Ministry forecasts steady economic growth

The Finnish economy is expected to post growth of 1.2% in 2017, said the Ministry of Finance in its Economic Survey published on Friday.

The GDP growth forecast is bolstered by improving business and consumer confidence, said a government press release.

Growth is also more broad-based than last year. Not only private consumption and investment, but also exports are picking up, said the survey report.

In 2018 and 2019 GDP growth will slow to around the one per cent mark, which is close to the long-term growth potential.

The main drivers of growth in 2017 are a broad-based rise in private investment and an increase in confidence-driven private consumption. Private investment growth is driven by business expansion and replacement investments as well as by consumer housing purchase intentions. Private consumption growth is supported not only by strong consumer confidence, but also improving employment. Export growth prospects are bolstered by strengthening global export demand and improving business cost competitiveness.

In 2018, private consumption growth is set to slow as wage earners’ purchasing power is dented by rising taxes and accelerating inflation. Machinery and equipment acquisitions will drive investment to slightly stronger growth than this year. On the other hand public consumption will remain on a downward track, partly because of the Competitiveness Pact and partly because of fiscal adjustment. Exports growth will continue to accelerate.

The Competitiveness Pact will improve price competitiveness, as measured by unit labour costs, and so pave the wave for exports growth. However, it will take time for the positive impacts of the pact to show up in economic indicators. In 2017 the Competitiveness Pact will have an adverse effect on public consumption.

The Finnish economy may grow faster than predicted, if the strong early monthly data on exports, output and confidence in Finland turn out to be sustainable.

If household confidence remains high, private consumption growth could be faster than predicted, which would bolster economic growth. As a result the high level of household debt would rise further.

The risks associated with private consumption may materialise if the employment trend is weaker than expected. The impacts on consumption would be channelled both via income formation and consumer expectations, which might have the effect of increasing consumer caution and pushing up the savings rate.

The GDP growth rate is enough to keep employment on an upward trend, and the number of people out of work is slowly falling. Labour costs are decreasing as a result of the Competitiveness Pact. Furthermore, employment growth is being accelerated by measures introduced from the beginning of 2017 to increase the supply of labour.

It is predicted that employment will improve by 0.5% a year, and the employment rate will rise to 70% in 2019.

The general government deficit is set to gradually decrease in the coming years. Economic growth and the Government’s actions will help to bolster public finances, but they will not be enough to eliminate the deficit. The foreseeable rate of economic growth will not generate sufficient revenue to cover expenses. Within general government, the sector showing the biggest deficit is central government.

The public debt to GDP ratio fell slightly in 2016, but will begin to edge up again in 2017 because of the central and local government deficits. It is expected that the increase in the debt rate will be reversed towards the end of the decade, but again only temporarily. The growth of the debt to GDP ratio is also being driven by population ageing and the associated rising costs of care, which will continue at a rapid rate in the 2020s.

The Ministry of Finance forecast takes into account the effects of the regional government reform on the structure of public finances. As a result of the reform local government revenue and expenditure will be reduced by almost one-half in 2019. Since the new counties will be financed by central government, the forecast works on the technical assumption that they will come under the same sector as central government in the national accounts. A separate forecast will be prepared for the regional government sector at a later date.

The health, social services and regional government reform is targeting savings of around EUR 3 billion in the long term. It is as yet too early to assess the prospects of achieving this goal as the reform is still work in progress as regards, for instance, the health care freedom of choice provisions. The reform will also entail costs from changes that will have a slight adverse effect on public finances.