Finland’s efforts to protect its stable AAA rating and keep borrowing costs down aren’t helping its businesses, which say they need to cut jobs even as the rest of Europe surfaces from its crisis.
While the government in Helsinki is pegging its recovery hopes to fiscal restraint, Finland’s biggest hurdle is its failure to adequately diversify its industries, according to Tiina Helenius, chief economist at Svenska Handelsbanken AB in Helsinki.
After coming to grips with the decline of Nokia Oyj -- once a provider of growth and jobs to the Finnish economy -- the northernmost euro member is struggling to find new industries to pick up the pieces. More than a dozen Finnish companies reduced their profit outlooks over the past six weeks, while stalwarts of heavy industry such as Outotec Oyj say they’ll need to cut hundreds of jobs.
“The difficulties are related to Finland’s industrial structure,” Helenius said in a phone interview. “The global industrial and investment cycles are the central drivers for our economy. Unfortunately, they haven’t performed on the level we’re used to.”
Finland’s economic pain suggests that governments bent on protecting their budgets may risk fueling debt relative to gross domestic product as their economies contract. Prime Minister Jyrki Katainen, who leads a six-party coalition, said last month public debt will breach the European Union’s 60 percent threshold to GDP for the first time next year even after a series of budget cuts.
Companies that cut their profit outlooks in the past month and a half represent about 16 percent of the market value of Nasdaq OMX Helsinki, excluding firms listed on the exchange that are domiciled abroad.
While Finland holds a higher credit rating than any other euro nation, its economy will shrink more than the 17-nation bloc this year. Finnish GDP will fall 0.6 percent in 2013, versus a 0.4 percent decline in the euro area, the International Monetary Fund said on Oct. 8. The unemployment rate rose to 7.6 percent in September from 7.1 percent a month earlier, the statistics office said yesterday. Exports dropped 11 percent in August from a year earlier, bringing the year-to-date decline to 4 percent, the customs office said on Oct. 8. Sales of machinery, forest industry goods, steel and pharmaceuticals shrank the most, it said.
Part of Finnish industry’s problem is its failure to latch on to the growth in consumer demand that’s coming from China, according to Kim Gorschelnik, head of equity research at Tapiola Bank Oyj in Helsinki.
Outotec, the Espoo-based smelter supplier, started talks last week on cutting 500 jobs and lowered its sales and profit forecasts as mining clients reduce capital spending. Other machinery makers suffering from lower demand include Helsinki-based rock-crusher manufacturer Metso Oyj, cargo-handling equipment maker Cargotec Oyj and Hyvinkaa-based Konecranes Oyj, a cranemaker for ports and shipyards, which all cut their full-year guidance last week.
“These companies are quite heavily dependent on China’s growth and infrastructure projects in the country,” Gorschelnik said by phone. “As Chinese demand shifts toward consumer goods from investment goods, it hits the Helsinki stock exchange pretty hard.”
Consumer goods account for about 10 percent of Finnish exports and investment goods about 29 percent, according to the customs office. The remaining 61 percent are raw materials and energy products. Sweden and Germany export twice as much or more in consumer goods, according to Helenius.
Finnish industrial-machinery makers Metso Oyj, Outotec and Waertsilae Oyj are among companies facing tougher conditions for years after benefiting from booming markets in the past decade, Goldman Sachs Group Inc. said in a report on Oct. 11.
Warnings about Finland’s faltering industry haven’t fallen on deaf ears. Katainen is due next month to unveil details of about 9 billion euros ($12.4 billion) in structural measures intended to boost competitiveness and improve the supply of labor. He’s also agreed to lower the company tax rate to 20 percent from 24.5 percent starting next year.
Katainen’s National Coalition party fell to third place in a poll by newspaper Helsingin Sanomat today, behind opposition Center Party and “The Finns” party for the first time since coming to power in 2011.
Finland’s experience may be a cautionary tale showing how rapidly an economy’s fate can turn. According to Helenius, the nation failed to invest in growth industries when the time was right.
As a result, even companies catering to consumer markets are cutting profit forecasts. These include meat producers Atria Oyj and HKScan Oyj, the biggest Nordic tiremaker Nokian Renkaat Oyj as well as residential builder YIT Oyj and the supplier of construction equipment Cramo Oyj.
“The problem is that our industry hasn’t perhaps invested enough in product renewal and innovation,” Helenius said. “The rush before the financial crisis, when many Finnish companies very successfully rode the boom of emerging markets, may have led to many neglecting things like product differentiation, development and creating new business areas.”