Finnish economy in a phase of rapid growth
According to the Economic Survey of the Ministry of Finance published on 19 September 2017, the Finnish economy is projected to grow at 2.1% in 2018. The continued phase of rapid growth will have a positive effect on employment and general government finances. Despite robust economic growth, general government debt will continue to increase.
According to the forecast, the rate of Finland’s economic growth in 2017 will clearly outperform that of 2016, after which the projected growth rate will slow to a level of around 2%.
Over the next few years, economic activity will be driven by both domestic and foreign demand. The patterns differ clearly, however. Improving global demand and business cost competitiveness will boost growth prospects for exports. Household consumption demand will be hampered by slowing purchasing power development. Investment growth will be held back by a slowdown in housing construction growth but accelerated by major production-related investment projects.
Finland’s gross domestic product (GDP) growth forecast for 2017 is 2.9%. New signs of the continuation of this positive trend were received early in the year. These include the increase in new orders in manufacturing industry and growth in private service production turnover as well as the sustained strength of construction in growth centres.
Robust economic growth will continue in 2018, despite GDP growth slowing to 2.1%. The slowing growth is largely due to falling private consumption demand, as purchasing power growth will be slower than this year. Employees’ purchasing power will be eroded by accelerating inflation despite at the same time being supported by an upward trend in employment and eased taxation on labour. Acquisitions of machinery and equipment will result in slightly higher investment increase compared to this year. Strong growth will also continue in construction investment, despite a slowdown in residential housing construction growth.
The rate of export growth will hold up well. Export growth will continue to come primarily from exports of goods, which will also increase imports of production inputs. Increasing demand in consumer and investment goods will also result in an increase in imports, reducing the positive contribution of net exports to economic growth.
In 2019, GDP will grow by 1.8%. Private consumption growth will slow further due to the subdued development of real income. Private investment growth will hold up well. Employment will continue to improve, but the rate will be slightly slower than earlier. The rise in consumer prices will level off to 1.5% in 2019.
Buoyant mood in global economy growing stronger
Global economic growth is being upheld by emerging economies in particular, but growth is also gaining strength in industrial countries. World trade has developed favourably since late 2016. In the next few years, world trade growth will increase more or less at the same rate as global output. The rate of growth in world trade will, however, be much slower than during the most intensive periods of globalisation seen last decade.
Productivity growth will slow improvement in employment
The reasonably rapid rate of GDP growth will have a positive effect on employment, but the decrease in the number of unemployed persons will still be slow. In recent years, obstacles to an improvement in the employment situation have included various regional and occupational mismatch problems between unemployed job seekers and job vacancies.
Employment is anticipated to improve by almost 1% per year, taking the employment rate to 70.5% in 2019.
Despite the economic upswing, Finland’s general government finances are showing a deficit
The long-awaited economic growth is also improving the poor state of general government finances. Tax revenue is increasing and the decline in unemployment is reducing unemployment expenditure. The economic rebound does not, however, eliminate the structural factors weakening general government finances. Despite the economic recovery, general government expenditure clearly exceeds revenue.
While robust GDP growth will set the debt ratio on a downward trajectory, the debt-to-GDP ratio will nonetheless decrease slowly and still remain around 60% in the early 2020s. It would appear that the Government’s target of ending living on debt by 2021 will be missed.
Over the long term, the high debt ratio will pose a risk to the stability of general government finances. In the following decade, general government will face considerable expenditure pressures threatening to push the debt ratio to another upturn. The most important factor is population ageing, which increases growth in pension, care and nursing expenditure.
”The favourable economic trend will not fix the subdued basic tone of the Finnish economy. Ageing will continue to choke the economy for a long time whatever the cyclical situation,” says Director General of the Economic Department Mikko Spolander.
A new Finnish general government finances subsector will be created in 2020 when the counties become operational. County government finances, as recorded in the national accounts, will show a slight deficit in the early 2020s. This deficit will be mainly due to the debt financing of the extensive hospital investments to be transferred to the counties’ national service centre responsible for facilities services.
Mikko Spolander, Director General, tel. +358 2955 30006, mikko.spolander(at)vm.fi
Jukka Railavo, Financial Advisor, tel. +358 2955 30540, jukka.railavo(at)vm.fi (economic cycles)
Marja Paavonen, Financial Advisor, tel. +358 2955 30187, marja.paavonen(at)vm.fi (general government finances)