Finnish, Slovakian economies are showing some pop

Finland and Slovakia are riding high because of their cyclical industries, but Slovakia has the advantage of lowered tax rates and government spending.

I noted in my previous post that Finland and Slovakia topped the European growth league. While I don't really regret what I wrote in that post, I do regret that I didn't write an explanation for why Finland and Slovakia had higher growth than others, which is why I am writing this follow-up post.

In the case of Finland it seems to be basically a case of it having a more cyclical sectoral structure, with heavy exposure to cyclical industries like the forest industry. Also, the fact that Russia is an important trade partner, and as the Russian economy is highly dependent on the price of oil and other commodities, the Finnish economy will indirectly be affected by the cyclical swings in the price of oil and other commodities that Russia exports.

Finland had higher growth than both neighboring Sweden and the Euro-area average in the years preceding the 2007-09 financial crisis. However, during the slump GDP fell by nearly 10%, significantly more than in both Sweden and the Euro area average. Now, it is again growing faster than both Sweden and the Euro area average. So this seems to be at least mostly a case of a more cyclical industrial structure.

Slovakia is a more interesting case. While it like Finland has a heavy exposure to cyclical industries (in this case mainly the car industry) and while this is part of the explanation for its current boom, that is not the entire story. In the years preceding the financial crisis, Slovakia was a star performer with annual growth rates at around 10%. Due to its exposure to many cyclical industries, Slovakia then suffered a drop in output similar to the euro area average. But unlike Finland it did not see a deeper slump than the average and it had a much stronger boom preceding the slump.

While there are many more contributing factors to Slovakia's success, perhaps the most important one is its strategy of cutting government spending and marginal tax rates.

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