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Finnish economic outlook: Towards a new dawn

Finnish economic outlook: Towards a new dawn

The outlook for the Finnish economy this year is good, as long as the service sectors can reopen. Private consumption, boosted by recovering employment, will act as a growth driver. Meanwhile, the recovery of the global economy will improve the outlook for exports and investment. Public finances, on the other hand, face plenty of challenges.

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Looking beyond the coronavirus

Nordea Economic Outlook January 2021 cover showing COVID-19 vaccine vialThe coronavirus pandemic will continue to wreak havoc across the world early this year. However, we are already looking towards the summer, when the seasonal factors are expected to curb the spread of the virus and at-risk groups have been vaccinated, which means restrictions can begin to be lifted and the economy opened up.

The Finnish economy continued to recover from the initial shock caused by the coronavirus, and by November, the total output was only 0.4% down from a year earlier. The economic recovery slowed down late in 2020 due to the second wave of the coronavirus. However, the Finnish economy has not entered a new slump, as the economies of many other countries have. In the service sectors, the situation continues to be dire. For the full year of 2020, Finnish GDP is estimated to have contracted by 3%.

The economy is forecast to grow by 3% this year, driven by private consumption, and the GDP level preceding the coronavirus crisis will be reached in late 2021. Next year, the economy is expected to grow by 2%.

The risks facing the economy, however, have not disappeared, and the forecasts include a considerable degree of uncertainty. Our forecast is based on the assumption that the coronavirus crisis in Finland will remain moderate in the spring and will subside in the summer, and that no new sweeping restrictions will have to be imposed next autumn.

Improved employment will support growth

The employment rate has begun to recover rapidly, as the number of employed persons and the total wages and salaries climbed back to the level of 2019 late last year. The workforce is also growing, which is rare in such weak economic conditions. Particularly the proportion of those aged over 55 in the workforce has continued to grow.

The growth in employment and wage increases of about 2% will increase consumers’ purchasing power this year, as inflation is expected to remain moderate, even though the prices of oil and other commodities are up.

Despite the rebound in the labour market, there were still 315,000 people who were unemployed or furloughed in November 2020, which was approximately 86,000 more than a year before. The largest number of furloughs has taken place in the hotel and restaurant sector and the transportation sector, which were the hardest hit by the coronavirus. The unemployed in these sectors can expect relief only after the coronavirus restrictions can be lifted. However, the unemployment rate is forecast to drop to pre-coronavirus crisis levels in late 2022.

Finland: Key figures

2018 2019 2020E 2021E 2022E
Real GDP, % y/y 1.3 1.1 -3.0 3.0 2.0
Consumer prices, % y/y 1.1 1.0 0.3 0.8 1.2
Unemployment rate, % 7.4 6.7 7.7 7.6 6.9
Wages, % y/y 1.7 2.1 1.8 2.0 2.0
Public sector surplus, % of GDP -0.9 -1.0 -4.7 -3.1 -2.5
Public sector debt, % of GDP 59.6 59.3 70.0 70.5 70.7
ECB deposit interest rate (at year-end) -0.40 -0.50 -0.50 -0.50 -0.50
Charts showing: A) Finnish GDP will grow rapidly this year and B) Finnish labour market has begun to recover

Consumption comes roaring back

Private consumption will serve as the driver of the economic recovery this year. Last year, private consumption contracted by about 4%, as households saved around 5% of their disposable income. As the coronavirus restrictions are removed and the economic uncertainty abates, consumers are expected to start spending again, and pent-up demand will begin to unwind. Private consumption is expected to grow 3.3% this year.

Many service sectors, in particular, are eagerly awaiting the recovery in private consumption. Nordea’s data indicates that, even though the total volume of card payments reached the previous year’s level in December, business in many service sectors is still 30% slower on average than a year ago. The tourism and hospitality industry is eagerly waiting for the return of foreign tourists and business travellers. Many Finns are also looking forward to travelling abroad once borders are opened, and demand for holiday packages has picked up, which is good news for the hard-hit airline and cruise industries.

Private consumption will serve as the driver of the economic recovery this year.

