Uncertainty over the trend in the international economy subdues the outlook for the Finnish economy. According to the Bank of Finland forecast published today, GDP will grow 1.6% in the current year and 1.5% in 2020. In 2021 growth will slow to close to its potential of 1.3%.
Economic growth will be subdued both in the euro area and around the world, and the uncertainty will undermine the corporate sector’s willingness to invest. Growth in Finland’s export markets will slow, but in the baseline forecast the reasonable level of growth in the euro area, improved competitiveness of Finnish exporters and relaxed financing conditions will continue to sustain export growth.
During the forecast period economic growth will rest on domestic demand, i.e. consumption and investment. Improved employment figures, pay rises and the prevailing low inflation will bolster growth in purchasing power and hence private consumption. In addition, households’ financial room for manoeuvre will benefit from the low level of interest rates. Uncertainty over the direction of the economy in general will, however, subdue households’ appetite for consumption.
Housing construction growth has slowed, which in turn will slow growth in private investment. The weakened cyclical conjuncture and structural factors, such as the increasing dominance of services in the economy, combine to explain the slower growth in private fixed investment.
Recent years have witnessed exceptionally rapid growth in employment, with the employment rate now exceeding 72%. However, the most rapid phase of employment growth is now over, and by 2021 the employment rate will only have grown to just over 73%. ‘The slowing of economic growth and decline in the working-age population will mean slower growth in employment,’ said the Bank of Finland’s Head of Forecasting, Meri Obstbaum at the press briefing for the latest issue of the journal Euro & talous. ‘Finding work is also hampered by various types of labour market mismatch, such as the weak availability of labour in some sectors,’ underlined Obstbaum.
The public finances have in recent years been strengthened by the positive trend in the economy and the consolidation measures introduced by the previous government. General government balance will not be achieved in the forecast period, with the general government deficit in 2021 still −0.3% relative to GDP. The forecast does not take into account the fiscal policy plans of the new government.
Finland’s economic growth in recent years has been broadly based, and the number of jobs has increased at a record pace. Although growth will continue, the downside risks are considerable. If the already observed slowdown in growth in Europe, and particularly in Germany, were to last longer than forecast, this would cause both a slowdown in Finnish export growth and an even weaker trend in the economy.
For further information, please contact Head of Forecasting Meri Obstbaum, tel. +358 (0)9 183 2363.