Govt forecasts economy to shrink by 5.5% in 2020

The Finnish economy will shrink by 5.5% this year, according to a forecast made by the finance ministry in its latest Economic Survey published on Thursday.

In 2021-2022, the economy, however, will return to its pre-crisis growth track. Although a crisis of short duration is not expected to weaken the economy’s production potential significantly, it will take time to make up for the production lost during the downturn period.

Economic forecasts across the world have been upended by the coronavirus (COVID-19) pandemic and the measures taken to prevent the virus from spreading. The transformation has been unprecedented in its speed and scale.

The lockdown measures taken in Finland to prevent the spread of the virus are restricting movement and business activities, and this has serious consequences for economic growth.

The biggest drop in the country’s gross domestic product (GDP) will be in the second quarter of this year, after which the level of growth is expected to pick up. The GDP is forecast to grow by 1.3% in 2021 and 2022.

The deficit in general government finances will rise this year by almost EUR 14 billion to a total of EUR 16.6 billion, or 7.2% of the GDP.

The foreseeable growth in the economy will not be enough to restore the general government budgetary position, and Finland’s general government finances will remain substantially in deficit in the coming years.

“Everything depends on how deeply the economy plunges and how long it stays there. The danger is that the longer the economy suffers the greater the difficulty in reviving it,” said Ministry of Finance Economics Department Director-General Mikko Spolander.

The global economy already began to slow down in the first quarter of this year, as China’s economy contracted sharply. Growth will nevertheless pick up in the second half of the year, despite the contraction in China. In all, though, the world economy is expected to shrink by two per cent in 2020.

The worldwide restrictions on movement are having an adverse impact on trade in goods around the globe. In 2020, as a whole, world trade will be down by five per cent.

The level of economic activities in Europe has declined substantially. In the United States, economic growth will turn negative as the country becomes the centre of the pandemic.

The sharp contraction in the Finnish economy is a result of the decline in global demand and in Finnish exports, and the restrictive measures taken by Finland to tackle the coronavirus epidemic. The restrictive measures have the effect of reducing private consumption. This is particularly so in the case of services, but the consumption of goods is also affected. The least affected is the consumption of daily consumer goods.

The uncertain outlook also means investments are being rescheduled or put on hold entirely. Private investment will be down substantially.

The number of people employed is falling as the global pandemic closes down business activities and shuts national borders. Employment in Finland in 2020 will be down, and the employment rate will fall to 71%. Correspondingly, the number of unemployed people will rise significantly, pushing the unemployment rate up to eight per cent for 2020.

An exceptional degree of uncertainty surrounds current forecasts, as assessments of the duration of COVID-19 mitigation measures change. Moreover, estimates of the economic impact of the restrictions are also uncertain.

In some sectors the restrictions have closed down business activities completely, while in others production continues or is even increasing. The current forecast is based, to a greater extent than usual, on assumptions about shifts in demand and supply.