General picture of the economy stable, despite the acceleration in the pandemic
The economy will grow rapidly in 2021 and 2022, although growth will be slower than was expected at the turn of the year, due to the acceleration in the COVID-19 pandemic and restrictive measures, the Ministry of Finance projects in its Economic Survey, published on 20 December.
This year, gross domestic product (GDP) is expected to grow by 3.4%. Moreover, GDP is expected to grow by 3.0% in 2022, by 1.5% in 2023 and by 1.4% in 2024. The economic recovery will continue, and growth will accelerate in 2022, particularly in those sectors where output has not yet reached pre-pandemic levels, for example in accommodation and food service activities.
Uncertainties arising from the manner in which the disease develops, virus mutations and vaccination coverage have increased further. The forecast assumes, however, that the deterioration of the disease situation will only momentarily slow down the economic recovery.
The general government deficit will decline sharply and the debt-to-GDP ratio will fall temporarily in 2021–2022. Rapid economic growth will not, however, remove the imbalance between general government revenue and expenditure. As economic growth slows, the debt ratio will once again begin to rise.
“The epidemic will recede in time, but the demographic and economic transformation will be prolonged. Navigating the transformation successfully will require from us frontline competitiveness, expertise, new technological solutions and substantial private investment as well as prudent public spending,” says Director General Mikko Spolander.
Growth outlook for global economy overshadowed by pandemic and accelerating inflation
The growth outlook for the global economy is overshadowed by, among other things, the protracted pandemic and rapidly accelerating inflation. The pick-up in consumer price inflation is due, among other things, to rising energy prices. Inflationary pressures are projected to ease during 2022, however.
The growth prospects for world trade are undermined by supply chain disruptions for various reasons as well as slowing growth in the global economy. In the euro area, the outlook for trade in goods is weaker than in the United States or the emerging economies.
Economic recovery to continue, driven by domestic demand
GDP is expected to grow by 3.4% in 2021. The deterioration in the COVID-19 pandemic at the end of 2021 is increasing uncertainty among economic agents and slowing economic growth in the final quarter.
GDP is expected to grow by 3.0% in 2022, but economic growth will be slow in the first quarter of the year. However, as the uncertainties surrounding the COVID-19 pandemic ease, economic growth will pick up once again.
The high savings rate and consumer confidence have created conditions for rapid growth in private consumption. Private consumption will continue to grow in 2022, and private investment will also grow rapidly. Funding received rom the EU's Recovery and Resilience Facility (RRF) will boost private investment, and research and development investment, in particular, is expected to benefit. The investment outlook for Finnish industry is also good. In 2022, export growth will continue strongly due to growth in the global economy. A recovery in exports of services will also accelerate export growth.
Economic growth will maintain demand for labour, which may also be met in the short term, as the number of unemployed remains high and the Government is taking steps to increase the labour supply. Employment is forecast to grow by 1.5% in 2022 and the employment rate to rise to just over 74% in 2024.
Inflation will accelerate to 2.6%, at national consumer prices, in 2022. Underlying this is the price of energy, which will sustain inflation around the turn of the year but will gradually decline during 2022. The acceleration in inflation is expected to be temporary. In Finland, inflation will slow to 1.8% in 2023–2024.
Public finances are recovering from the crisis, but indebtedness will continue to increase
The imbalance between general government expenditure and revenue will sharply decline in 2021 but will still be well above the pre-pandemic level. Public finances have been strengthened, particularly by the rapid growth of tax revenues and social security contributions as a result of buoyant economic growth and improved employment. In addition, the pick-up in the economy from the downturn has reduced the need for recovery and support measures. The COVID-19 pandemic, on the other hand, continues to impose a burden on health and social services, in particular.
The general government deficit will not be eliminated completely, however, even though the economy will recover and the pandemic will ease over time. There is a structural deficit in general government finances, which the good economic conditions will not correct. The general government deficit is expected to be around 1% of GDP in the mid-2020s.
Rapid GDP growth and the falling deficit will result in a decline in the debt ratio in 2021. As economic growth slows, however, the deficits of central government, local government and the wellbeing services counties will again turn the debt ratio to growth from 2023 onwards. The debt ratio is expected to be approximately 69%, i.e. roughly 10 percentage points above the pre-pandemic level, in 2026.
Rapid deterioration of pandemic the main threat to economic growth
The most significant risks to the forecast continue to be related to the COVID-19 pandemic and the development of the restrictive measures taken to manage it. Virus variants are changing the outlook for disease control in a more uncertain direction, and the pandemic situation may deteriorate rapidly despite the progress of vaccinations. If development in the emerging economies is poor and their pandemic management is unsuccessful, this will be a major blow to global economic growth.
A prolongation of the epidemic would reduce private consumption and demand for services, in particular, which would undermine the economic recovery. The deterioration of the disease situation is also reflected in increased uncertainty in the investment environment, which may delay investments or prevent their implementation.
The pick-up in inflation is expected to be a temporary phenomenon and inflation will slow again from the second half of next year. It is possible, however, that inflation will continue to be high for a longer period. A key concern with regard to expectations of rising inflation is that wages will also rise along with prices. A price-wage spiral in the economy would be a self-sustaining and longer-term phenomenon that would slow economic growth.
The fact that the EU's Recovery and Resilience Facility will generate more private investment than projected in the forecast can be viewed as a positive risk.
Mikko Spolander, Director General, tel. +358 2955 30006, mikko.spolander(at)gov.fi
Jukka Railavo, Senior Financial Adviser, tel. +358 2955 30540, jukka.railavo(at)gov.fi (real economy)
Marja Paavonen, Senior Financial Adviser, tel. +358 2955 30187, marja.paavonen(at)gov.fi (general government finances)