Economy is moving towards quieter times
Economic growth will slow down and set at around one per cent in the next few years according to the forecast of the Ministry of Finance in its Economic Survey, published on 18 December.
The growth in Finland’s economy is forecast to be 1.0 per cent in 2020, 1.1 per cent in 2021 and 1.2 per cent in 2022. Economic growth is sustained by domestic demand. In the medium term (2023–2024), due to structural factors affecting the economy, economic growth will slow down to under one per cent.
The general government deficit will increase in 2020 when the spending increases according to the Government Programme enter into force. Without measures to improve the employment rate and the productivity of the economy and public administration, general government finances will remain in deficit in the coming years. General government debt as a proportion of gross domestic product (GDP) will start growing again by degrees.
“The basic economic outlook has not changed significantly during the autumn. Economic growth will slow down to around one per cent in the next few years. Economic policy should keep a close eye on the structural conditions for economic growth, which lay the foundation for growth in well-being and sustainable management of public finances,” says Mikko Spolander, Director General of the Budget Department of the Ministry of Finance.
Global trade is recovering slowly
The situation in the global economy is still uncertain, even though there are some signs of stabilisation. The global economy will recover starting from 2020, but the recovery is very slow. The outlook for the euro area is overshadowed by the vulnerable situation of the German industry. In the United States, unemployment is very low, but the most rapid growth is already behind us. Risks to China's economy continue to grow, darkening the outlook for growth. The growth in world trade in 2019 is very weak due to trade conflicts, cyclical reasons and the ongoing structural change in the automotive industry. Global trade will recover in the next few years as the economic outlook improves.
Services will support economic growth
GDP will grow by 1.6 per cent this year, slowing down to 1.0 per cent in 2020. The outlook for export markets will stabilise and export growth will slow down. Growth in service exports is faster than growth in goods exports and makes export growth more rapid than export demand.
Private consumption growth will continue steady in 2020. The disposable income of households will increase due to rising earnings and persistently high employment. However, growth in private investments will decrease. In particular, housing construction investments will decrease. Growth in public consumption will accelerate, which will increase domestic demand. Public consumption and investments will have an impact on GDP growth particularly in 2020.
The number of employed people will increase by 0.5 per cent in 2020. A slowdown in economic growth and growth in nominal wages will weaken employment growth. At the same time, the number of unemployed will decrease and the unemployment rate will fall to 6.5 per cent. There are fewer and fewer unemployed jobseekers per job vacancy, which increases the pressure to raise wages. In 2020, nominal earnings are expected to rise by 3 per cent.
GDP will grow by 1.1 per cent in 2021 and by 1.2 per cent in 2022. Growth is accelerated by the recovery of productive investments supported by large projects and R&D investments. It is also forecast that the decline in housing construction investments will end in 2022.
Exports will increase faster towards the end of the forecast period as global trade improves. By contrast, private consumption will slow down as households save more. The household savings rate will nevertheless remain low.
With sluggish economic growth and accelerating growth in nominal wages, there will be no further increase in the demand for labour in 2020 and 2021. However, the employment rate will continue to rise, reaching 73.6 per cent in 2022, as the working-age population will decrease. At the same time, the unemployment rate will also fall and earnings growth will approach the average annual growth rate of around three per cent in the 2000s.
General government finances will weaken
The general government deficit will grow in 2020 when the spending increases according to the Government Programme enter into force. The tax increases agreed in the Government Programme will gradually increase tax revenue as the government term advances. However, the growth in age-related expenditure associated with the ageing of the population will keep the general government deficit close to EUR 3.5 billion in the early 2020s. In order to balance general government finances, the measures aimed at in the Government Programme to strengthen the employment rate and the productivity of the economy and public administration must be specified and implemented.
The local government deficit will grow to a historically high level this year. Without municipalities' measures to strengthen local government finances, the imbalance between revenue and expenditure will also remain substantial in the coming years. Local government finances are weakened by the increase in health and social services expenditure and large investment needs. The weakening of local government finances highlights the need for the health and social services reform.
General government debt relative to GDP has declined over the past few years. The debt ratio will gradually increase from next year onwards and threatens to rise to more than 60 per cent in the early 2020s.
Risks in the economic outlook slightly stabilised
The forecast mostly involves downside risks. However, these risks have stabilised over the last few months. The deepening of trade tensions is still the most important risk overshadowing the outlook of the global economy. Trade tensions between the major economies are reflected unfavourably on world trade and their indirect effects on Finnish exports may be greater than anticipated.
The risk of a recession in Europe following the decline in industrial production remains significant. Exports may also be lower than forecast if production costs increase more than anticipated in Finland and, in particular, faster than in the competitor countries. A quicker-than-expected abatement of the trade tensions between China and the United States would be the most significant positive risk in the baseline scenario of the global economy.
Mikko Spolander, Director General, tel. +358 2955 30006, mikko.spolander(at)vm.fi
Jukka Railavo, Senior Ministerial 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)