The upswing in the Finnish economy has strengthened and the base of growth is now broadening from private demand towards exports. Economic growth will, however, slow towards the end of the forecast horizon 2017–2019. This reflects structural weaknesses in the Finnish economy that weigh on potential growth.
The Bank of Finland forecasts GDP growth of 2.1%, 1.7% and 1.4% in 2017, 2018 and 2019, respectively. GDP will reach the level of 2008 during the course of 2019. Risks to the forecast are on the upside in the short term, but weaker-than-expected developments are possible towards the end of the forecast horizon. Inflation in Finland will pick up, but will be lower than the euro area average throughout the forecast horizon 2017–2019.
Despite the firming up of exports, economic growth in the forecast period will mainly depend on private consumption and investment. Private consumption growth will be bolstered by an improvement in the employment situation and rising purchasing power. At the same time, households will continue to accumulate further debt. Looking to the immediate years ahead, the household savings ratio will remain exceptionally modest, as the low level of interest rates and strong consumer confidence will encourage households to consume.
The recovery in demand will increase the need for investments both in Finland and globally. Growth in private investment in Finland will be boosted particularly by construction, but also an increase in fixed investment. The rate of growth in investment will, however, decelerate slightly towards the end of the forecast horizon, with the flattening out of the upward trend in construction.
Finland's exports will benefit from the strengthening of the export markets and from the composition of growth generally becoming more favourable for Finnish exports. Finnish export prices will rise more slowly than those of competitor countries, and the economic situation in Russia will improve, with these factors, too, making a positive contribution to exports.
The employment situation is expected to ameliorate further, driven by the cyclical trend, but employment growth will be restricted by labour market mismatch problems and constraints in labour supply. Demographic change will slow expansion of both the labour force and the number of employed in the forecast years. The emphasis of economic growth will also be shifting to less labour-intensive sectors, as exports assume a greater role as the engine of growth. At the same time, productivity growth will improve.
Despite the improvement in the cyclical situation, Finland's external indebtedness will continue to grow. The accumulated current account deficit in 2010–2016 already stands at more than EUR 14 billion, as both general government and household debt levels have been rising rapidly. The current account will remain persistently in deficit in the forecast period.
The improved cyclical situation will not be sufficient to remedy the general government fiscal deficit. Fiscal policy will be eased in 2017, on account of lower taxes and reductions in social insurance contributions relating to the Competitiveness Pact. In the later forecast years 2018–2019, fiscal policy will be tightened, but this will not suffice to repair the general government structural deficit. General government debt in the forecast years will grow to 66.8% relative to GDP, and the debt ratio will remain on an upward trajectory.
Inflation will pick up slightly in 2017, but will remain slow throughout the forecast period. Although moderate growth in labour costs as a consequence of the Competitiveness Pact will rein in upward pressures on consumer prices, the positive cyclical environment, greater aggregate demand and higher import prices will boost inflation towards the end of the forecast period.
For further information, please contact Juha Kilponen, Head of Forecasting, tel. +358 9 183 3441.
Forecast for the Finnish economy will be published in English in the end of June at www.bofbulletin.fi.