The Finnish economy has returned to growth, driven by private consumption and investment. Growth will, however, remain slow relative to previous cyclical upswings and the rest of the euro area as structural problems in the economy and population ageing dampen recovery. The Bank of Finland forecast foresees GDP growing by 1.3% in 2017 and 1.2% in 2018 and 2019. The risks to the forecast are tilted to the downside and relate to increased uncertainty about developments in the global economy.
Private consumption will still be the main driver of growth. An improving employment situation and low inflation will bolster real disposable household income. Meanwhile, the slowing rise in average earnings in consequence of the Competitiveness Pact will be offset by lower labour taxation. Exports will recover amid better competitiveness and higher external demand. Growth in domestic demand and the deteriorating terms of trade will, however, keep the current account in deficit. The accommodative stance of monetary policy is supporting growth in both Finland and the rest of the euro area. The euro area has become an increasingly important destination for Finnish exports.
Recovery in demand will increase the need for investment. Growth in private investment has picked up in Finland, particularly following a rebound in construction. Even so, growth in the private capital stock will still be subdued in 2017–2019, and corporate fixed investment relative to GDP will remain lower than usual. Due to an investment slump of several years, investment is still nearly 6% lower than in 2011.
The situation on the Finnish labour market has continued to improve. Employment growth will be underpinned by higher labour demand against the backdrop of the Competitiveness Pact and by the fact that economic growth predominantly rests on labour-intensive service sectors and construction. On the other hand, mismatch problems on the labour market, the large number of long-term unemployed and marginalisation among young adults will hamper the recovery of the economy.
Inflation has been higher in Finland than in the euro area on average. Inflation in the immediate years ahead will, however, remain low on account of moderate cost developments. According to the forecast, inflation in Finland will increase to just under 1% in 2017–2018 as the effect of falling crude oil prices recedes. The Competitiveness Pact will contribute to the sluggishness of price developments, as the muted trend in labour costs will be reflected in end-product prices.
The move out of recession, coupled with savings in public expenditure, will strengthen the general government fiscal position. At the same time, however, growth in pension expenditure will remain rapid. The ratio of general government debt to GDP will reach as much as 70% in 2018. Although halting the rise of the debt ratio appears feasible over the medium term, the long-term sustainability problem of the public finances will remain unresolved.
For further information, please contact Juha Kilponen, Head of Forecasting, tel. +358 10 831 3441.
Forecast for the Finnish economy will be published in English later in December or in early January at www.bofbulletin.fi.