New figures released by Statistics Finland show a sharp, sudden drop in gdp last year.

Finnish GDP took a historically large tumble last year. According to figures released on 1 March by Statistics Finland, total production contracted by 7.8 per cent. The national accounts show that the economy plunged into recession over a mere three months in response to collapsing export markets.

“At the beginning of the 90s GDP fell by around ten per cent, but it happened over a three-year period. The last time total production contracted so sharply was in 1917 and 1918,” said Tuomas Rothovius, head of national accounts at Statistics Finland.

Rothovius explained that the fall in production was quite violent. Finland dropped down to a new, lower level of production quite swiftly. The situation was quite different at the beginning of the 1990s, he said.

But as Director-General Heli Jeskanen-Sundström points out, the key difference is that this time Finland is in the euro and Finnish banks are in good shape. Thanks to this, interest rates are low, households have access to long-term loans, and even the finance sector’s results for last year remained positive.

It began with the financial crisis

The international financial crisis triggered the most rapid economic contraction in the history of independent Finland. Last year’s fall in total production was chiefly due to a collapse in exports and industrial output. They caused a drop in private consumption, inventories and net exports. The slowdown in industry explains most of the decline in consumption and inventories. Construction also saw a powerful contraction.

“The free fall was concentrated on three months: March and December of the year before last, and January of last year. Since then production has continued at a low level,” said Ilkka Lehti-
nen, development director at Statistics Finland. The spiral began with the escalation of the global financial crisis.

The value of GDP dropped last year to 171 billion euros, from the previous year’s 184.2 billion. The economy sunk into recession from what, in real terms, was the highest level of total production to date. Record-breaking 2008 had been preceded by a phase of exceptionally strong growth.

Employment surprisingly stable

According to Lehtinen, the rapid fall is reflected in all indicators. Twenty billion euros’ worth of exports evaporated. Since then, exports have remained fairly stable. As demand in export markets fell, so too did prices.

“Industrial export prices fell by nine per cent. Last year export prices were an average of 13-14 per cent lower than in 2000. If the price level of exports was the same as at the turn of the millennium, Finland would be doing quite well now with her current production volumes,” Lehtinen noted.

According to Lehtinen, employment has held up surprisingly well, even if 100,000 jobs have been lost. The employment rate dropped by three per cent over the whole of last year, and the number of hours worked fell by 5.9 per cent.

Households’ real incomes grew last year by an average of one per cent. Because unemployment rose, total national wages earned decreased by one per cent, despite a rise in the average wage level for those still earning. Households cut back on consumption, even though their incomes grew. Consequently, the savings rate for households turned positive at 2.5 per cent. The recession wiped out 15 per cent of the government’s tax revenues.

As a result of rising expenditure and falling revenues, last year the deficit in central government finances blew up to 8.2 billion euros. Statistics Finland reports that last year the state deficit climbed to 2.2 per cent of GDP. The deficit was chiefly due to the weakening state of government finances. A year earlier, the government recorded a surplus equivalent to 4.2 per cent of GDP.

Last year the overall Finnish tax burden fell by a few tenths of a percentage point to 43 per cent. Taxes and compulsory social insurance levies brought in 73.6 billion, or almost eight per cent less than in the previous year. The State’s tax revenues fell by 15 per cent.

The government gathered 33.8 billion in tax revenues last year, or just under 6 billion less than the year before. Government debt climbed to 65.4 billion, a growth of 11 billion on the year before.

HEIKKI KARKKOLAINEN – STT
MATTHEW PARRY – HT