The Finnish economy has been growing exceptionally fast for about one year. The level of GDP is, how-ever, still clearly lower than before the recession, and the gap is not expected to close before 2012. Em-ployment has been slow to improve, and the unemployment rate has ceased to decline over the last six months. ‘Recent high GDP growth rates threaten to mask the fact that the state of the Finnish economy is still weaker than in the pre-recession period,’ stated Bank of Finland Governor Erkki Liikanen at the Euro & talous (Bank of Finland Bulletin) press conference.

The strong output recovery resumed a year ago, as Finnish exports began to increase rapidly and domestic demand picked up, driven by private consumption and housing investment. The first months of this year have exhibited signs of decelerating growth rates in both Finland and in the international economy.

According to the new Bank of Finland macroeconomic forecast, GDP growth in Finland will be almost 4% in the current year. The yearly growth rate is amplified by the large carry-over effect from last year’s exceptionally strong output growth. The rate of growth in the Finnish economy will ease back to about 2½% in 2012–2013. Employment has improved only slowly after the recession. Still in 2013, the number of employed is forecast to be markedly lower than before the recession.

The rise in Finnish consumer prices has picked up considerably since the latter part of 2010. Energy and food prices have risen strongly, and the rise in services prices has also accelerated in the early part of the year.  In addition to higher raw material prices, indirect tax increases have also fuelled inflation. Inflation will accelerate to about 3½% this year. In 2012–2013, however, the rate of increase in consumer prices is forecast to slow to around 2%. ‘If the temporary acceleration of inflation were to lead to a spiral of rising wages and prices, it would erode Finland’s export performance, output growth and employment,’ underlined Governor Liikanen.

The Finnish general government deficit will decline in the current year, due to economic growth and al-ready implemented tax increases, but general government finances will remain in deficit throughout the forecast period. A sizable structural deficit has emerged in central and local government finances. In the absence of new fiscal policy measures, the combined central and local government deficit will still be almost 4% in 2013. The forecast period will see an increase in central government debt, with the debt amounting to EUR 100 billion, ie 48% to GDP, at the end of 2013.
The challenges for general government finances are sizeable. The implications of population ageing will already begin to manifest themselves in economic activity over the next few years and, at the same time, public finances have been strongly impaired by the recession and its consequences. ‘If fiscal consolidation and structural reforms to improve long-term fiscal sustainability are not embarked upon promptly, the risks taken will be significant and responsibility will be shifted on to future generations,’ emphasised Governor Liikanen.
Euro & talous 3/2011
Forecast tables (PDF)
Slides (PDF)
Slides (PPT)