What MNCs need to know about Finland

August 2, 2017 – This post was written by Annabel Edwards and Athanasia Kokkinogeni, Europe Analyst

The healthy Nordics economies (Finland, Norway, Sweden, Denmark, Iceland) will remain vital to the eurozone through strong trade links in manufacturing, machinery, and energy. MNCs should explore the strong business opportunities provided by the Nordics – particularly Finland, which could act as a safe stepping stone for expansion not only into the rest of the Nordics markets and the eurozone (Finland is the only Nordic using the euro), but also into Russia and the Baltics.

Finland’s economy is likely to grow by an impressive 2.1% YOY in 2017. This will slow down to 1.5% YOY in 2018 due to higher consumer prices and lower investment, as the construction sector passes its peak. However, after years of a muted outlook, the economy is strengthening across most sectors, fueling general optimism.

Consumer spending remains the main pillar of 2017 growth. Therefore, B2C MNCs will be in a position to capitalize on accelerating consumer spending – reaching 1.7% YOY in 2017. The main drivers of this are strengthening disposable income and consumer purchasing power. These are further enhanced by historically prolonged low savings with Finns saving less of each euro earned. The decline in unemployment (from 9.5% in 2015 to 8.4% in 2017) drives the highest consumer confidence in the eurozone. Likewise, the rising consumer purchasing power is bolstered by income tax cuts, relatively low consumer prices, and low ECB interest rates. With interest rates expected to remain low, a key threat is brain drain that could erode Finland’s human capital, and labor market inefficiencies. However, the government is aware and planning reforms to reduce both issues.

On the political side, the election of infamous anti-immigration euroskeptic Halla-aho to the Finns party chairman triggered a near-collapse of the three-party-coalition government in June and the Finns’ split, which saw Halla-aho and his associates ejected from the coalition. Despite the recent reshuffling, the political environment remains conducive to growth. B2G MNCs could face risks related to policy continuity if an early election is called at the oppositions’ request, but this is unlikely as the government continues to hold majority with improving opinion polls.

B2G MNCs will make gains on favorable government reforms. Already boasting the lowest corporate tax of the Nordics (20%), the government is committed to lowering business costs further through the Competitiveness Pact, targeting a 4% decrease in labor costs by 2018 to accelerate labor productivity growth. Government measures will continue increasing investments into transport and renewable energies, in addition to aiding the manufacturing sector, whose production surged to 4.5% YOY in May. In contrast, the government is likely to cut €3 billion from public healthcare spending by 2029, representing a risk for healthcare MNCs.

B2B MNCs are expected to experience favorable market conditions as business credit is accelerating and exports strengthen in H2. Business credit growth surged to 5.9% YOY in April supporting business demand, and business insolvencies declined by 7% in 2016. The economy has become more export-based due to strengthening global demand and Finland’s growing competitiveness. The largest share of Finland’s exports, manufacturing, will continue gathering momentum, with global export demand rising and German demand for exports growing by 1.9% YOY 2017.

Source: Frontier Strategy Group Analyst

EU sanctions against Russia had initially hurt the Finnish economy in 2014 through exports (Russia accounted for 10% of Finnish export sales in 2013), but the threat has since diminished after Finland diversified its exports by improving linkages in stronger, larger growing markets like the US and Germany, whilst Russia’s share has nearly halved by 2016. Finland would capitalize from ending of sanctions towards Russia, but this remains unlikely in 2017, as Russia is expected to refuse compliance with the Minsk agreement – a precondition for lifting the sanctions.

Diving deeper into sectors performance, the automotive sector is likely to provide opportunities – with Mercedez-Benz already contracted to produce their new compact cars in Finland – in addition to the pharmaceuticals, retail, and tourism. To pharma firms’ benefit, Finland has reduced time taken to market new drugs, technologies and solutions through changing regulations. B2C MNCs will benefit from significantly growing retail and tourism as demand for brands grows, with many shopping center projects and extensions planned in Finland, and tourism flows continuing to support consumer spending. Overnight stays grew by 17.7% in 2016, and this trend is likely to hold in H2 with Finland ranked the world’s safest destination. MNCs should expect the construction sector to slow down by 2019, however renovation-oriented construction will remain lucrative due to Finland’s aging housing stock.

Overall, Finland’s economy presents MNCs with a plethora of unexploited opportunities in various sectors. MNCs could capitalize on this by entering the expanding consumer market, commanding first mover advantages into the B2B sector, or as a means of exposure to neighboring markets.

Clients can access our recently published Quarterly Market Review: Western Europe – Q3 2017 on South Europe, and listen to the podcast on FrontierView here.

Not a client? Listen and subscribe to FSG’s Emerging Markets Insights channel on iTunes or Stitcher. You can also read our related blog posts, Has Western Europe become free of political risk for MNCs? and Western Europe lingering concern: What MNCs need to know about Italy, or purchase the EMEA Outlook for 2017 from our online store.

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