Economy to shrink by 7% in 2020: Bank of Finland

The Finnish economy will contract sharply this year by about 7% due to the coronavirus pandemic, according to a forecast of the Bank of Finland published on Tuesday.

The central bank of the country, however, in a press release said it does not see a rapid recovery from the economic crisis.

The volume of output will be below pre-crisis levels in the years ahead. For the years 2021–2022, the growth forecast is around 3.00% per annum.

According to the forecast, the economic outlook, both globally and in Finland, weakened suddenly and substantially during the course of the spring on account of the coronavirus pandemic.

“The outlook for the Finnish economy is overshadowed by both the weakness of the global economy and the restrictive measures introduced at home. Weakened household and business confidence in Finland is an additional factor that overshadows the prospects for growth,” Bank of Finland’s Head of Forecasting Meri Obstbaum told a press briefing.

The forecast contains an exceptional degree of uncertainty. According to the alternative scenarios, the contraction of the economy in 2020 could be as little as 5.00% or as much as 11%, depending on how the coronavirus epidemic progresses and how successfully it can be contained in different parts of the world.

Not all companies will survive the recession and some job losses will be permanent.

‘It will probably not be possible to avoid permanent losses of output in Finland, but economic policy can be used to mitigate their scale,’ Obstbaum observed.

Employment will decline much less than during the depression of the 1990s, but slightly more than in the financial crisis of around a decade ago. The employment rate will decline around two percentage points in 2020–2021 and recover only partially in 2022.

Both domestic demand and net exports will contract strongly in 2020. At the same time, the structure of the economy will change in an unfavourable direction, towards increasing dependence on public demand.

Foreign trade will not support the Finnish economy during the years covered by the forecast, as the halt in global investment caused by the corona crisis and Finland’s weakening cost-competitiveness will keep the outlook for exports very subdued.

Moreover, the prevailing uncertainty will continue to slow growth in consumption and investment, even after the lifting of restrictions.

The general government balance will deteriorate and public debt will grow considerably in a short time. This is due to the decline in tax revenues, growth in unemployment and other expenditures as well as government measures to soften the economic impacts of the lockdown.

The general government deficit relative to GDP will deepen to 8.00%, and public debt will rise to 71% of GDP in 2020. In 2022, the debt ratio will already be approaching 75%, from where it will continue to grow in the years ahead.