Brighter days ahead

It is hardly surprising that Finns have been feeling a strong sense of deja vu. After all, it is less than 20 years since their country faced a full-blown economic depression, with GDP down by more than 10 per cent and unemployment approaching the 20 per cent mark. The key difference between then and now is that this downturn is not of their own making.At that time the country had been through a debt-fuelled boom. Financial deregulation had boosted the flow of foreign credit. Household and private sector debt had more than doubled between 1987 and 1990. Sounds familiar?
As if the domestic situation was not bad enough, matters were exacerbated by the depressed state of many of Finland's main trading partners, while no country was as adversely impactedby the collapse of the Soviet Union, taking 10 per cent of exports.

General slump

Businesses and individuals alike paid a heavy price. As house prices slumped by 50 per cent, and interest rates rose to 13 per cent, defaults rolled in, resulting in a near-collapse of the country's banking system, requiring the equivalent of a 10-billion-euro (Dh53 billion) bailout and leading to consolidation of the sector. As politicians struggled to cut spending, public debt doubled to around 60 per cent of GDP.

With the general upturn of Finland's main markets, the economy made a slow export-led recovery assisted by a devaluation of the currency and lower interest rates. It's all history now, of course, but it had its consequences, which continue today.

In 1995, for not only economic but also security reasons, Finland (along with Austria and Sweden) joined the European Union, adopting the euro in 2002, the only Nordic country so far to do so. Many commentators attribute Finland's strong performance in recent years to the stability that monetary union has brought the Finnish economy by its policy strictures in the monetary and fiscal domains. That has been complemented by the growth of the successful high-tech electronics sector.

Prior to the current crisis Finland had been among the best-performing of EU countries in terms of average GDP during the period 1999-2007 (3.4 per cent, against the EU average of 2.4 per cent). The public finances responded, and national debt was virtually halved to 33 per cent.

However, the country's dependence on exports brought that record to an abrupt end in the second half of 2008. Having had a current account surplus, alongside a restrained approach to credit growth, Finland experienced a collapse in exports and a rapid contraction in GDP, extending well into 2009. By the spring, industrial production had fallen by more than 20 per cent year-on-year, most sharply in the forestry sector.

Banking sector

Despite the sharp downturn in output and the prospect of rising unemployment (forecast to move into double digits by next year from 7.6 per cent now), some aspects of the economy have held up remarkably well. For instance, the housing market is thought to have fallen by only 5 per cent, and, more crucially, the banking sector, owing to minimal exposure to toxic assets and a focus on traditional banking activities, has fared better than many elsewhere.

In September the Finnish Financial Supervisory Authority reported that “according to stress tests, the capital adequacy of banks and insurance companies would be sufficient even in case of a very severe recession over the [next] two years”, although, with corporate bankruptcies up by 33 per cent in the first five months of this year, banks will not escape unscathed.

Meanwhile, the global economy has shown some signs of stabilising. Besides the actions of other governments to help, Finland's own stimulus package of higher spending (mainly in transport infrastructure and construction) and lower taxes (employer costs) introduced last January amounted to some three billion euros, 1.7 per cent of GDP.

Equally, the European Central Bank's interest rate cuts from close to four per cent a year ago to one per cent have eased the pressure on Finnish business. That contrasts starkly with the last recession, when interest rates rose to 13 per cent.

There is no expectation of a swift recovery, but the Bank of Finland sees some scope for optimism in the economic outlook for 2010, driven by the quality of the corporates on show. It states, "The fundamentals are all in place: company balance sheets are healthy and in terms of their technology, Finnish companies are among the best in the world.'

It's no idle boast. Finnish firms have established strong global market positions, supported by high levels of research and development. No company better illustrates the point than Nokia, the world's leading mobile-phone supplier. There can be few cases where a single company has commanded such a large proportion of a nation's GDP.

Other global leaders include Stora Enso, the Swedish/Finnish venture, but headquartered in Helsinki, which is the largest paper manufacturer in the world, UPM/Kymmene, the third-largest in the same sector, Outokumpu, the world's leading producer of stainless steel, and Wartsila, a market leader in diesel and natural gas engines.

Global trade to pick up
Market analysts have seen light at the end of the tunnel. Helge Pedersen, Global Chief Economist at Nordea, the region's largest bank, mentioned in a September press release that “we are set to witness quite a marked turn for the better … thanks to the pick-up in global trade. The issue, of course, is whether that momentum will be sustained; the world economy still faces head winds of imbalances and other dislocations”.
The latest update from the Bank of Finland revised down its forecast for GDP to a contraction of 7.2 per cent from five per cent, but raised its outlook for 2010. Zero growth is expected next year, up from minus 1.1 per cent, and growth of 1.6 per cent in 2011.
All in all, nothing like as bad as in the early 1990s, despite the extent of the global gloom that there has been — a better view than deja vu.