The governing partnership of the centrist KESK, the conservative KOK, and the populist-nationalist PS encountered a rough patch in June, when the PS elected Jussi Halla-aho, an extremist on issues related to immigration and asylum, to replace Timo Soini as party leader. Prime Minister Juha Sipila and Finance Minister Petteri Orpo, the leaders of KESK and the KOK, respectively, decided that they could not work with Halla-aho, who has a hate-crime conviction on his record and regularly uses inflammatory xenophobic rhetoric.

One-half of the PS’ 38 lawmakers split off to form the New Alternative parliamentary group, whose support is sufficient to sustain the government’s majority in the 200-seat Eduskunta. The splinter faction includes five members of the Cabinet, including Soini, and the parliamentary speaker, and the group is planning to formally establish a new party called Blue Reform.

Sipila faces the first major test of his ability to govern with a shrunken majority in mid-September, when the Parliament will vote on the budget for 2018. With the economy growing at a faster pace than expected, there will be some room for concessions to Soini’s faction. Likewise, an improved economic performance will reduce the risk that a one-year delay (to 2020) in implementing cost-saving reforms of the health-care system might contribute to a divisive fiscal dilemma ahead of the April 2019 deadline for holding the next general election.

Revisions to the national accounts data revealed a stronger and more even pattern of growth in 2016 than the preliminary numbers suggested, and the economy expanded by a seasonally adjusted 1.2% in the first quarter of this year, and by 2.7% compared to the same period in 2016.

The improved outlook for the export sector amid a revival of demand in the EU and in Russia bodes well for a sustained improvement in economic performance that pushes the annual growth rate above 2% this year. The current account balance recorded a surplus of more than $2 billion over the first five months of the year, but the movement of the income balance into deficit in June points to a shift in the overall current account balance into negative territory over the second half of the year.

Since 1979, The PRS Group Inc., has been a global leader in quant-based political and country risk ratings and forecasts. For more information on The PRS Group and its wide range of risk products, go to: www.prsgroup.com, or contact us at (315) 431-0511 and sales@prsgroup.com