Finnish government struggles against recession threat

HELSINKI, Nov 9, 2011 (AFP) - As Finland grapples with the impact of the eurozone crisis on its own economy, analysts remain divided about its prospects for sustainable growth.

HELSINKI, Nov 9, 2011 (AFP) - As Finland grapples with the impact of the eurozone crisis on its own economy, analysts remain divided about its prospects for sustainable growth.

The question on everyone's lips is: Can the small, heavily export-dependent Finnish economy side-step a recession amid the eurozone turbulence?

According to Raimo Sailas, a straight-talking senior finance ministry bureaucrat, the answer is an unequivocal "No."

With Finland's economy expected to contract in both the current quarter and in the first three months of 2012, he sees Finland facing a recession.

"I recently came across information that isn't yet all public, indicating that global trade is contracting faster than it did ahead of the ... 2008 recession," Sailas said in a recent interview with public broadcaster YLE.

"The government must act quickly if a recession is on the way," he added.

OP-Pohjola bank analyst Reijo Heiskanen was however less pessimistic, telling AFP that while two successive quarters of economic contraction constitutes a recession, the Finnish economy was expected to rebound in the second quarter of 2012.

And since other indicators like consumer confidence and employment had not declined, the expected two-quarter slump in economic growth could merely be described as a "technical recession".

Finnish unemployment dipped slightly to 6.9 percent in September down from 7.0 percent a year earlier, and although official data has shown a steady decline in consumer confidence in the overall economy, there was little change since the beginning of the year in consumers' confidence in their own finances.

Sailas however stressed that prior to the 2008 downturn, employment levels in Finland were higher than they are now, while exports were stronger.

"In other words the basics at this point are very poor," he stressed in the YLE interview.

Given disintegrating expectations regarding the wider eurozone, Sailas said Finland needs to improve competitiveness, balance public finances and maintain prudent economic policy.

In 2010 when Prime Minister Jyrki Katainen was finance minister, the government passed a 50-billion-euro ($60-billion) stimulus budget to try to stave off economic decline and stimulate employment.

The government has maintained its forecast of economic growth next year, although it in August lowered its expectations to 1.8 percent growth for 2012 from the 2.8 percent forecast in March.

Heiskanen insisted things were not too bad.

"Back in 2008 interest rates were high so this affected consumer behaviour. Now they're low and falling slightly so the situation is different," he said.

"There is risk but people can be calm because their situations are stable and their finances look good," he added.

Helsinki-based welfare services director Jarmo Koekkoe agreed, pointing out there were no signs yet that people were suffering on the ground.

"The recession in 2008 hit the public services in Finland badly and they still haven't recovered. The new situation hasn't affected anyone yet in that regard," Koekkoe noted.

But while the situation at home may not be too bad, external factors are even more toxic than prior to the financial meltdown three years ago and analysts agree that the menu of options in Finland is limited.

Back then the financial profligacy could be attributed to the banking sector, while today's mea culpa's are being sung by the governments of Greece and Italy.

Sovereign debt has spiraled out of control, with Athens teetering on the brink of default and Italy facing record high borrowing rates near those that forced Greece, Ireland and Portugal into seeking bailouts.

"Today global and European factors are important," said Penna Urrila, chief economic policy advisor for the Finnish employers organisation EK.

"We need to follow the surveys to see how fast international developments are being reflected in Finland," he told AFP.

Regardless of the accelerating global crisis, Heiskanen meanwhile insisted "it's important for government to stick to the plan to balance state finances rather than introduce panic-driven measures."