Flame From A Lit Match
Finnish economic outlook: The fuse is lit

Finnish economic outlook: The fuse is lit

The Finnish economy will recover quickly this year and the next. The decreasing savings ratio and growing employment will accelerate domestic consumption. Manufacturing and exports are already growing well, driven by the recovering global economy. Public finances, on the other hand, face plenty of challenges.

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A strong recovery

Nordea Economic Outlook May 2021 front cover

The third wave of the coronavirus pandemic was quickly beaten back in Finland during April. The vaccination rate is approaching a high enough level to keep the risk of a significant turn to worse small. Still, the virus mutations create uncertainty and may aggravate the situation again.

The Finnish GDP contracted by 2.8% last year, and like the rest of the Nordic countries, Finland has survived the coronavirus crisis with relatively moderate financial damage. Many service sectors are, however, still having difficulties after the lockdown restrictions imposed early in the year, but the outlook for the rest of the year is positive in the home market. In manufacturing, production has already surpassed the pre-pandemic levels, and the order books have started to fill up again.

The economy is forecast to start a tangible recovery during the summer, boosting GDP growth to 3% this year. Growth is expected to remain at 3% in 2022, but to slow down significantly after that, as the working population continues to shrink.

The risks facing the economy have not disappeared, and the forecasts include a considerable degree of uncertainty due to strong cyclical fluctuations. Our forecast is based on the assumption that the coronavirus pandemic will be completely over in Finland during the summer, and that no restrictions affecting the economy will have to be imposed anymore. If the pandemic surges in Finland or elsewhere, it will affect the economic outlook negatively.

Find out more about the Nordea Economic Outlook: Unrestricted Growth.

Employment on the rise

Employment growth continued in early 2021, despite the coronavirus restrictions still hitting employment in the restaurant, hotel and culture sectors in particular. There were 322,000 people who were unemployed or furloughed in March. In manufacturing, construction and other services, employment is already at the levels seen before the pandemic.

The forecast expects employment to rise rapidly starting from the summer when the demand in the service sectors will improve. The employment rate is anticipated to reach 73% towards the end of 2022, and the availability of labour will start to restrict economic growth in some sectors very quickly.

The wage bargaining round that will take place next autumn will be very interesting, considering the introduction of the new, more decentralized system. While there are factors prompting wage raises, such as an improved economic outlook and higher inflation, unemployment is still high and the ability of businesses to pay higher wages is low due to the pandemic.  We expect wages to rise 2% next year, which is the same pace as this year.

Finland: Key figures

2018 2019 2020E 2021E 2022E
Real GDP, % y/y 1.3 1.3 -2.8 3.0 3.0
Consumer prices, % y/y 1.1 1.0 0.3 1.6 1.5
Unemployment rate, % 7.4 6.7 7.8 7.6 7.0
Wages, % y/y 1.7 2.1 1.8 2.0 2.0
Public sector surplus, % of GDP -0.9 -0.9 -5.4 -3.5 -2.5
Public sector debt, % of GDP 59.7 59.5 69.2 71.2 71.8
ECB deposit interest rate (at year-end) -0.40 -0.50 -0.50 -0.50 -0.50
Charts showing: A) Finnish production is on the rise in all the main sectors and B) The labour market will recover quickly

Consumption comes roaring back

Domestic consumption is revving up as the spring progresses, since the coronavirus pandemic has been brought under control and the restrictions are being lifted gradually. One encouraging sign is that card payments within services increased in late April. Private consumption is expected to grow 4% this year with rising employment and the release of pent-up demand, which will push the savings ratio down. (Read more on the outlook for consumption and savings.)

The rising inflation will eat away part of increasing purchasing power. In March, inflation stood at 1.3%. It has accelerated because the prices of oil products have risen, but the prices of other raw materials and industrial production inputs have also shot up as a result of inventories being supplemented early in the year.

In the service sector, the inflation pressure is still low, but the peak in demand resulting from the lifted coronavirus restrictions may generate supply bottlenecks in the tourism sector, for instance. The quick rise in prices is, however, expected to remain temporary, and the price rise is not expected to accelerate anymore next year.

