Cost Competitiveness and Export Performance

This brief focuses on the importance of international cost competitiveness of output in Finland, as measured by relative nominal unit labour costs, and the development of export markets for Finnish goods exports. Cost competitiveness fluctuates around some long-term equilibrium level and tends to adjust towards that level over the course of time, while export markets can in principle grow forever. According to our estimation results, both improved cost competitiveness and growth in export markets support Finnish exports. These explicatory variables are positively correlated, which shows that Finland’s cost competitiveness is procyclical. This may be due to wage rigidities and differences in economic structures vis-à-vis other countries, among other things. Procyclicality may increase the volatility of Finnish exports, but it may also smoothen the domestic demand cycle. In principle, more volatile cost competitiveness and thereby more volatile development in the volume of exports may increase uncertainty and affect investments and economic growth negatively. Based on forecasts by Etla and the European Commission, Finland’s cost competitiveness improved by 0.7 per cent in 2020, but it will decline by three per cent this year and further by one per cent next year. The decline is due to development in labour costs. On the other hand, export markets will grow markedly.