The Finnish economy will continue to grow at a robust pace, supported by favourable productivity developments, financing conditions and strong export demand. Output will grow swiftly in the early part of the forecast period, and employment will improve. The Bank of Finland forecasts GDP growth of 2.9%, 2.2% and 1.7% in 2018, 2019 and 2020, respectively.
Economic growth will be underpinned by productivity growth, which has strengthened after several years of muted developments. ‘Total factor productivity, in particular, has developed favourably,’ stated Head of Forecasting Juha Kilponen at the press briefing for the publication of the new issue of the journal Euro & talous. ‘Higher business investment will also help to lay a stronger foundation for growth in the immediate years ahead, Kilponen added.
The continued strong global cyclical trend will boost the export markets and spur Finnish exports, which consist largely of capital goods. The moderate wage increases of recent years have served to improve export competitiveness. The current account will remain in surplus during the forecast period.
Domestic demand will continue to grow robustly throughout the forecast period, bolstered by household consumption and corporate investment. Higher employment, rising earnings and subdued inflation will sustain purchasing power. Growth in household consumption will also be supported by the low level of interest rates and strong household confidence. Private consumption will exceed disposable household income, meaning households will continue to accumulate further debt in the forecast years. Enhanced corporate profitability and attractive funding costs will stimulate investment, although investment growth will slow during the forecast period.
Despite the boom, inflation will remain subdued over the forecast period. Measured by the Harmonised Index of Consumer Prices, inflation will be 0.9% in 2018 and will thereafter pick up gradually to 1.5% in 2020.
The number of employed increased rapidly in late 2017, and employment growth will remain strong throughout the current year. Thereafter, however, employment growth will be restrained by the ongoing contraction in the working-age population, labour market mismatch problems and high structural unemployment.
The general government fiscal balance improved noticeably in 2017 due to moderate expenditure developments and increased tax revenue. Fiscal stance in the forecast period will be loose relative to the cyclical situation. On the back of favourable cyclical conditions, the general government debt-to-GDP ratio will contract below the 60% reference value in 2019.
Finnish economic developments in the immediate years ahead may remain weaker than forecast, if growth in foreign demand decelerates. Some euro area countries witnessed signs of a moderation in economic growth in the spring, and heightened protectionism is reining in global trade growth. On the other hand, if the export outlook does not deteriorate and financing conditions remain favourable, investment growth may be faster than forecast and the economy may grow more strongly than expected. However, high household indebtedness has increased the economy’s sensitivity to negative shocks, since consumer demand could contract rapidly in the event of rising interest rates, falling house prices or declining household income.
For further information, please contact Juha Kilponen, Head of Forecasting, tel. + 358 9 183 3441.