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

Juho Kostiainen, Nordea Economist

Manufacturing is speeding up

Growth in manufacturing has continued this year, and production volumes have already surpassed the pre-pandemic levels. The manufacturing outlook has improved in all industrial sectors, except for the production of printing paper, which is suffering from a structural decline in demand.  The growth pace has been the quickest in the timber industry, supported by the rapid global recovery of construction.

One particular manufacturing driver has been the quick recovery of exports propelled by the growing world trade. Backed by this trend, Finnish export demand is expected to rise 8% this year. The order books of the export industry already look normal, and new orders are coming in at such a pace that the growth outlook remains excellent for the next few years.

For Finnish service exports, growth continues to be subdued, even though the sector does not depend on tourism as heavily as in many other European countries. Service exports, which cover about one-third of total exports, are again expected to outperform goods exports after the coronavirus crisis is over, driven by ICT services.

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.

Booming housing market drives construction

Home sales have broken records this spring, and the trend is no longer explained solely by the recovery from the abrupt halt brought on by the start of the pandemic last spring. Funds saved from other spending have, together with new mortgage loans, been used on the housing market for changing homes to meet the needs of more frequent remote working. Investment properties have also attracted buyers despite the subdued rental demand in cities due to distance learning and weak employment in the service sectors.

Housing prices have continued to rise in the growth centres, and improved employment, the low interest rate level and scarce supply will support the prices throughout the rest of the year. In locations with declining population, housing prices are expected to continue to fall.

Thanks to the increased demand and the rise in housing prices, the number of permits and new housing construction starts is rising again in the growth centres. In other construction sectors, especially for commercial and office buildings, new construction starts continues to decline. As a whole, construction is expected to remain at last year’s level in 2021 but to return to a growth track next year.

Charts showing: C) The housing market is burning hot and D) Government finances have deteriorated rapidly

No balance to public finances

The public sector deficit grew to 5.4% of GDP last year. This is almost entirely attributable to government finances, as municipalities and social welfare funds broke even with the government’s support.

Public spending has rocketed with the growing unemployment benefits and coronavirus relief for businesses, which is why the government spending limits have been exceeded in 2020 and 2021.  On top of the costs for unemployment and other spending arising from the pandemic, the government expenditure budgeted for 2021 includes a EUR 1.7bn reservation for the project to replace the Finnish Air Force’s fighter jets. The total costs of this project are expected to be EUR 10bn. After its discussions on the framework on spending, the government decided to continue to exceed the spending limits in 2023 and 2024, which will make the structural government deficit even larger.

This means that the public finances will not be balanced despite rapid economic growth, as spending has been increased permanently and the employment measures that would support the public finances have not been sufficient. As a result, it looks like balancing public sector spending and cutting the budget deficit will need to be addressed by the next governments. The ratio of public sector debt to GDP jumped 10 percentage points to 69.2% last year. Despite the major government deficits, the ratio will grow moderately this year and the next, as economic growth is projected to be strong.

Financial challenges after the pandemic

The financial damage caused by the coronavirus crisis seems relatively moderate in Finland, and the momentum of the global economy and the use of savings for consumption will send the economy back to a growth track. However, it looks like rapid economic growth will not last beyond the next few years due to the re-emerging structural challenges. A shrinking working population, high structural unemployment, growing costs of health care and subdued productivity growth are a ticking time bomb and the fuse is already lit.

The lack of skilled labour will restrict economic growth starting from next year, so now should be the time to take quick action to make social welfare more motivating, to invest in employment services and education and to promote labour migration. Finland will need an increasing share of the working-age population to be employed in order to be able to cover the rising costs of the welfare state in the future. The financial operating environment and taxation will also need to be attractive to businesses and investments to generate productivity growth in both businesses and public services.

This article originally appeared in the Nordea Economic Outlook: Unrestricted Growth, published on 11 May 2021.


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

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