In the aftermath of the financial crisis, economic activity has been exceptionally subdued in many countries. In the euro area, the private sector is unwinding its debt, public finances are undergoing consolidation and unemployment is widespread. In November 2013, the European Central Bank lowered its key policy rate to 0.25%. ‘The Governing Council of the ECB expects the key interest rates to remain at present or lower levels for an extended period of time. The capacity of monetary policy has not been exhausted. We are ready and able to act,’ said Bank of Finland Governor Erkki Liikanen at the press conference for publication of the latest issue of the journal Euro & talous.
In addition to the effects of the weak international economy, the Finnish economy is also facing industrial restructuring, rising domestic costs and an ageing population. ‘There are encouraging signs from the international economy. The outlook for the Finnish economy is slowly improving,’ said Governor Liikanen.
Finland’s real GDP is forecast to contract this year by 1%, but to return to a tentative 0.6% growth in 2014. The estimate for 2015 is for growth to accelerate to 1.7%. The economic recovery will not be sufficient to boost employment until 2015, when the unemployment rate is expected to come down to 7.5%. The forecast is based on the twin assumptions that the global recovery will gain strength and the stressed economies in the euro area will succeed in balancing their economies.
The Finnish economy will begin to recover, with exports taking the lead as the situation improves in the export markets. The moderate pay deal negotiated in autumn 2013 will halt growth in unit labour costs relative to Finland’s trading partners on average and reduce unit labour costs relative to Germany and Sweden.
Inflation will slow to 2.2% in 2013, as measured by the harmonised index of consumer prices (HICP inflation). Inflation is forecast to slow further to 1.6% in 2014 against a background of weak domestic demand and the moderate pay settlement.
Due to the weak growth in the economy, government finances are now showing a substantial deficit, which, together with the poor economic outlook and an ageing population, means that the long-term sustainability of the public finances cannot be guaranteed. ‘Once implemented, the government’s structural policy programme will strengthen the foundations of growth and the long-term sustainability of the public finances,’ averred Governor Liikanen. Local government consolidation measures are particularly important to achieving balance in the immediate years ahead, but on their own they will be insufficient to place the public finances on a sustainable trajectory.
The expected acceleration in the accumulation of further public debt in the 2020s can be largely prevented by implementing the government’s structural policy programme in its entirety. Here, the extension of working careers and reform of the pension system are of decisive importance. ‘The decisions necessary to achieve the objectives of the structural policy programme will not be easy and will need a lot of work. However, they should be taken soon, as their full effects will not be felt for many years,’ said Governor Liikanen.