OECD Economic Outlook, Volume 2019 Issue 2

Finland

The expansion is projected to continue to lose momentum, with GDP growth edging down to around 1%. Exports are set to weaken, mainly reflecting a deteriorating global environment, and housing investment will slow from recent high rates. Despite a sharp fall in job creation, unemployment should remain unchanged as labour force growth stalls.

Fiscal policy is currently neutral but will appropriately become expansionary in 2020, with the budget deficit widening to 11/2 per cent of GDP in 2020-21. Promoting employment by enhancing work incentives, particularly for older workers and young women, and advancing productivity-reviving reforms are essential to boost growth and improve the fiscal position.

Growth is slowing

Economic growth slowed to 1.2% (year-on-year) by mid-2019, reflecting weakening private consumption and residential and business investment. Both consumer and business confidence have fallen, weighed down by the deteriorating global economic outlook and the downturn in the labour market – the unemployment rate has started rising again after having fallen steadily since 2016. The number of building permits issued has plunged, pointing to further declines in residential investment from near record levels. Export growth was strong early this year owing to temporary large ship deliveries, but is slowing due to the sluggish growth in key export markets. Inflation is rising as a tighter labour market pushes up wages.

Employment growth and Investment growth: Finland

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

Source: OECD Economic Outlook 106 database; and Statistics Finland.

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Finland: Demand, output and prices

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Measures to boost employment and productivity are needed

The underlying primary budget deficit is projected to rise by 0.8% of GDP by 2021, mainly reflecting increases in government consumption expenditure and transfers. The government aims to return to budget balance by 2023, implying a consolidation of 1.2% of GDP between 2020 and 2023. This goal is partly to be achieved by increasing the employment rate from 72.4% currently to 75% by 2023, which would bring it closer to the average for other Nordic countries. The shortfall in Finland’s employment rate largely reflects lower labour participation of older workers and young women. Key to boosting the employment rate for older workers is closing early retirement routes, notably extended unemployment benefits (“the unemployment tunnel”) and preferential conditions for accessing disability benefits. The participation of young women could be increased by reducing the home-care allowance and enhancing access to quality childcare.

Productivity growth remains subdued and has not recovered as fast as in previous upswings. It could be boosted by reducing barriers to product market competition in some sectors, notably transport and retail distribution, increasing funding for young firms so that their involvement in R&D and innovation can be strengthened, and removing unnecessary obstacles to the growth of start-ups.

Growth is projected to weaken

Growth is projected to slow to less than 1% in 2021, dragged down by declines in the growth of exports and residential investment. Private consumption growth will also moderate, reflecting lower employment growth. The unemployment rate is expected to remain around the current level but inflation is projected to edge up owing to rising labour costs. The main downside risk to the outlook is a greater-than-expected downturn in Germany, Finland’s largest export market, depressing exports and business investment. There is also a risk that wage increases are higher than compatible with preserving Finland’s cost competitiveness, weighing further on growth. However, a faster-than-expected relaxation of trade tensions and economic recovery in euro area countries could lead to surprises on the upside.