The recent major changes in the structures of the Finnish economy are leaving their mark on the long-term outlook for growth. ‘The decline in exports and the related contraction in high-productivity sectors of the economy, scarcity of investment and decline in the labour force will weigh on Finnish growth for years to come. In addition, weaker-than-expected developments in the global economy and the ongoing geopolitical uncertainty have an impact on the shorter-term outlook for growth,’ said Bank of Finland Governor Erkki Liikanen in connection with the publication of the latest issue of the journal Euro & talous.
Due to the policies of monetary and fiscal stimulus, domestic demand has developed more positively than GDP since 2008. The decline in exports and narrowing of the industrial base have, however, begun increasingly to cast a shadow over the outlook for the future, as the stimulus policies have been taken about as far as possible. Since the onset of the financial crisis, Finnish exports have declined by around a fifth, which is more than in any other advanced economy. The decline in exports is due, above all, to structural problems in the electronics industry, and also to some extent in the paper industry, as well as a decline in cost-competitiveness, particularly since 2007.
Restoring the economy to a stronger trajectory will require major decisions, and it will not be possible to resolve all the problems quickly. ‘The pension reform is an important structural measure. However, there are still many other important decisions lying ahead. The weakness of the long-term outlook for growth means that the constraints to economic policy will remain tight for a prolonged period and the general government sustainability gap is large,’ stressed Governor Liikanen.
‘The key issues for the Finnish economy are to improve competitiveness, extensive implementation of structural reforms to foster growth and consolidation of the public finances in order to secure the most important functions of the welfare state without undermining the economy’s capacity to create new jobs,’ stated Governor Liikanen. ‘It is possible for Finland to build a road to more sustainable growth and employment, but it will require a dedicated commitment for a considerable period of time.’
Monetary policy for its part will continue to support economic activity in Finland. Euro area interest rates will remain low for an extended period of time. In addition, the European Central Bank has in recent months further relaxed its monetary policy with the launch of purchase programmes for covered bonds and asset-backed securities. ‘Early next year the Governing Council will reassess the monetary stimulus achieved, the expansion of the balance sheet and the outlook for price developments. Should it become necessary to further address risks of too prolonged a period of low inflation, the Governing Council remains unanimous in its commitment to using additional unconventional instruments,’ stressed Governor Liikanen.