Globalisation, which once had a significant beneficial impact on the Finnish economy, is now in a transitional stage, and Finland’s position is no exception, as there is growing evidence that the country has begun to lag behind in terms of investment attractiveness, education, competencies and labour resources, Azam Muradov writes.
International practice shows that global economic factors play a decisive role in shaping the well-being of national economies. In this context, we turn to the experience of Finland, which now is faced with numerous challenges and unfavourable trends in its economic policy.
Despite all its previous achievements and innovative potential, the Finnish economy is currently beset by a number of serious structural problems, including a decline in production and a slowdown in economic growth, significant consumer and industrial inflation, high unemployment, a shortage of skilled labour, a chronic budget deficit with a rising public debt, a negative trade balance, and a decline in foreign trade, especially with Russia, which had been one of Finland’s most important trade and economic partners for decades.
The starting point is the fact that previously, under the government led by Sanna Marin (SDP) in 2019–2023, the state budget deficit in 2022 reached a record 18.6 billion euros (0.8% of GDP). According to estimates issued by the Ministry of Finance of Finland, this year it will increase to 2.4%, and in 2024 – to 3.2% of GDP. The ratio between the country’s total public debt and its GDP has increased from 59.5% in 2019 to 73.3% (196.9 billion euros) at the end of 2022. State expenditures on interest payments on public debt in 2023 will grow to 2.6 billion euros (+209.5% y/y). Average annual inflation increased from 1% in 2019 to a historic high of 7.1% in 2022, for the first time since 1984.
Although the average employment rate increased by 3%, its growth was driven by an increase in the number of part-time workers, which means that overall labour productivity, or the number of worked hours, did not increase.
Against this background, on June 20, 2023, under the slogans of achieving balance in the economy and the optimisation of public spending, a new government coalition under the leadership of Petteri Orpo (NCP), came to power. It included representatives of the National Coalition Party, the True Finns, the Swedish People’s Party and the Christian Democrats. One of the key provisions of the new government programme was to stabilise the national economy, which entailed a significant reduction in government spending (about 4 billion euros) during the new cabinet’s tenure, as well as a number of structural measures that will allow Finland to achieve positive effect in the revenue of government finances, approximately another 2 billion euros.
By the end of 2022, the national GDP of Finland had reached 268.7 billion euros; the growth rate of the gross domestic product was 2.1%. At the same time, already in autumn, the quarterly indicators of the national economy began to reveal a negative trend, which continues to this day. Because of current processes in the global economy, in Finnish industry and services, as well as taking into account the changes in fiscal policy after the parliamentary elections, all leading experts (the Ministry of Finance of Finland, Bank of Finland, ETLA Economic Research Institute, and the European Commission) are unanimous in their assessments and believe that in 2023, we should expect stagnation or even decline in the Finnish economy. The Ministry of Finance and the Bank of Finland expect a fall of 0,5% and 0.2% in 2023 and in 2024, respectively.
Such a macroeconomic situation inevitably affects the activities of Finnish companies and ordinary citizens. According to the Asiakastieto (customer information) agency, by the end of last September, 194 Finnish companies with a turnover of at least 1 million euros were declared bankrupt (+50% y/y). The large companies that have filed for bankruptcy have about 3,200 employees – more than half of all jobs lost due to bankruptcies in 2023.
The total number of bankruptcies for the period January-October 2023 amounted to 2,726 companies (+ 24% y/y). Allianz Trade predicts that the number of companies filing for bankruptcy this year will grow much faster in Finland than in the EU on average – to approximately 3,700 thousand (+25%) by the end of the year.
The situation is unfortunate in many industries, for example, in the construction sector and the high-tech and export-oriented wood and paper industry, which is suffering from weakening demand and rising costs, including due to restrictions on the import of Russian raw materials. Optimisation efforts are common, especially in the wood and paper industry. The decline in construction, in turn, has led to a decrease in demand for lumber.
Industrial production in September 2023 decreased by 1.9% y/y. The largest year-on-year declines occurred in forestry (-18.8%), mining (-18.5%), electronics and electrical industry (-16.1%), and chemicals (-6%). The volume of new orders in the manufacturing industry decreased by 21.1% y/y. Orders fell the most in the chemical industry (-34.6%), metallurgy (-19.1%), and in the production of paper (-16.7%). In the first nine months of 2023, the volume of new orders decreased 11% year-on-year. The decline has been recorded for eight months in a row in all major industries.
In turn, foreign trade turnover decreased to 113.1 billion euros (-12.6% y/y), including exports – up to 55.9 billion euros (-6.8%). In November, the Finnish Customs Service reported that Finnish export volumes were at around their 1999 levels, with export and import prices falling since June 2022. In addition to prices, there have been significant changes in export volumes. This year they were lower than in 2010, which is one of the main reasons for the slow growth of the Finnish economy.
The Finnish Business Council (EC) believes that the winter will be difficult for many Finnish companies, and the number of bankruptcies and layoffs will remain high in the coming months. According to the organisation, the Finnish economy is heading towards recession and is doing worse than some statistics suggest. The Bank of Finland states that economic recovery will take longer time than previously expected.
The reaction of Finnish citizens to economic problems is often expressed in protests. Trade unions oppose government reforms in the field of social security and the labour market. Throughout November, 24-hour strikes were held in various regions of the country, and at workplaces in large companies, particularly in the technology industry.
Of greater concern is Finland’s long-term growth potential. Economists emphasise that the entire system of global economic stability is in a state of transition, and this could significantly weaken long-term economic growth. Globalisation, which once had a significant beneficial impact on the Finnish economy, is now in a transitional stage, and Finland’s position is no exception, as there is growing evidence that the country has begun to lag behind in terms of investment attractiveness, education, competencies and labour resources.
In general, authorities, business and society openly discuss the causes of the country’s economic problems and connect them with the current geopolitical situation. For example, the Bank of Finland lists them this way in order of priority in its report: “the conflict in Ukraine, the energy crisis, a surge in inflation and rising interest rates are consequently weakening the global economy. At the same time, hostilities and the energy crisis are putting pressure on growth in Europe especially noticeably. Finnish exports are constrained by the marked decline in key Finnish export markets”.
Few people, however, talk about the real causes of these problems, which lie in the sanctions policy of the European Union against Russia, which is actively supported by Finland itself. Suomi, once a model welfare state in Northern Europe, is in a difficult situation and the current problems of its economy require the adoption of comprehensive strategies to restore and maintain stability. It is believed that without establishing constructive trade and economic ties with its eastern neighbour, solving this array of problems will be at least difficult, if not impossible.
