Finland’s Economic Contraction Deepens on Industrial Decline

Finland’s economic contraction worsened in the first quarter, underlining the depth of the structural industrial slump in the northernmost euro member.

Gross domestic product contracted 0.4 percent from the prior period, adjusted for seasonal variations, after a revised 0.2 percent drop in the fourth quarter, Statistics Finland said today in Helsinki. That matched the estimate of four economists surveyed by Bloomberg. Output fell 0.6 percent in the year, adjusted for working days. The economy last grew in the first quarter of 2012.

“Exports were a clear disappointment, and to some extent investments,” Reijo Heiskanen, economist at OP-Pohjola Group, said by phone today. “Exports were supposed to bring a recovery during the winter -- as long as we don’t see export growth, the economy will at best be stagnant.”

Finland has endured two recessions since 2008 after its economy lost much of the output of two key industries: paper and electronics. A shift to online publications has led to a decline in demand for newsprint worldwide and the failure of Nokia Oyj to grasp the emergence of smartphones led to the cull of consumer electronics in the only Nordic euro nation.

Export Weakness

A weak domestic economy is standing in the way of recovery and exporters have yet to latch onto a global upswing. Industrial output shrank 2.6 percent in the quarter, while construction grew 0.2 percent. Services gained 0.1 percent from the prior period. Imports fell 2.9 percent, more than the 1.9 percent drop in exports.

“All elements of depression start to be in place,” Nordea Bank AB economist Pasi Sorjonen wrote in a report yesterday. GDP will shrink 0.5 percent this year, a third consecutive year of declines, he forecast.

“Finland’s been through a long period of economic weakness,” Heiskanen said. “Whether you call that a recession or a depression may be splitting hairs -- we’re in negative territory waiting for the turn for the better.”

Government Borrowing

Finland’s government has responded to the recessions by expanding borrowing, allowing public debt to rise by 47 billion euros ($64 billion) net since 2008, to a total of 110 billion euros, according to the statistics office. It has also cut spending and raised taxes by 6.8 billion euros to defend its AAA credit rating and avoid debt growth from getting out of hand.

The government has sought to temper some tax increases, such as higher levies on energy, by reducing the company tax rate to 20 percent from 24.5 percent in January. It sold its stake in construction company Destia Oy for 148 million euros last week in the first step toward a goal of raising 1.9 billion euros by selling assets by the end of next year.

The government also added about 200 million euros in funds meant to spur growth in last month’s supplementary budget, while Social Democratic Party chief Antti Rinne, who is sworn in as finance minister tomorrow, argues that the state should spend more to create jobs. That won’t help, according to Nordea.

“Deep down, the economic problems are structural, so they cannot be fixed with an expansionary economic policy.”

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