Govt forecasts 2.6% growth for 2021

Underpinned by global growth and recovery, growth in Finland’s economy will quicken to reach 2.6% for 2021, according to the updated forecast of the Ministry of Finance published on Thursday.

The trajectory of the economy has fluctuated considerably in the first part of the year, reflecting the path taken by the COVID-19 pandemic, but a favourable outlook has emerged and become more firmly established.

Finland's economy will make a distinct recovery in the latter part of 2021 and the early months of 2022. The export market will pick up strongly and the investment outlook will become brighter, which will lead to a growth in gross domestic product (GDP) of 2.8% in 2022.

GDP growth in 2023, however, will slow to 1.6%.

General government finances will be in deficit by over EUR 10 billion this year, despite the positive trend in the economy. Next year, the imbalance between expenditure and revenue will narrow considerably, as many of the pandemic-related support measures will come to an end and GDP growth will continue to be brisk. General government finances will nevertheless remain significantly in deficit, and the ratio of general government debt to GDP will continue to rise.

“The latest data indicate that the expected upturn in the economy is getting under way. Demand will recover, employment will grow and the chasm created by the pandemic will close rapidly. The economic upturn now at hand is an ideal time to support structural change in the economy and strengthen public finances,” said Mikko Spolander, Director General at the Ministry of Finance.

Industrial output will grow due to a powerful global recovery and rising demand for exports. In construction, 2021 is a busy year for house building, but overall the construction sector will not see growth until 2023. Service provision is expected to pick up strongly in the third quarter of 2021 and to continue growing throughout the forecast period.

Private investment will show only slight growth for the first half of 2021, but this will pick up towards the end of the year. Investment in residential construction will not decline as sharply as earlier forecast, as the trend in newbuilds was favourable in the early part of the year. The positive outlook for industry will be favourably reflected in construction in 2022.

A strong global economy will spur on investment in machinery and equipment, which will see growth this year and also in 2022, when it will be underpinned by domestic projects. Among other areas of investment, the level of investment in research and development will increase throughout the forecast period, due to favourable support policies, among other things.

Foreign trade will grow sharply during the forecast period. Goods exports will climb rapidly in both 2021 and 2022 in the wake of the growth in world trade. Both the export and import of services will return to a growth track, though more slowly than for foreign trade in goods. There will be major differences between sectors, however. Annual growth of exports and imports will be highest in 2022, when a strong rise in foreign trade is expected in services, in particular.

Employment has grown continuously since June 2020, and the recovery in the economy will also strengthen employment growth in 2021 and 2022. Next year, employment will exceed the pre-pandemic level, and the growth in demand for labour will push up the employment rate to 73% in 2023. The employment measures decided by the Government will help support the supply of labour, and the unemployment rate will fall to 6.6% in 2023. Wages and salaries will rise this year more rapidly than in 2020, due to higher contractual pay rises. Earnings are expected to rise by about 2.5% in the next couple of years.

Consumer prices will rise quickly in 2021, driven by energy prices. Although the inflation spike caused by energy prices will be transitory, the strengthening level of demand will gradually encourage faster growth in prices.

The imbalance between general government expenditure and revenue this year will be smaller than was earlier estimated in the spring. General government finances will be boosted by strong employment growth in particular. Public expenditure will, on the other hand, remain high due to the pandemic-related healthcare expenditure and support measures. The forecast takes into account the Government’s proposed third supplementary budget for 2021, submitted to Parliament in May. Despite the favourable growth in the economy, the deficit in general government finances will be substantial, at 4.3% of GDP.

Next year, the general government deficit will shrink significantly as GDP growth continues to be brisk and many of the pandemic-related support measures come to an end. General government finances will nevertheless remain considerably in deficit throughout the first half of the decade, and the ratio of general government debt to GDP will continue to rise.

The budgetary position of central government in 2021 is estimated to show a deficit of 4.7% in relation to GDP. Central government will cover the majority of costs related to the COVID-19 pandemic. The EU's Recovery and Resilience Facility (RRF) will also raise expenditure, especially in the period 2021–2023. However, the expenditure increases associated with the RRF will not increase the central government deficit or the deficit in general government finances, because for the forecast period it has been assumed that the revenue from the RRF will meet the expenditure.

The pandemic-related support measures for local government finances resulted in a surplus for local government in 2020, and will also ease local government finances in the current year.