Economic Survey: Recovery from recession is set in motion
In 2009 the global economy suffered its deepest downturn since the Second World War. The year was exceptionally bad in the Finnish economy. According to preliminary figures from Statistics Finland, GDP plunged by 7.8 per cent. The last time GDP figures dropped as sharply was more than 90 years ago. During the previous recession in 1991 GDP fell by 6.0 per cent.
Demand was mainly affected by the decrease in exports and investment. The volume of exports fell by a quarter and investment was down by more than 13 per cent. Private consumption dropped by more than 2 per cent.
The Economics Department at the Ministry of Finance forecasts that output in the Finnish economy will start rising this year. Driven by the recovery of private consumption and exports, GDP is expected to grow by 1.1 per cent from last year. Next year private investment will also start growing, and at the same time exports and consumption will continue to rise. Output growth in 2011 is expected to average just over two per cent.
Export prospects are limited by the fact that the bulk of Finnish exports go to the EU area, where the outlook for growth is weaker than average. The forecast for 2010 projects a 5.5 per cent increase in exports. In 2011 exports are expected to slow somewhat despite the accelerating global economy. This is due tonon-recurring factors, such as the timing of ship deliveries.
Inflation
Consumer prices did not rise at all in 2009 as measured by the national consumer price index. However, the harmonized consumer price index, which excludes the effect of interest rates and house prices, went up by 1.6 per cent, which is well above the average for the whole euro area. Inflation will accelerate to 1.5 per cent this year because of rising prices in energy and other raw materials. House prices and interest rates will also stop falling. Next year prices will continue to rise and the increase in energy taxes at the beginning of 2011 means that consumer prices are expected to increase by about 2½ per cent.
Earnings increased very rapidly in 2009 relative to the cyclical environment. Wage rates rose by 3.7 per cent and the earnings level by 3.9 per cent. The level of earnings is anticipated to increase by 2.8 per cent this year.
Finland's price competitiveness has in fact deteriorated considerably relative to the euro area in the past few years. In 2008 and 2009, unit labour costs rose at twice the average rate for the euro area, with wages continuing to grow in line with agreed pay rises despite the fall in output.
Unemployment still to rise this year
The number of people out of work will continue to rise this year despite the trend of output growth, and the unemployment rate is expected to climb to 10.2 per cent. The highest monthly unemployment rates will probably be recorded late in the spring. The situation will improve in 2011 when the employment rate is expected to edge up to 67 per cent and the unemployment rate to fall back to 9.6 per cent.
The labour market situation looks set to improve over the medium term, and it is expected that the number of job vacancies will begin to rise sharply. At the same time the mismatch between labour supply and labour demand will get worse. The new jobs that are being created after the recession are notlocated in the same places and in the same branches where jobs were lost during the recession. This is hampering growth in employment. Population ageing will also begin to constrain the labour market during the present decade.
Public finances in deficit despite economic recovery
The legacy of the recession will continue to impact public finances for years to come. This year the deficit is estimated to slide to 4 per cent of GDP and therefore clearly exceed the 3 per cent budget deficit ceiling of the Stability and Growth Pact. This will only be a temporary breach, though, because in 2011 the deficit will narrow to 2 per cent of GDP.
Although general government finances will continue to improve over the years ahead on the back of economic recovery, it is expected that without new measures to stimulate growth and consolidate public finances, they will remain firmly in deficit in 2014. Only social security funds will retain a surplus. The general government debt ratio began to rise last year, and by 2014 it is projected to climb to 56.5 per cent. In 2014 central government debt will stand at around EUR 109 billion, almost 55 billion more than at year-end 2008.
The sustainability gap in public finances has increased very rapidly as a result of the recession. The sharp deterioration in the budgetary position of general government is severely hampering efforts to prepare for the expenditure pressures arising from population ageing, underlining the need for reforms to strengthen the sustainability of public finances.
Inquiries: Mr Mika Kuismanen, Director, Forecasting Unit at the Ministry of Finance, tel. 358 9 160 34865 or 358 40 502 5107