Recovery of the Finnish economy gathers pace

The Ministry of Finance economic survey forecasts 2.4 per cent growth in the Finnish economy this year. Renewed brisk growth in industry is also driving a rapid improvement in productivity.

A strengthening upswing at the start of the year substantially improves the growth forecast for the year as a whole. Economic growth rests on a solid foundation, as growth is quickening in all demand items and all major sectors, including manufacturing, are also growing.

GDP growth will slow to around 1.5 per cent in 2018 and 2019, which is faster than the long-term growth potential.

Private consumption will continue increasing this year, boosted by rising employment. The focus of private investment is shifting from construction to productive investment in manufacturing.

Conditions are improving for growth in exports, as global export demand is rising and businesses are becoming more cost-competitive. After years of negative contribution, foreign trade will begin boosting GDP growth.

Growth in private consumption will slow down next year as rising inflation erodes employee purchasing power. Growth in private investment will also decline as growth in construction investment levels off. Growth in exports will slow marginally as it returns a little more slowly than growth in export demand.

The rate of growth in private consumption will continue to fall in 2019 due to a slowing of real growth in disposable income. Growth in private investment is expected to accelerate again due to major investment projects planned for Finland. Export growth will keep pace with growth in export markets.

The current account will remain in deficit throughout the forecast period, notwithstanding the upturn in the balance of trade.

Faster growth in the global economy

Growth in the global economy is gaining momentum, but some uncertainty remains concerning the solidity of growth prospects. Growth in global trade last year was the slowest in several years, although there was a clear recovery towards the end of the year. For Finland, the upturn in global trade will give rise to somewhat higher demand than in recent years.

Though economic growth is strengthening in industrialised countries, the growth of nearly 4 per cent in the global economy is still maintained by emerging economies.

Strengthening economic growth improves employment

The rapid economic recovery has brought an upswing in employment, but this improvement remains moderate due to a clear rise in work productivity.

The factors boosting growth in employment include measures to increase the labour supply that took effect at the beginning of this year. Activation of the disguised unemployed will nevertheless hold back the fall in unemployment over the next few years, as this phenomenon swells the ranks of the unemployed with people from outside of the labour force.

The forecast suggests that employment will improve by 0.6 per cent annually, with the employment rate rising to just over 70 per cent by 2019.

Upswing will not correct structural problems of the economy

While the favourable cycle will increase public finance revenues and reduce outlays on unemployment, the improvement in public finances will be hindered by the ageing population, which automatically increases public spending. The general government deficit will therefore fall only sluggishly over the next few years.

Even if the public debt ratio appears to stop increasing over the forecast period, its development involves considerable uncertainty. The ratio of government debt to GDP will remain high, and will begin growing again during the next decade.

The upswing will not resolve structural problems in the economy. Long-term growth prospects are muted, with insufficient revenue to cover public spending over the long term.

Public finances are considerably weaker following a long recession than before the financial crisis, so there will be less room for manoeuvre going into the next downturn than a decade ago.

“The economy is growing and demand is strong. This would be a good time to restructure the economy and strengthen conditions for future growth", explains Director General Mikko Spolander.

Economic Survey, summer 2017
Photos from the press conference (Flickr)

Inquiries:

Mikko Spolander, Director General, tel. +358 2955 30006, mikko.spolander(at)vm.fi
Jukka Railavo, Financial Advisor, tel. +358 2955 30540, jukka.railavo(at)vm.fi (economic cycles)
Marja Paavonen, Financial Advisor, tel. +358 2955 30187, marja.paavonen(at)vm.fi (public finances)