OECD Economic Outlook, Volume 2019 Issue 1

Finland

The economy is projected to expand at a slower pace of around 1½ per cent in 2019‑20, as export growth will weaken due to lower foreign demand growth, especially for investment goods. Residential investment will remain weak. Earnings and employment growth will support private consumption, even though gradually rising inflation is set to erode household real incomes. Employment growth will slow, as labour market mismatch binds.

Strong growth, rising employment and fiscal consolidation measures have reduced government debt. However, population ageing will continue to weigh on public finances and potential growth. Raising the employment rate to the level of other Nordic countries through enhancing skills and strengthening active labour market policies is key to addressing long-term fiscal challenges.

GDP growth is slowing

Residential investment growth has declined considerably from record levels. Business and consumer confidence have fallen, but are still close to their long-term averages. Export growth is sluggish, as global trade tensions weigh on foreign demand, while strong domestic demand pushes up imports. The unemployment rate has fallen to its lowest level since 2011, thanks to robust output growth, wage moderation resulting from the Competitiveness Pact and activation measures. Nevertheless, structural unemployment remains relatively high due to labour market rigidities and skills mismatches. The tightening labour market is starting to push up wages, which should gradually lift inflation from its currently low level.

Residential investment and structural unemployment: Finland

1. Year-on-year percentage changes of 3-month cumulated flows.

Source: OECD Economic Outlook 105 database; and Statistics Finland.

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Finland: Demand, output and prices

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Employment needs to be boosted further

The ECB’s monetary policy continues to provide strong support to the economy. Fiscal policy is broadly neutral, with a small reduction in the government budget deficit over the projection period resulting mainly from higher employment. The fiscal position provides room to let the automatic stabilisers operate and for some discretionary fiscal stimulus in the case of a severe downturn.

Finland’s employment rate, which remains well below that in other Nordic countries, will need to rise further, not least to finance growing age-related spending. The employment rate has reached the government’s target of 72%, thanks to a strong economy and a range of policy reforms carried out over the past few years to boost employment. The duration of the earnings-related unemployment insurance benefit was shortened to increase work incentives. Early childhood education fees were lowered to increase work opportunities for women. Stricter conditions to receive unemployment benefits were set. Nevertheless, high tax rates upon return to work and complex benefit rules still weaken work incentives for many. Strengthened active labour market policies and welfare reform are required to tackle structural unemployment.

Growth will slow and is vulnerable to further global economic weakness

Growth is projected to weaken markedly, due to capacity constraints, notably skilled-labour shortages, and fading foreign demand. Private consumption growth will slow somewhat as gradually rising inflation limits household real income gains. Government investment will slow after the completion of several projects. Residential investment will decelerate, but non-residential investment will remain relatively strong due to several planned major projects, notably in the forest and shipping industries. Exports will grow only moderately, reflecting weak external demand from the euro area and Germany in particular. Inflation will rise due to high capacity utilisation. Employment will expand modestly as the working-age population continues to shrink and labour market mismatches persist. The main downside risk to the outlook is a further slowdown in global growth and investment, as equipment goods account for a large share of Finland’s exports. Higher wages resulting from labour market tightness would support private consumption, but could erode competitiveness.