Finland - the Finnish economy and Finland's trade with the U.S

Business America, July 15, 1991

Long Period of Growth Comes to a Screeching Halt. But New Government Hopes to Engineer a Soft Landing The Finnish expansion collapsed last year following a period of average annual growth rates of 4 percent in 1985-89 and a gain of 5.2 percent in 1989. Tight monetary policy, together with export-numbing recessions in the OECD countries and internal difficulties in the U.S.S.R., hit at once. There is little prospect of salvaging much economic growth this year, but the government hopes that demand recovery in OECD countries will drive real gross domestic product up about 1.5 percent in 1992. Despite the current recession, Finnish industry's dependence on maintaining export competitiveness, combined with a high domestic cost environment, makes it necessary increase the value-added component of domestic processing. This translates into strong demand for sophisticated, state-of-the-art machinery and equipment, reports the U. S. Embassy in Helsinki in the following report.

Finland's long period of economic growth came to an abrupt halt in 1990. Growth in private consumption-the economic engine during the boom-is slowing to zero in 1991, exports are declining (particularly to the Soviet Union), and investment is drying up The Ministry of Finance projects a O.5 percent decline in Finland's real gross domestic product for full-year 1991, while private economists put the expected decrease closer to 2 percent.

A better external balance and lower inflation have been the government's priorities. The new government sworn in just before May I will also have to deal with mounting unemployment caused by falling production. On the good news side, Finland's current account is not worsening, and inflation is decelerating, thanks to tight monetary policy. The trade balance should be in surplus this year due to a substantial drop in imports, while the current-account deficit could decline to 4 percent of GDP. Inflation is anticipated to decline to the OECD average of 5 percent.

The new government faces a number of policy dilemmas. Measures to alleviate unemployment would conflict with the stated objectives of lowering foreign borrowing and the current-account and budget deficits. The need to finance foreign borrowing with high domestic interest rates will act as a constraint on flexibility in monetary policy. Should aggregate public spending be sharply cut without an appropriate monetary policy being implemented, the Finnish economy runs the risk of pancaking as the government attempts to engineer a soft-landing. The success of the government's stated goal of avoiding the 1970s devaluation inflation cycle depends on very moderate labor settlements and domestic inflation well below OECD levels. Restoration of export competitiveness is the key to sustained economic recovery.

The other major policy choice facing Finland's first non-socialist government in two decades is the form of association with the European Community. Whether this involves the conclusion of the, European Economic Area (EEA) agreement between the European Free Trade Association (EFTA) and the EC, or eventual full membership, the Finnish economy must adjust to European rules. An, improvement in macroeconomic performance is essential for Finland to meet the challenges of an integrating Europe and a more competitive global trading environment.

With a 6.8 percent market share in Finland in 1990, the United States ranked as Finland's fifth largest supplier, following Germany, Sweden, the U.S.S.R., and the United Kingdom. The main U.S. exports to Finland were: computers, software, and peripherals; industrial machinery; aircraft and parts; road vehicles; electrical machinery; and measuring, testing, and analyzing instruments.

The composition of Finnish imports and exports has shifted over the past decade toward more manufactured goods. In 1977 nearly one-fourth of Finland's purchases from abroad were petroleum products from the Soviet Union. By 1989 this share had declined to less than 10 percent. Manufactured goods, which accounted for 77 percent of Finnish exports in 1977, rose to 86 percent in 1990, while exports of raw materials dropped from 16 to 13 percent. This trend is likely to continue as Finland's forestry and metals industries expand their downstream processing of wood and metal raw materials.

Despite the current recession, Finnish industry's dependence on maintaining export competitiveness, combined with a high domestic cost environment, makes it necessary to increase the value-added component of domestic processing. This translates into strong demand for sophisticated, state-of-the-art machinery and equipment.

Opportunities for U.S. business are best in the following product lines: computers and peripherals, electronic components, electronic industry production and test equipment, telecommunications equipment, business and office machinery, medical electronics, automotive parts and accessories, avionics and ground support equipment, pollution control equipment, and industrial controls.