Finland’s economy and the euro area economy are continuing to recover strongly, although the quickest phase of growth is beginning to fade. The monetary policy pursued by central banks has helped businesses and households weather the effects of the COVID-19 crisis and has supported economic growth. Uncertainty has increased, however, particularly on account of the deterioration in the pandemic. ‘Bringing the pandemic under control remains central both in terms of people’s health and for the economy,’ says Bank of Finland Governor Olli Rehn.

In the early phase of the COVID-19 crisis, euro area inflation slowed substantially. During the course of 2021, inflation has increased, and was 4.9% in November. The surge in inflation is explained by the rise in energy prices, the low level of prices in the comparison period and production bottlenecks.

Even if inflation remains high for longer than anticipated, the forces driving it are to a great extent expected to subside next year. ‘There is considerable uncertainty about the path which inflation will take, and I’m well aware that rising inflation feeds through to our everyday lives,’ says Governor Rehn. ‘The factors that have been driving inflation this year will not themselves lead to a longer term upsurge in inflation, unless they are accompanied by second-round effects and a wage-price spiral,’ continues Rehn.

At its December 2021 meeting, the European Central Bank’s Governing Council determined that the progress on economic recovery and towards its medium-term inflation target permits a step-by-step reduction in the pace of its asset purchases. ‘Net asset purchases under the pandemic emergency purchase programme can be discontinued at the end of March 2022, as the economy and inflation are recovering from their low levels during the pandemic. As a whole, monetary policy will remain accommodative to ensure that inflation stabilises at its 2% target over the medium term,’ explains Governor Rehn.

Under stressed conditions, the Governing Council of the ECB stands ready to adjust all of its monetary policy instruments, as appropriate and in a flexible manner. The Governing Council decided that flexibility will remain an element of monetary policy whenever threats to monetary policy transmission jeopardise the attainment of price stability.

The COVID-19 crisis has led to a substantial rise in Finland’s public debt. Alleviating the effects of the pandemic using public funds has been justified during the acute phase of the crisis. Once the economy is on a stronger footing, an expansionary fiscal policy becomes less effective in supporting growth and employment. ‘With the economy now standing on firm ground, there is good reason to change direction in order to prepare for the ageing of the population and to strengthen the sustainability of our public finances,’ underlines Governor Rehn.

‘To bring the public finances onto a sustainable path, it may be of help to have a comprehensive, regularly prepared review that critically examines each expenditure item.Such a spending review would be most meaningful if it has the support of decision-makers and is commissioned by them,’ he adds.

According to the Bank of Finland’s new long-term forecast, economic growth in Finland will average 1.2% per annum over the next 20 years.Finland’s population will decline, and labour productivity growth will be sluggish. The outlook for productivity is dampened by the likelihood that the average level of education in the population will begin to fall in the decades ahead. ‘The growth prospects for the Finnish economy can be boosted by investing in education and improving the possibilities for hiring globally. Strengthening the incentives to search for employment will also be important,’ explains Governor Rehn.