Employment growth strengthens public finances
The Finnish economy will grow by 2.6 per cent in 2018 according to the forecast of the Ministry of Finance in its latest Economic Survey, published on 13 April. With this continued strong growth the demand for labour is rising and employment is growing at a rate not seen for many years.
The Finnish economy will continue to grow at an annual rate of more than 2% in the next few years but will slow to less than 1½% in the medium term. The employment rate is forecast to reach 72.5% in 2020. The reduction in unemployment is nevertheless likely to be slow, despite the increase in job vacancies.
The growth in Finland’s economy is forecast to be 2.2% in 2019 and 1.8% in 2020. This growth will be attributable particularly to domestic demand and foreign trade. Household consumer demand will be restrained by a slowing of the growth in real disposable income. Although the growth in private investment will be down from its 2017 level, investment will nevertheless rise to 20% of gross domestic product (GDP). Growth in exports will fall into line with the growth in world trade, and the contribution of net exports to the growth in the economy will be less significant.
Employment growth exceeded expectations
The level of employment improved in 2017 as a result of the rapid and broad-based upturn in economic activity. The improvement in employment gathered pace exceptionally quickly towards the end of the year and in the early part of 2018, pushing up the employment rate to around 71%.
The demand for labour has been growing rapidly. The continuing brisk GDP growth and the moderate rise in real pay will boost the number of people in employment in 2018 to a level 1.8% higher than the previous year. The growth in employment will continue to be strong throughout the forecast period, with the employment rate reaching 72.5% in 2020. Employment growth and GDP growth are not yet being restricted by the supply of labour across the economy as a whole, due to the large number of unemployed and the high level of disguised unemployment, and measures serving to increase the labour supply.
Private consumption growth is gathering pace in 2018, due to the rising level of employment and earnings. Faster economic growth, export expansion, low interest rates and positive trends in the global economy all ensure the continuing growth of private investment. The growth in exports will be more moderate than the sharp rise seen in 2017 but will continue to outperform the growth in world trade.
Earnings growth in 2018 is expected to be 1.9%. Wage drift is forecast to remain below average as company-level agreements become more widespread. The rise in earnings will accelerate in 2019 to 2.5% as a consequence of the timing of contractual pay increases. In 2020, there will be a slightly steeper rise in earnings, reaching 2.8%, boosted by the growth in the economy and the restoration of public sector holiday bonuses. Inflation will remain moderate, despite the accelerated growth in pay.
Robust growth in global economy
The global economy is experiencing a distinct upswing in the current year. This growth is broad-based, with many economies seeing strong growth in both exports and domestic demand. In the euro area, strong growth is continuing, confidence is buoyant and investment has risen to almost its pre-crisis level.
Domestic economy risks are in balance
Consumption by households may increase more rapidly than forecast if there are positive surprises in the employment rate and household confidence remains high. On the other hand, household consumption could be lower than forecast if there is a decline in household confidence and households start saving, or if demand runs up against capacity shortages, costs increase and inflation starts to rise more quickly.
Stronger public finances but still an imbalance in long term
GDP growth, employment growth and steps to dampen the rise in government expenditure will together strengthen general government finances in the next few years. Public finances will come into balance and move slightly into surplus in 2020, after more than a decade of being out of balance.
“Thanks to the higher rate of employment, the outlook for public finances is more favourable than was previously forecast. This provides a firm basis for continuing the efforts to raise employment further. Growth will bring stronger public finances,” explains Director General Mikko Spolander.
Government expenditure will remain significantly greater than government revenue in the coming years, despite the robust GDP growth. The imbalance in central government finances will gradually diminish and central government according to the national accounts will almost come into balance in 2022. Nevertheless, the balance achieved threatens to be short-lived, as central government expenditure in the 2020s will also need to cover the growth in age-related expenditure associated with the ageing of the population and the funding of the Defence Forces’ fighter jet acquisitions.
The growth in Finland’s economy and the steps taken to dampen the rise in government expenditure will also reduce general government debt as a percentage of GDP. This debt ratio will fall to below 60% in 2019 and will gradually decline further to 56% by 2022. The general government debt will nevertheless continue to grow.
The economic growth now in progress will not change the long-term challenges in public finances. As the upswing levels off, GDP growth will slow significantly and will be insufficient to cover the rapidly rising public expenditure associated with the changing demographic structure of the population. There will remain an imbalance between revenue and expenditure in public finances in the long term. The magnitude of this sustainability gap will be about 2½% of GDP.
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 (public finances)