Economic upswing losing momentum
The Finnish economy will grow by 2.5 per cent in 2018 and 1.5 per cent in 2019 according to the forecast of the Ministry of Finance in its latest Economic Survey, published on 17 December.
The growth in Finland’s economy for the full year 2018 will be 2.5%. This is below the 2017 figure but is still high. World trade is slowing as further trade barriers are put in place, reducing export growth and also feeding through to investment expectations. The growth in Finland’s economy in 2019 is expected to slow to 1.5%, while the growth in 2020 and 2021 is forecast to be 1.3% and 1.1%, respectively. In the medium term, growth will be below 1%, which will be lower than the growth in potential output.
The growth in the economy and the measures to curb rising expenditure are strengthening general government finances and will bring them almost into balance. The ratio of general government debt to gross domestic product (GDP) will also fall in the next few years. However, general government finances will begin to weaken gradually in the early part of the 2020s, as GDP growth slows and fiscal adjustment measures are brought to an end.
“We are seeing a loss of momentum in the economic upswing, and growth is returning closer to a normal level. Further employment and growth are needed to boost the public finances if we are to withstand the rising pressures on expenditure. The economy’s resources should be used more effectively,” says Director General Mikko Spolander.
Pace of growth will slow
The rate of growth in Finland’s economy will decrease in the next few years. The growth in Finnish exports will slow and the willingness to invest will decline as growth in the global economy slackens and further barriers to international trade are erected. The slowdown in investment growth will also be attributable to a drop in housing investment, falling back almost to a normal, unexceptional level. Towards the end of the forecast period, major investment projects will nevertheless counteract the investment-reducing impact of the weakening global economic outlook.
Despite the slowing of economic growth, the emergence of only a moderate rise in real wages and salaries will ensure that labour demand is maintained. Taking the economy as a whole, there will still be no constraint on employment growth and economic growth in labour supply terms, due to the fairly high level of unemployment and disguised unemployment and the measures to boost the supply of labour. The employment rate is expected to rise to 73.3%, and the unemployment rate to fall to 6.6%, in 2021.
Global GDP growth slackening off
In the global economy the phase of most rapid growth is over for now, and growth will slow down in the next few years. Besides following the normal pattern of economic cycles, the slowing of global GDP growth is also attributable to trade disputes between major economies being put partially into effect. Trade barriers will produce a rapid slowdown in global growth to a level of 3.5% by the end of the forecast period.
The outlook for the euro area has weakened during 2018, and confidence in the economy expressed by industry in particular has fallen. The United States’ economy is doing well, but growth will slacken off during the forecast period to a level close to the growth potential.
Large sustainability gap in general government finances
The growth in the economy and the measures to curb expenditure growth are strengthening general government finances. Still considerably in deficit just a few years ago, Finland's general government finances will be approximately in balance at the end of the present decade. The government-debt-to-GDP ratio will also fall in the coming years.
General government finances will nevertheless begin to gradually weaken in the early part of the 2020s when GDP growth slows and the annual adjustment measures being made in the current government term come to an end. The ageing of the population will weaken general government finances, as this will increase the expenditure on pensions and health and care services.
With rising age-related expenditure and sluggish GDP growth, a long-term imbalance – or sustainability gap – will occur between expenditure and revenue in the general government finances. The sustainability gap will be almost 4% of GDP. The estimated size of the sustainability gap has grown for a number of reasons, such as the new, longer term population forecast published by Statistics Finland and the lower assumptions contained within it concerning the birth rate and immigration.
Heightened risks of slower growth
A key risk overshadowing the outlook for the global economy and world trade is a further worsening of trade disputes. For Europe, principal risks are the direction taken by Italy in its economic policy and the uncertainty surrounding the United Kingdom’s exit from the European Union. Geopolitical tensions remain high and could, for instance, raise the price of oil beyond what has been anticipated.
Trade barriers and any increase in these could adversely affect Finland’s export growth. Taking into consideration global value chains, China and the United States are more important trading partners for Finland than the foreign trade statistics alone might indicate. If trade barriers continue to be in place, this could weaken Finland’s exports more than is visible through shifts in export demand.
Mikko Spolander, Director General, tel. +358 2955 30006, mikko.spolander(at)vm.fi
Jukka Railavo, Senior Minsterial Adviser, tel. +358 2955 30540, jukka.railavo(at)vm.fi (real economy)
Marja Paavonen, Senior Ministerial Adviser, tel. +358 2955 30187, marja.paavonen(at)vm.fi (general government finances)