The problems of the Finnish economy are not mainly cyclical, but largely of a longer-term, structural nature. In addition to the weakness of the global economy, growth in Finland has been dampened by structural changes in the country’s industry, a contraction in the working-age population, weakening cost competitiveness and the difficulties of the Russian economy.
‘The Finnish economy is facing headwinds, with no strong growth recovery in view. The problems are widely understood. It is now important to stay committed to ambitious objectives and proceed to implementation,’ said Bank of Finland Governor Erkki Liikanen today at the press briefing for release of the Bank’s journal Euro & talous. Structural reforms, fiscal consolidation and improved cost-competitiveness are needed to resolve the problems.
The longer-term outlook for the public finances has deteriorated in response to growing deficits and population ageing. The effects of the essential structural reforms will take several years to materialise, and the size of the impact is uncertain. More adjustment measures are therefore needed. The scale of the fiscal adjustments envisaged by the Government is justified.
Population ageing will already weigh more on the general government fiscal balance in the next decade. The pension reform will improve the outlook, but fiscal sustainability and the conditions for economic growth must additionally be bolstered by other structural reforms. We need longer working careers, reform of social and health services and improved housing supply.
To overcome the problems of the economy, one important objective is the containment of domestic cost developments. ‘The moderate pay settlement agreed in autumn 2013 ended the weakening trend in cost-competitiveness. However, earlier losses have not yet been recouped, as wage increases are, on average, also muted in our trading partners. Wage restraint will still be needed and, in addition, other measures will also be necessary to restore cost-competitiveness,’ said Governor Liikanen.
The Eurosystem’s expanded asset purchase programme has proceeded as planned and is beneficial also for the Finnish economy. Euro area inflation expectations have recovered from their low levels, and borrowing conditions for firms and households have improved. ‘Full implementation of the ECB’s monetary policy measures will provide the necessary support for the euro area recovery and contribute to a sustained return of inflation rates towards the price stability target. Monetary policy will maintain its steady course,’ emphasised Governor Liikanen.
- Rakenneuudistuksissa ja kustannuskilpailukyvyssä tavoitteet korkealle (in Finnish)
- Editorial: Ambitious objectives needed for structural reforms and cost-competitiveness
- Euro & talous publication website (in Finnish)
- Slides (PDF)
Forecast for the Finnish economy will be published in English later in June at www.bofbulletin.fi.