Finland: Finland implements labor reform as Q1 GDP results show modest growth
June 22, 2016
According to preliminary data released by Statistics Finland on 3 June, the Finnish economy expanded a seasonally-adjusted 0.6% in Q1 2016 over the previous quarter, which represented a slight improvement from Q4’s revised 0.5% expansion (previously reported: +0.1% quarter-on-quarter). In annual terms, GDP registered a 1.2% rise in Q1 (Q4: +1.3% year-on-year).
The slight improvement was mainly driven by stronger private consumption, which increased by 0.6% following 0.3% growth in Q4. Growth was held back by lower public spending, which contracted 0.3%, contrasting a 0.7% expansion in the previous quarter. Fixed investment grew 0.4% in Q1 (Q4: +0.6% quarter-on-quarter).
On the external front, exports dropped a seasonally-adjusted 1.1% in Q1, which contrasted the 0.6% expansion observed in Q4. Imports fell 1.8% in Q1, which was a significant reversal from the 2.0% growth registered in Q4. As a result, the external sector’s net contribution to GDP growth advanced from minus 0.6 percentage points in Q4 to plus 0.3 percentage points in Q1.
While Q1’s GDP reading marked a slight uptick, exports remained sluggish. In recent years, Finnish exports and growth have been restrained by high labor costs and a rigid labor market, along with the recession in Russia, a slump in the paper industry and Nokia reducing activity in the country.
To tackle the problem of sluggish exports, the government has been negotiating with employees and trade unions for over a year to come to an agreement on reforming the labor market and cutting labor costs to boost Finnish exports. The administration’s efforts were fruitful and on 14 June a landmark competitiveness pact was signed. The deal intends to boost the economy by restoring the competitiveness of Finnish exports. In particular, the agreement freezes wages for one year, raises the annual working time by 24 hours without lifting wages, allocates a larger share of social security payments to employees and reduces holiday bonuses in the public sector, with most measures becoming effective in 2017. In turn, the government promised income tax concessions for employees in the 2017 budget worth a total of EUR 315 to EUR 515 million, depending on the pact’s coverage. Currently, the pact’s coverage includes around 85% of Finnish workers and the coverage could increase in the next two months if more unions sign up for the deal. Prime Minister Juha Sipilä said in June that the current coverage would allow for tax concessions of up to EUR 415 million.
The deal marks an important step forward to reform Finland’s rigid labor market and will likely cut labor costs and boost competitiveness notably by the end of next year, thus supporting exports, GDP growth and employment. Critics, however, point out that the final agreement might be insufficient to fully restore Finland’s competitiveness and that the government did not make more progress on moving from a centralized to a company-level wage negotiation system.