The problems in the Finnish economy have turned out to be long-term in nature. Recovery is gradually getting underway, but in 2016 Finland will be one of the most weakly growing economies in the euro area. Since 2008, there has been a particularly strong decline in exports and investment in the export industries. ‘The outlook for the Finnish economy is burdened by industrial restructuring, weakened cost-competitiveness and a contracting working-age population. Turning this trend around is vital and will require determined action,’ said Governor Erkki Liikanen today at the launch of the latest issue of the Bank of Finland journal Euro & talous.
In Finland, the price of labour has risen faster than average among the country’s trading partners, while companies’ wage-paying capacity has developed more weakly, particularly since 2007. In the export industries, profitability has declined. ‘In Finland, we need solutions that can substantially improve cost-competitiveness. This will bolster confidence and improve the outlook for economic growth as exports and investment gather strength,’ Governor Liikanen pointed out.
Finland’s public finances remain weak. The GDP ratio of the general government deficit is now over 3%, and general government debt over 60%. In the absence of new decisions, the debt will continue to grow rapidly. ‘When an economy can look forward to a prolonged period of strong growth, growing public debt is less of a problem. This is, however, not the case at the moment. Taking on more debt simply passes the burden onto the young, who will also be forced at the same time to bear the costs of health and care services as well as pension costs to the extent that pensions are under-funded,’ Liikanen continued.
Improving the possibilities for growth and ensuring the sustainability of the public finances requires structural reforms. ‘The pension reform will reduce the sustainability gap and is a significant achievement. Swift progress is also required with other reforms. It is vital that social and healthcare reform is carried through in such a way as to improve productivity in the public services,’ Liikanen said.
In Finland, the current low level of interest rates has bolstered the economy particularly well via the lower rates of loan interest for households and businesses. ‘The better the measures to repair the economy succeed, the more monetary policy can support growth in Finland,’ Liikanen underlined.
Monetary policy measures have significantly eased financial conditions and supported the real economy in the euro area. Euro area inflation has, however, hovered around zero for over a year already, and the inflation outlook remains very weak. At its December 2015 meeting, the Governing Council of the ECB decided on a further easing of monetary policy. The deposit rate was lowered to -0.3%. In addition, the Eurosystem’s expanded asset purchase programme was extended to run to March 2017, and, if necessary, purchases will also continue beyond that date. ‘The Governing Council’s decisions were taken in order to secure a sustained adjustment in the path of inflation consistent with its aim of achieving inflation rates below, but close to, 2%, and to secure the anchoring of medium-term inflation expectations in accordance with this target,’ Governor Liikanen emphasised. The Eurosystem will also reinvest the principal payments on the securities in the purchase programme as they mature.
- Determined action needed to strengthen the economy
- Euro & talous publication website (in Finnish)
- Slides (PDF, in English), Slides (PDF, in Finnish)
Forecast for the Finnish economy will be published in English later in December at www.bofbulletin.fi.