Economic Fact Book: Finland

Finland is a well-functioning economy with good institutions, a high educational level and strong fundamentals for economic development despite current challenges. Finland is ranked 11th in the world in the World Bank’s Doing Business report, which is the highest within the euro area. According to Transparency International’s Corruption Perception Index, Finland has the lowest level of corruption in the world's public sector. Finland fulfils all the Maastricht criteria and is expected to continue to do so. As a result government bond spreads to Germany are low. The current account has changed from a surplus to a deficit but the deficit is far from alarming. There is no external debt.

Finland was hard hit by the financial crisis and the resulting slump in global trade. Two structural changes also occurred nearly simultaneously: the forestry industry started to suffer from the global decline in paper demand, and production was also moved closer to growing markets in Asia and Latin America. Secondly, the important export sector of electronic products, namely Nokia, lost its dominance and plunged in a matter of a few years. Besides the two structural shifts, Finnish competitiveness compared with Germany and Sweden decreased due to large increases in unit labour costs. The near-term recovery depends to a large degree on the economic development in three main export markets (Sweden, Germany, Russia), as well as the ability of the Finnish economy to develop new industries and products to replace the ones lost. No quick recovery is in sight as Finland’s exports have a high share of cyclical investment goods and structural shifts take time.

The government continues to have broad support, although opposition parties have gained more support in recent surveys. The stance on euro rescue packages remains cautious and Finland is likely to demand collateral in future cases as well. The government aims to narrow the budget deficit by cutting expenditure and raising some taxes; general VAT was raised from 23% to 24% in 2013. Due to long-term challenges, especially ageing, fiscal policy remains prudent. House prices have risen generally in line with earnings and Finland has the lowest housing loan rates in the euro area. In Central Helsinki, prices clearly exceed the national average, which is largely explained by lack of supply and a growing population. Together with a weak but stable economic outlook, national house prices are likely to move sideways in the near future, which would mean a further decline in real house prices which began in 2011.

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