Juho Kostiainen, Senior Analyst, Nordea

Goods exports and manufacturing are perking up

The manufacturing sector has fared substantially better during the coronavirus crisis than in many previous crises.  Towards the end of 2020, new manufacturing orders indicated year-on-year growth after lagging behind the previous year’s level, and goods exports picked up clearly towards the end of the year as global trade recovered.

It appears that the global investment recession experienced after the financial crisis will not be recurring this time, and the Finnish economy is not suffering from any acute competitiveness problems, which is extremely positive from the perspective of goods exports and manufacturing. Investments in clean energy, electric transportation and digitalisation will require ample resources in the coming years. Investments are supported by the low interest level and public stimulus projects, as well as the EU stimulus package, which focuses on the transition to a green economy and on digitalisation.

Finland’s service exports have not yet begun to recover after shrinking by almost a third last year. While service exports are hampered particularly by the weak state of the travel industry, ICT services and logistics services also saw their exports decline during the coronavirus year. Once the crisis subsides, growth in service exports is expected to outpace growth in traditional goods exports.

The improved outlook for manufacturing is also increasing businesses’ plans for investment. Manufacturing investments are forecast to start growing this year, as companies begin to carry out postponed repair investments as well as allocate more resources to new capacity and product development.

The quick rebound in the housing market has sent the number of building permits for residential construction rising, and housing construction is expected to begin growing again this year (more in the housing market theme article from the Nordea Economic Outlook). In other construction, the number of permits and new construction starts has decreased significantly. It is yet unknown if remote working and the online sales revolution will be permanent, but uncertainty over the future is holding back investments in commercial and office buildings. As a whole, construction is expected to contract slightly this year but to return to a growth track next year.

Charts showing: C) Private consumption continues to recover in Finland and D) Finnish government finances have deteriorated rapidly

Public finances more robust than expected

The government has assumed a large role in managing the economic fallout from the coronavirus crisis, offering relief to businesses, municipalities and unemployed from the public purse. As a result, municipal finances were exceptionally strong last year due to the abundant subsidies from the central government.

Despite the sharp increase in expenses and drop in revenue, the government budget deficit appears to be only around EUR 13 billion in 2020, or EUR 6 billion smaller than the estimates in the government’s supplementary budgets. The government budget deficit will decrease this year as economic conditions improve. Government debt increased by EUR 18 billion last year to cover for the budget deficit, public companies’ capitalisation and increase the amount of government funds. The entire public sector’s debt rose to around 70% of GDP.

The government has been able to borrow very cheaply – even at negative rates – so the higher indebtedness has not led to an increase in interest expenses.  However, the added debt does increase the risks related to a rise in interest rates. The government could defend against higher interest rates by extending the average maturity of government debt and the average fixing.

The public finances have a structural deficit that will not fully disappear once the economy picks up. The ageing of the population will increase public spending every year while the number of working-age citizens continues to decline. Therefore, more labour immigration and steps to improve the employment rate are needed to balance the public finances.

The economy in the coronavirus crisis and beyond

The economic damage has been less severe in Finland than in many other countries, thanks to successful efforts to combat the coronavirus. Businesses have been forced to furlough employees and borrow in order to survive, and government subsidies have helped them navigate through the crisis. It has been crucial to keep viable businesses alive to avert the loss of important production capacity so that the economy can start to grow swiftly as soon as demand picks up.

The coronavirus came as an external shock to the economy, so the recession was not the result of an imbalance in the real economy or the financial markets. That said, the global economy was cooling down before the coronavirus crisis, and the Finnish economy was already contracting at the end of 2019. The economic recession caused by the coronavirus is expected to be short-lived since there are no signs of a major need for reallocating labour or capital.

The digital ways of working and service models adopted during the coronavirus pandemic could in turn boost growth in productivity once the crisis abates. However, long-term growth in productivity will require investments in research and development, which will ultimately result in innovation and higher productivity.

This article first appeared in the Nordea Economic Outlook: The Growth Booster, published on 27 January 2021.


Juho Kostiainen, Senior Analyst, Finland
Juho Kostiainen, Nordea Senior Analyst

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