Finland’s economic growth will remain subdued, predicts Ministry of Finance
The Finnish economy will grow by 1.1% this year. In the following years, economic growth will also be around 1%.
Although the price competitiveness of production will improve and unemployment will gradually fall, GDP growth will be very slow and general government finances will remain significantly in deficit. In 2018, GDP will still be nearly 3% below and industrial production just over 5% below their levels in 2008.
Economic growth underpinned by private consumption and investment
Although prospects for the global economy and trade have deteriorated in recent times, in many countries important for Finnish exports the outlook is quite favourable. Finnish exports will grow more slowly than global trade and export markets, and Finland will continue to lose its share of international trade.
Slowly improving employment, a strengthening of belief in the future, low inflation and tax reductions linked to the Competitiveness Pact will support consumption. In 2018 the unemployment rate is projected to be 8.5%. Investment growth will be broad-based. Particularly in construction, growth will be buoyant.
Improving competitiveness will boost conditions for growth
As a result of the Competitiveness Pact, earnings will rise by less than 1% in 2017 and employers’ social security contributions will decrease by approximately 7%. According to the forecast, the pact will improve the price competitiveness of Finnish companies significantly, for example in comparison with Sweden and Germany. Although the positive effects of the pact will become fully evident in the economy only over the longer term, the pact will already begin to increase employment within the forecast horizon.
In the next few years, the economy will grow faster than potential output, which describes the production opportunities of the economy. In the medium term, growth of potential output will remain below 1%, because the increasing role of the service sector in the economy will slow productivity growth and the contraction of the working age population will constrain growth in the supply of labour in the economy.
Public finances will remain in deficit
Although Finland’s general government deficit will decrease, public finances will remain significantly in deficit within the forecast horizon. The subdued growth in the economy will not generate sufficient income to finance public expenditure. Expenditure will be increased by the ageing population in particular. Government consolidation measures will reduce the deficit over forecast period.
The public debt-to-GDP ratio has been increasing for a long time now. General government debt exceeded the EU Treaty’s 60% reference value last year. According to the forecast, the increase in the debt ratio will halt at the end of the decade. The debt ratio threatens to rise once again in the following decade, however, because public finances are not on a sustainable foundation in the long term.
Finnish economy sensitive to disruptions
There are upside and downside risks associated with the forecast. As the Finnish economy is growing slowly, it is sensitive to disruptions. Growth is insufficient to improve the labour market situation adequately. Increasing long-term unemployment threatens to remain an enduring problem for the Finnish economy. In Finland’s public finances, there are no buffers to absorb shocks arising from possible disruptions. On the other hand, the measures contained in the Competitiveness Pact might improve Finnish companies’ opportunities to benefit from demand in the global economy, and by more than anticipated in export markets important to Finland.
Mikko Spolander, Senior Financial Adviser, tel. +358 2955 30006, mikko.spolander(at)vm.fi