Finland’s economy falls into technical recession in H2 2015, downside risks to GDP growth outlook

Finland's economy fell back into recession in H2 2015; however, this is expected to be for a brief period of time. But the threats to below-consensus GDP growth forecasts remain on the downside. The first estimate for Q4 GDP implies that the economy contracted 0.1% in Q4 after a 0.6% fall in Q3. The disappointing performance is expected to have been mainly because of external factors. The weakness of Russian economy has also weighed heavily on Finland. The Russian economy is facing challenges from high inflation, lower oil prices and tight monetary policy.

This has considerably impacted Finland's exports. Finland's goods exports to Russia from its total share declined from 9.6% in 2013 to 8.3% in 2014. It is expected to have declined to less than 6% in 2015. In Q4, Finland's exports to Russia are expected to have declined by €350mn, as compared to Q4 2014. For the same period, Finland's real GDP fell by €440mn. While Russia is likely to remain in recession in 2016, output is not expected to drop sharply as it did in 2015. This implies that exports from Finland will not fall as much either.

However, the advancement towards resolving fundamental issues in the Finnish economy has been slow. Meanwhile, Finland's competitiveness continues to be a problem. The country's labor costs have increased more sharply than in the euro area since the financial crisis. Finland's Prime Minister Sipilä's plan to form an agreement between unions and employers that will cut labor costs has been put on hold. If the ECB further eases monetary policy in March, the euro might depreciate and improve Finland's competitiveness with non-euro area nations.

However, this will not improve Finland's competitiveness against other euro area members, with which it carries out around 40% of its trade.  Even if the Finnish economy returns to growth in 2016, any growth is expected to be small.

"Given the weaker outlook for Russia on the back of lower oil prices, the risks to our GDP growth forecast for Finland of 0.5% this year (the consensus is 0.8%) are skewed to the downside", says Capital Economics.