Export-driven growth set to continue over coming years
The Finnish economy turned around in 2010 and showed broad-based growth. The forecast for 2011 predicts annual growth of 3.6%, much of which will come from a carry-over effect. Strong external demand is accelerating the growth of exports, which will drive up capacity utilization. As a result it is expected that investment will gather momentum and that economic growth will continue to expand.
Output growth in 2012 is expected to average 2.7%. Growth will remain export-driven, but not to the same extent as in the current year. Investment through building construction is set to slow somewhat, as is the growth of private consumption.
In 2013 it is projected that output will increase by 2.4%. Despite relatively robust growth over the outlook period, GDP will not recover to its pre-recession levels until late 2012.
Germany, Sweden and Russia, all of which are key export markets for Finland, have shown strengthening economic growth, which is increasing import demand in these countries. Industry export expectations were relatively high at the start of the year. The main driver of export growth is the traditional metal industry, as export orders for machinery and metal products increased sharply during 2010. At the start of the year export expectations remained very strong in the chemical industry, too.On the other hand export demand for electronics products remain subdued, and exports of wood and paper industry products are no longer growing at the rate they did last year.
The growth of service exports will probably be slower than the growth of goods exports, and overall exports are projected to rise by 8% in 2011. Imports will increase by 6½%. In 2011 and 2012 exports will increase more rapidly than imports in euro terms, which will improve the balance of goods and services despite deteriorating terms of trade. The current account surplus will remain at around EUR 4 billion throughout the outlook period.
Employment improving
The projected unemployment rate for 2011 is 7.6%, which in annual average terms is almost one percentage point lower than in 2010. The employment rate is expected to edge up to 69.1%. In 2012 the unemployment rate will fall to 7.2%.
The rise in the employment rate will be boosted by the anticipated decline in the number of people in the 15-64 age group. It is expected that those who are outside the labour force will have less difficulty finding jobs, which will be reflected in a rising employment rate. The number of people out of work will also fall, but long-term unemployment will continue to rise. In 2012 and 2013 the numbers in employment will continue to rise. However it will not be until towards the end of 2103 that the numbers in employment will recover to the levels at the outset of the cyclical downturn - i.e. almost four years later.
Inflation set to accelerate
Rising raw materials prices coupled with higher market interest rates will push inflation to over 3% in 2011. Inflation is being driven above all by rising world market prices of food and energy raw materials.
Rising mortgage interest rates will keep inflation high, and in 2012 it is predicted to average 2.7%. Inflation will gradually slow to around 2% towards the end of the outlook period as raw material prices begin to slow and tighter monetary policy begins to curb total demand.
Wage rises moderate
Improving employment means that households? earned income is increasing. Household confidence in the future also remains strong and spending propensity is high. On the other hand moderate wage settlements mean that nominal earnings for individuals who are keeping their jobs will not rise very much, and if, as expected, inflation gathers speed, real wages will move into negative territory. Furthermore there are upward rather than downward pressures on tax rates.
Wage settlements for 2011 concluded by the beginning of March have yielded increases of around 1½-2%. General wage increases have been at a higher level than the year before, but the effects of the previous year?s increases on the current year will be lesser compared to the situation in 2010. The forecast is based on the assumption that new wage settlements will be broadly in line with those concluded during the spring, which means that earnings levels in 2011 will rise quite moderately from the year before. The index of wage and salary earnings is therefore expected to continue to accelerate in 2012 and 2013.
It is expected that private consumption will increase by 2% this year and by 1.8% next.
Household consumption intentions are expected to exceed the rate of income increase, and therefore saving will probably decrease in 2011. This trend will continue into 2012 and 2013 as consumption continues to accelerate towards the end of the outlook period. Household debts are projected to exceed 120% of annual disposable income in 2013. Households in Finland will be affected by rising interest rates much sooner than households elsewhere in Europe because household loans here are tied to much shorter interest rates than is the norm in other countries.
Predicted economic growth not enough for public finances consolidation
The general government financial balance turned into deficit in 2009, bringing to an end a sustained period of surpluses. Nonetheless the deficit in 2009 and 2010 did not exceed the 3% threshold under the Stability and Growth Pact. Public finances are set to improve in 2011 in the wake of economic recovery, tax hikes and the withdrawal of temporary stimulus measures.
In 2011 the general government deficit is estimated at 0.9% of GDP. However unless new measures are introduced to consolidate the financial position in general government, public finances will continue to remain slightly in deficit over the coming years. The predicted rate of economic growth will not be enough to sufficiently consolidate public finances. Although indebtedness is rising rapidly, the public debt to GDP ratio will not exceed the 60% limit set for EU Members under the Stability and Growth Pact during the outlook period through to 2015.
As confidence has been restored, economic activity has begun to rebound after the recent exceptionally deep recession. Nonetheless the central government budgetary position continues to remain weak in the aftermath of the economic crisis. In 2010, following an appreciable decrease in the cyclically most sensitive income items and a range of stimulus measures, the central government deficit (on a national accounts basis) was 5.4% of GDP. Central government tax revenue turned around into growth last year. In 2011 central government tax revenue will continue to accelerate as a result of favourable tax rate developments and an increase in indirect taxation. The central government deficit will shrink but still remain at 3.7% of GDP in 2012.
Local government debts have increased rapidly in recent years. Revenue prospects for local governments are quite good for the coming years. If expenditure growth remains moderate, local government finances will remain close to balance. This will also help to slow the growth of indebtedness, at least temporarily.
Employment pension institutions are firmly insurplus, but it is predicted that the surplus will begin to contract with the sharp rise in pension expenditure in the current decade. The other social security funds, i.e. the Social Insurance Institution and the Unemployment Insurance Fund, are close to balance.
Inquiries: Mr Mika Kuismanen, Director, Forecasting Unit, tel. 358 9 160 34865, gsm 358 40 502 5107