OECD Economic Outlook, Volume 2020 Issue 2

Finland

Recovery from the COVID-19 hit to the economy began in the second half of 2020, led by consumption and exports. GDP is estimated to have fallen by 4% in 2020 and is projected to expand by around 1½ per cent in 2021 and 1¾ per cent in 2022. Investment will be slow to recover owing to surplus capacity and uncertainty about the economic outlook. The unemployment rate will peak in 2021, but will remain high by the end of 2022. The main risk to the outlook is that virus infection rates rise again in Finland and its trading partners before an effective vaccination is implemented, delaying the recovery.

If the recovery is delayed, fiscal stimulus should be extended and temporary income support measures prolonged. To encourage employers to limit use of the temporary layoff scheme to viable jobs, they should contribute to the benefit costs of their furloughed employees. Once the recovery is firmly established and the pandemic has subsided, fiscal prudence will be required to stabilise the debt‑to‑GDP ratio. Reforms to close early retirement pathways would make a significant contribution to fiscal consolidation.

The first COVID-19 wave was mild, but a second wave has arrived

Finland has had a relatively low incidence of COVID‑19 cases by international comparison since the onset of the pandemic. Hospitalisations of people with coronavirus-related illnesses soared during the first wave, but large reductions in mobility and timely containment measures cut the tally to low levels during the summer. Since then, a second wave of infections has developed, with the source of infection being unknown in more than half of new cases, impeding contact tracing. While hospitalisations have again increased markedly, they remain well below the levels reached during the first wave. To slow the spread of the virus, the government recently strengthened capacity and opening‑hour restrictions on bars and restaurants, but devolved their implementation to regional authorities based on local epidemiological conditions, and tightened border entry restrictions.

Finland: COVID-19 and unemployment

Source: Ministry of Social Affairs and Health; and Statistics Finland’s Px Web databases.

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Finland: Demand, output and prices

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The economy has shrunk and forward indicators have recently turned down

Real GDP contracted by 4.5% in the second quarter, much less than in most other OECD countries. Accommodation, tourism and food and beverage services experienced the largest falls in activity. The trend employment rate has declined, reversing most of the gains since 2017, and the unemployment rate increased to 7.6% in September, 1.7 percentage points higher than a year earlier. Consumer and business confidence fell in August‑September, largely offsetting earlier summer gains. Capacity utilisation in industry has fallen sharply, as have the volumes of construction underway and building permits issued, pointing to falls in business and housing investment.

The government has provided substantial income support

The government has provided substantial support to limit both household and business income losses caused by the crisis. The temporary layoff scheme, under which laid‑off workers are paid unemployment benefits, has protected many jobs and limited the increase in unemployment. Stand‑down periods before receiving unemployment benefits were eliminated and eligibility for unemployment benefits was extended to entrepreneurs and the self‑employed. The government has also provided support for SMEs and hard‑hit industries, such as air and sea transportation, restaurants and cafés. It also reduced firms’ tax burdens and social security contributions temporarily. Mainly because of the crisis response, the structural budget deficit is estimated to have increased by 3.5% of GDP in 2020. With special measures unwinding and planned consolidation in the event that the economic recovery is sustained, the structural deficit is projected to decline by 1.7% and 0.7% of GDP, respectively, in 2021 and 2022.

Consumption and exports will lead the recovery

The economic recovery began in the summer, but following the initial rebound is set to slow somewhat owing the second virus wave in Finland and its trading partners. The recovery will be led by consumption and exports. Rising employment and the running down of savings accumulated during the pandemic will support private consumption, with export market growth underpinning rising exports. The unemployment rate will peak in 2021 as many temporary layoffs become permanent, and slowly decline to 7¾ per cent in 2022. Inflation should rise as the output gap shrinks but remain moderate. The recovery would be delayed if the recent resurgence of coronavirus infections is not soon reined in, the rollout of an effective vaccine is delayed, external demand remains weak owing to a prolonged global pandemic or banking losses were greater than expected, leading to tighter credit conditions.

Further measures may be needed to sustain the recovery

In the event that the economic recovery is delayed, the government should extend temporary income support measures beyond the end of 2020 and reinstate the temporary limitation on creditors’ rights to petition for bankruptcy. The government should also create a default unemployment insurance fund into which uninsured employees are automatically enrolled to expand coverage of earnings‑related unemployment benefits. To encourage employers to limit temporary layoffs to jobs they believe can be restarted, employers should be required to contribute to the unemployment benefit costs of their furloughed employees.