(Updates markets in seventh paragraph.)
Sept. 1 (Bloomberg) -- Finland’s latest spate of job cuts by companies from Nokia Oyj to papermaker UPM-Kymmene Oyj threatens to sap economic growth and drain public finances in one of the euro area’s six AAA rated members.
Prime Minister Jyrki Katainen said yesterday Finland “faces challenges in creating profitable companies,” after UPM, the country’s second-biggest papermaker, announced it will cut 1,170 European jobs. That followed an April announcement from mobile-phone maker Nokia, based outside Helsinki in Espoo, that it will fire 4,000 workers worldwide. Stockholm-based Nordea Bank AB, which is Finland’s biggest lender, said this week it will cut about 500 jobs there.
“It appears companies don’t really want to invest here, especially since cost pressures have increased,” Tiina Helenius, Helsinki-based chief economist at Svenska Handelsbanken AB, said by phone yesterday. “Companies are downsizing early” as demand grows less certain, she said.
Finland, which relies on exports for about 40 percent of its economic output, may face a similar fate to junk-rated Portugal in the next decade unless it creates more profitable industries and shores up its public finances, according to Katainen. As economic expansion wanes, Finns need to brace for “hard, corrective” measures to ensure budgets don’t stay in deficit, he said. The Nordic economy’s growth will slow to 1.6 percent next year from 3.5 percent in 2011, Nordea estimates.
As Finland’s economic prospects worsen, the government is hardening its stance on euro-area nations looking for more bailout money.
Finland is the only country in the 17-member euro bloc to have arranged extra assurances from Greece that its commitment to a new rescue package will be backed by cash collateral. The bilateral agreement, which needs to be approved by euro region governments, has sparked a backlash of criticism as other countries in the region seek similar terms to protect their bailout contributions.
Finland’s benchmark stock index, this year’s second-worst performer in the developed world after Greece’s ASE Index, has lost 26 percent since the beginning of January. The Helsinki- based HEX Index lost 1.7 percent today, compared with a 1.3 percent drop in the Euro Stoxx 50.
Finnish industry is battling against a number of obstacles, according to UPM Chief Executive Officer Jussi Pesonen.
“Finland faces challenges in raw materials pricing, energy, transportation and labor costs,” he said in an interview after presenting the job cuts. Staying competitive is hard because “demand is declining, slowly, especially in newsprint and fine paper,” he said.
The northernmost euro member is struggling to adapt its biggest industries to global shifts such as cheaper production in emerging markets and rising commodity costs.
Finland’s $255 billion economy, home to Europe’s two biggest papermakers, Stora Enso Oyj and UPM, was built on its forests. Since the 1960s, the country’s pulp industry has languished as South America and Asia produce cheaper timber. Forestry’s share of the economy dropped to 2.4 percent in 2009 from twice that in the late 1970s. It employed 2 percent of the workforce in 2009, from almost 5 percent four decades ago, government data show.
Unemployment will be 7.5 percent in 2012, while hourly wages will rise 2.8 percent from 2.4 percent in 2011, Nordea estimates. Faster pay growth will accompany a slowdown in exports, as sales abroad increase 2.9 percent this year after growing 6.4 percent in 2011, the bank estimates.
“Finland’s economic prospects have grown bleaker,” Nordea said in a report published yesterday. Slower growth outlooks in Germany, Sweden and the U.S. “signal that Finnish exports will be much weaker than previously anticipated,” the bank said.
Companies are likely to delay planned investment, while declining consumer confidence will stall both private spending and household investment, according to the Stockholm-based bank.
“Job cuts are not good for sentiment,” Helenius at Handelsbanken said. “The pressure to fix the balance of public finances amid the structural pressures of the aging population is becoming more acute.”
Finland, lumbered with the fastest aging population in Europe, has missed opportunities to raise the retirement age from 63, while public finances face a sustainability gap equivalent to 6 percent of gross domestic product, the International Monetary Fund said in September last year.
Efforts by Former Prime Minister Matti Vanhanen to push back the retirement age in 2009 were abandoned following public protests. Finance Minister Jutta Urpilainen has ruled out such pension reform. Katainen’s six-party coalition, formed two months after April elections, may face hurdles in agreeing to legislative changes needed to jumpstart growth, Helenius said.
“The government doesn’t seem to be finding a consensus over long-term structural changes,” Helenius said. “Companies are worried the government will be forced to take sudden, possibly less optimal, decisions in crisis conditions.”
UPM will close two publication paper mills in Finland and Germany as well as some paper machines to reduce capacity. The roughly 1,170 jobs will be cut by the end of 2011 as the mills in Albbruck and Myllykoski are shuttered, the company said yesterday.
The cuts “would ensure the efficient use of our remaining capacity,” Pesonen said yesterday. “However, this plan would not solve the cost challenges of the industry.”
--Editors: Tasneem Brogger, Jonas Bergman.
To contact the reporters on this story: Kati Pohjanpalo in Helsinki at email@example.com; Diana ben-Aaron in Helsinki at firstname.lastname@example.org
To contact the editor responsible for this story: Tasneem Brogger at email@example.com