OECD Economic Outlook, Volume 2020 Issue 1

Finland

The COVID‑19 pandemic has pushed Finland into a deep recession, with private consumption and investment as well as exports plunging in the first half of the year. In the event of a second virus wave, GDP is projected to fall by 9.2% in 2020 and to increase by only 2.4% in 2021. Absent a second virus wave, the decline in GDP will be smaller and the subsequent increase greater. A gradual recovery will be led by exports and consumption. Investment will be slower to recover owing to weakened balance sheets, low capacity utilisation and high uncertainty. Unemployment and bankruptcies will soar, although less so should there be no need for another shutdown.

Measures to limit the spread of the virus continue to be necessary, including ensuring that adequate supplies of protective equipment are available for exposed workers and expanding testing, tracing and isolation of infected persons. Should more fiscal stimulus than announced so far be needed to support the recovery, it would be most effective if, like the new business subsidy announced in May 2020, it is well targeted. To help workers adapt to ongoing changes in the labour market, the public employment service should redesign active labour market policies, for instance by pairing online training and unemployment benefits.

Broad containment measures were implemented early

Finland confirmed its first COVID‑19 case on 29 January 2020 and experienced rapid growth in the number of cases through March, but growth has slowed since then. The country has one of the lowest COVID‑19 death rates in Europe. Finland has been relatively well equipped with personal protective equipment, such as surgical masks, although increased supplies will be needed to avoid future shortages. However, Finland has few intensive care unit (ICU) beds with ventilators by international comparison. Together with a relatively old population, this made it important to take distancing measures early.

Finland: Two scenarios of real GDP and economic sentiment

Source: OECD Economic Outlook 107 database; and European Commission.

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Finland: Demand, output and prices (double-hit scenario)

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The government declared a state of emergency in mid‑March for the first time since the Second World War, and introduced broad containment measures. These included closing all schools and universities, banning public gatherings of over 10 people, suspending visits to nursing homes, closing borders to non‑essential travel and shutting down restaurants and cafés except for takeaways. Furthermore, the Helsinki-Uusimaa region was quarantined from the rest of the country for three weeks, with exceptions for essential commuting and other work‑related travel. Preparations have been made to expand temporary hospital capacity, if needed. Restrictions on business travel within the Schengen area were relaxed on 14 May. From 1 June, the limit on the number of people who may meet increased from 10 to 50 and restaurants and cafés reopened, albeit with reduced capacity owing to distancing requirements.

Economic activity is contracting fast

Economic growth was already slowing before the COVID‑19 hit. Since the pandemic struck, economic conditions have worsened markedly. Consumption collapsed, with card transactions down by around a quarter compared with pre‑crisis levels, and business has declined by 80% to 100% in tourism and cultural activities. Layoffs have jumped and the number of bankruptcies has soared. The economic sentiment index has plummeted to the low level of the global financial crisis, and consumer confidence has fallen to its weakest level since the survey began in 1995.

Finland: Demand, output and prices (single-hit scenario)

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There is substantial policy support to businesses and workers

To help businesses and individuals cope with the crisis, the government launched a series of support packages totalling around EUR 18.6 billion (7.8% of GDP), of which EUR 3.8 billion (1.7% of GDP) increase the budget deficit in 2020; a further package amounting to EUR 5.5 billion presented to Parliament on 5 June has not been included in the OECD projections. Key tax and spending measures include grants for businesses, some expanded unemployment insurance, and social benefits to support households. Measures with no direct impact on the budget balance include loan guarantees for firms and easing of payment terms for taxes. Credit institutions’ capital adequacy requirements have also been reduced to boost their lending capacity by EUR 30 billion (12.5% of GDP). The temporary layoff scheme, which provides employers with a more flexible alternative to reduce staffing than permanent layoffs and access to unemployment benefits for temporarily laid-off employees, will also help to reduce bankruptcies and shore up household income. To enhance the effectiveness of this scheme, the notice period for temporary layoffs has been shortened.

The recession will be deep and the recovery slow

The double‑hit scenario assumes that a second wave of infections occurs in autumn 2020, resulting in a renewed GDP contraction in the fourth quarter. All demand components contract sharply but consumption and exports subsequently recover somewhat faster than other demand components as some deferred consumption takes place and export markets rebound. Investment recovers slowly owing to heightened uncertainty about the outlook, low capacity utilisation, weakened balance sheets and delays in re‑employing staff and organising new projects. In the single‑hit scenario, in which a lockdown in late 2020 is avoided, consumption and investment recover more strongly than in the double‑hit scenario as fewer temporary layoffs become permanent, fewer firms go bankrupt and firms face stronger demand for their outputs.

Measures to limit the spread of the virus and boost demand would support the recovery

The top priority for economic recovery is to limit the spread of the virus once the lockdown ends. To this end, it will be important to ensure adequate supplies of protective equipment, require people to wear masks in crowded places and undertake extensive testing and tracing to identify infected people and isolate them. Should further fiscal stimulus be needed as supply recovers, it should be targeted on the most adversely affected sectors and groups and on projects that improve environmental outcomes, such as supporting the development of a charging network for electric vehicles. Cash transfers to help low‑income households, the self‑employed and small businesses could also be made. To foster labour market adjustment, the public employment service should provide more online training and education to the unemployed, for instance by pairing online training and education with unemployment benefits.