Upswing in Finnish economy to continue in coming years
The Finnish economy will grow by 2.4 per cent in 2018 according to the forecast of the Ministry of Finance in its latest Economic Survey, published on 19 December. The favourable trend in the economy means an increase in employment, a decline in the general government deficit and slower growth in the state’s debt burden.
The Ministry of Finance’s forecast shows that Finland will post a GDP growth figure of 3.1 per cent for the full year 2017, and that the growth rate will then slow to around two per cent.
In the next few years, growth in the economy will be driven by foreign trade and domestic demand. Growth in exports will fall into line with the growth in world trade, and the contribution of net exports to the growth in the economy will be less significant. Household consumer demand will be limited by slower growth in the real disposable income of households. Even though there will also be a slowdown in the growth of private investment, the investment-to-GDP ratio will exceed 19 per cent for the first time in many years.
Pay will rise more rapidly in 2018 and 2019. Unit labour costs will rise, albeit more slowly than in competitor countries, and there will be a further improvement in the competitiveness of Finnish industries. Labour productivity will increase more rapidly than in the past few years. The booming economy will boost employment and reduce unemployment.
Export-led economic growth
Driven by demand, exports will grow strongly in 2018 and Finland will no longer be losing market share in different areas. Exports will be further boosted by improvements in the cost competitiveness of Finnish companies. Export growth will continue to be driven mainly by exports of goods. Net exports will support growth in the economy throughout the forecast period, even though imports of production inputs will also increase. The level of imports will rise not only because of the greater demand for production inputs but also as a result of domestic investment demand and consumer demand.
In 2018, private consumption growth will be driven by higher earnings and a rising employment rate. Investment of all types will increase, underpinned by the favourable position of the global economy and continued low interest rates. The boom in housing construction does not yet show any sign of slowing down.
The earnings level in 2018 is forecast to rise by 2 per cent, assuming that the forthcoming pay settlements are in line with agreements already made. Wage drift is expected to remain below average because of company-level agreements and company-specific items. Prices will rise in 2018 in a broad range of different product categories, but the increase in the prices of services will continue to have the greatest impact on overall inflation. Employment growth will accelerate to one per cent.
In 2019, Finland’s GDP is expected to grow by 1.9 per cent. The slowdown in GDP growth will be largely attributable to private consumer demand, because the growth in households’ disposal income will slow as inflation increases. Private investment growth will continue to be strong, as production-related investment picks up. The employment rate will continue to improve, albeit at a slightly slower pace. The rate of increase in consumer prices will stabilise at 1.5 per cent in 2019.
Global economy on a growth path
Growth in the global economy is broad-based, and the outlook has improved in the euro area in particular. The acceleration in economic growth has also boosted world trade, which is now growing at a significantly faster pace than global GDP. The improved economic outlook for the major economies also means that investment goods now account for a larger share of world trade.
Risks are balanced in domestic economy
Consumption by households may increase more rapidly than forecast if there are positive surprises in the employment rate and household confidence remains high. At the same time, however, if there is a decline in household confidence and households start saving, or if demand runs up against capacity shortages, costs increase and inflation starts to rise more quickly, household consumption could be lower than forecast.
GDP growth will slow the rise in the state’s debt burden but will not eliminate the general government deficit
The public-debt-to-GDP ratio began to decline in 2016, and the debt ratio is shrinking due to the rapid growth in Finland's GDP. In 2019 the ratio is expected to fall to slightly below 60 per cent.
The general government deficit will also fall as a result of the favourable economic situation. However, the growth in the economy will not set right the imbalance in general government finances. Even when the economy is at the height of its upswing, revenue will still not be sufficient to cover expenditure. Central government finances in particular will remain substantially in deficit.
A booming economy is part of a cycle and therefore of fixed duration, and so it will not provide a solution for general government finances in the long term. The ageing of the population will mean increased expenditure, and this burden will be felt in public finances for the whole of the coming decade. When GDP growth is slowing at the same time as the increase in age-related expenditure is continuing, there is a danger that the debt ratio will start growing again.
“The Finnish economy is now growing at a brisk pace, and it looks like this favourable trend will last longer than previously thought. This growth will create opportunities for building up a public finances buffer for coping with quieter times and for putting in place reforms that will support employment and productivity growth in the longer run,” says Director General Mikko Spolander.
Mikko Spolander, Director General, tel. +358 2955 30006, mikko.spolander(at)vm.fi
Jukka Railavo, Senior Financial Adviser, tel. +358 2955 30540, jukka.railavo(at)vm.fi (real economy)
Marja Paavonen, Senior Financial Adviser, tel. +358 2955 30187, marja.paavonen(at)vm.fi (general government finances)