finnish economy has contracted less than expected and more moderately than the economies of many other countries. In the second quarter, Finland’s GDP shrank by 6.4% year-on-year, while across the entire EU, GDP fell by 14%.

The fact that the epidemic was brought under control relatively quickly has been key for the Finnish economy. This has made private consumption safe, allowing many service sectors to recover quickly from the collapse that took place in the spring. Meanwhile, manufacturing and construction have been kept going, and good IT capabilities have helped information workers switch smoothly to teleworking.

 The economy is forecast to contract -5% this year, and next year GDP is forecast to rebound and grow by 3%. In 2022, the economy is expected to return to near its normal 2% growth. The risks facing the economy, however, have not disappeared, and the forecasts include a considerable degree of uncertainty for the current year as well.

The late-summer increase in the number of infections in Finland and the rest of Europe, as well as uncertainty over how the second wave will play out, are slowing economic recovery in the areas of exports, investment and private consumption alike. The virus will continue to cast a shadow over the economic recovery for a long time.

The forecast includes the assumption that the coronavirus situation will remain moderate and no sweeping restrictions will have to be implemented. A vaccine is expected to provide relief around the mid-point of next year, helping us reach a normal situation in 2022.

Finland: Macroeconomic indicators

2018 2019 2020E 2021E 2022E
Real GDP, % y/y 1.5 1.1 -5.0 3.0 2.0
Consumer prices, % y/y 1.1 1.0 0.4 0.8 1.1
Unemployment rate, % 7.4 6.7 8.0 8.0 7.0
Wages, % y/y 1.7 2.1 1.6 2.2 2.0
General gov. budget balance, % of GDP -0.9 -1.1 -7.5 -4.0 -3.0
General gov. gross debt, % of GDP 59.6 59.4 70.0 72.0 74.0
ECB deposit interest rate (at year-end) -0.40 -0.50 -0.50 -0.50 -0.50

The fact that the epidemic was brought under control relatively quickly has been key for the Finnish economy.

Juho Kostiainen, Nordea Senior Analyst

Furloughs have provided a partial buffer against rising unemployment

The number of workers furloughed in the spring briefly exceeded 170,000. This number has declined over the summer, falling to 65,000 workers in mid-August. The largest number of furloughs took place in the hotel and restaurant sector and in retail. While some of those furloughed have returned to work, job losses have not been avoided. There were 47,000 more unemployed job seekers in July than a year ago. Unemployment is expected to continue to grow throughout this year. How the second wave of the pandemic plays out will also be crucial for the employment trend this autumn.

Charts showing Finnish furloughed and consumption

Card data shows private consumption rebound

Card data published by Nordea indicates that the rebound in domestic consumption has been faster than we expected. Domestic card purchases were already higher in early June than a year ago. The trade in goods, in particular, has been strong throughout the crisis.

Card purchases in the service sector began to recover in May, reaching last year’s level in July. However, differences between sectors remain high. The culture and public transport sectors are still well below last year’s level, whereas restaurants have already rebounded to where they were a year ago.

In normal times, Finns spend more money abroad than foreign tourists do in Finland. The diversion of tourist spending to the domestic economy this summer has supported the domestic market’s recovery from the sudden stop in the spring. The absence of foreign tourists and the low level of business travel, however, will continue to strain the tourism sector outside the Finnish holiday season.

Furlough compensation and repayment holidays granted by banks have helped households, although they won’t fully make up for the drop in earned income. Disposable income will fall this year since the employment rate will remain below last year’s level.

Government and banks have helped businesses weather the crisis

The coronavirus crisis put many companies in financial trouble. However, many of them have been aided by the pick-up in economic activity over the summer and by government subsidies and loan guarantees.

The ECB’s loose monetary policy, which has kept interest rates low, as well as flexibility in banks’ capital requirements and banks’ strong balance sheets have made financing readily available, allowing companies to borrow to make up for their cash shortfall.

The strong pre-crisis order backlog in the manufacturing sector enabled companies to maintain their production while foreign demand deteriorated during the spring.

That said, the volume of new orders has decreased sharply, which will pose challenges for the export industry. Finland is a post-cyclical economy due to the high proportion of investment goods in its exports. Businesses across the world appear to be less willing to invest due to weaker demand, a fact that will have a negative impact on Finland’s manufacturing output and the performance of its export sector.

The deteriorating outlook for orders will also curb domestic investment. And if investment remains low for a prolonged period, it will also significantly weaken the long-term growth outlook.

Public finances have been hit hard

The coronavirus crisis has dealt a severe blow to Finland’s public finances. Support packages for businesses, coupled with the rise in unemployment and furlough benefits, have increased public spending substantially. At the same time, tax revenues have been much smaller than last year, especially those from corporate and value added taxes.

Corporate tax revenues have been adversely impacted by the collapse in corporate profits, while value added taxes have decreased due to the contraction of the economy and the possibility to postpone their payment until next year.

Even if the crisis for the most part turns out to be short, the economic decline and subsequent recovery will weaken public finances significantly in the coming years, not just this year.

The ageing of the population will increase spending pressures year by year, while the number of working-age citizens continues to decline. In the coming years, public spending will have to be adjusted, and employment will have to be boosted in order to balance public finances.

Charts showing Finnish new manufacturing orders and government revenue and expenses

Housing market is functioning well

The number of transactions in the housing market collapsed in the spring, as general uncertainty and the difficulty of showing homes restrained buyers and sellers alike. During the summer, housing sales picked up quickly.

No major movements have occurred in housing prices, and the long-standing divergence between housing prices in attractive cities and the rest of the country appears to continue unbated. Low interest rates and pent-up supply and demand will stimulate housing sales for the rest of the year. While the number of new building permits fell in the spring, housing production has continued at a good clip during the coronavirus crisis. However, uncertainty will limit commercial construction, in particular.

Significant uncertainty remains over the recovery

The rapid recovery seen during the summer is partly due to the unwinding of pent-up demand. As we head into the autumn, the recovery is expected to slow down. Even though a majority of businesses appear to have survived the first wave of the coronavirus fairly well, there are some operations that will have to be shut down or drastically downscaled. It will take some time before new jobs can be created, which means it will also take time for the economy to return to its pre-crisis levels.

The recovery of the global economy will go a long way towards determining the speed at which Finland’s export sector will rebound. Therefore it is now more important than ever to maintain Finland’s competitiveness. In the aftermath of the eurozone debt crisis, the Finnish economy was much slower to recover than that of other countries due to, among other things, a deterioration of its cost competitiveness during that crisis. Such a situation should now be avoided at all costs.

A second wave of the pandemic and a re-closing of the economy would put the entire corporate sector, and the government finances that partially supported it during the first wave of the crisis, on the ropes. A faster-than-expected recovery is possible if an effective vaccine can be quickly made available and stimulus measures begin to have a tangible impact in our export markets.

Read more about the Nordea Economic Outlook: Bouncing Bank, and watch recorded webinars with our chief economists (available in English, Finnish, Swedish, Danish and Norwegian).

Author:

Juho Kostiainen, Senior Analyst, Finland
Juho Kostiainen, Nordea Senior Analyst

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