Finnish parliamentary polls point to a new government

Finland is preparing for parliamentary elections on 19 April 2015. The election is of high significance, because the new government will inherit a weak economy, growing debt and a need to implement several structural reforms, which the current coalition government failed to do. Continued failure to carry out reforms could doom Finland into a slow growth path and lead to downgrade of sovereign ratings, in our view.

The Centre Party, currently in opposition, is expected to win the election with nearly 1/4 of the votes and to start negotiations to form a new government. It is a close call whether the Social Democrats or conservative National Coalition, both in current government, or the populist Finns Party (previously True Finns Party) comes 2nd and has the chance to negotiate with the Centre Party. Of these contenders, the Finns Party would have least experience in government and be most opposed to EU integration.

The Centre Party is a liberal party with agrarian roots. Party leader Juha Sipilä has an entrepreneurial background and comes from outside of old political circles, which has been positive for his popularity. The party wants to reduce regulation, cut the budget deficit mainly through expenditure cuts and limit growth in EU-wide transfers. Given the rural roots of the Centre Party, we believe that public investments would flow more evenly to whole country, rather than focusing on growth centres.

The Centre Party will probably get a strong mandate from voters to negotiate future plans, but it needs one or two partners from other major parties. Some smaller parties are likely to be included as well. Forming a new government may well take weeks. After the last election in 2011 it took two months thereby delaying decision making.

A conservative government formed by the Centre Party and National Coalition would probably be the most reform oriented. In our view, the handicap for conservative governments of the past has been opposition from the labour unions. Progress in reforms could be plagued by labour disputes unless a ‘social contract’ proposed by Juha Sipilä can be reached. A centre-left coalition (‘Rödmylleregering’) is unlikely to cut expenditure as much and labour market reforms could stall, but it might be in a better position to further some key reforms in social care and healthcare.

The outlook for the Finnish economy is weak: we expect only 0.5% GDP growth in 2015E. The economy operates below potential (IMF and OECD both estimate the output gap to be roughly 3% of potential GDP) and the economy might benefit from stimulus. Additional debt would not be too costly, because Finnish government bond yields have remained close to those of German bunds. However, public debt is already rising at a worrying rate and we see limited space for stimulus. Finland needs to prepare for the rapid ageing of population and potential growth has slowed towards 1% per annum, which points more to structural problems rather than cyclical issues.

Irrespective of the composition of the government, we expect it to reduce public expenditure by at least EUR3bn, refrain from raising taxes, implement a social & healthcare reform, cut red tape from business and try to keep labour cost inflation low. This kind of tough love would curb domestic spending in 2015-2016, but boost longer term growth outlook. Market reaction to the election results is likely to be muted.