Executive Search in Finland– 2017 Outlook
Outlook Gloomy as Economy Lags
The Finnish economy is returning to growth. Economic data have strengthened, and leading indicators suggest growth continuing through the forecast years. However, this growth is entirely dependent on domestic demand, and net exports remain weak. The Finnish economy is still lagging behind activity in the rest of the euro area, and real GDP will not recover its pre-financial crisis level even by the end of the forecast period.
Meanwhile, the increasing role of the service sector in the economy slows productivity growth and the decline in the working-age population also dampens longer-term prospects. The Bank of Finland forecast foresees 1.1% GDP growth in 2016. The economy will continue to grow by 1.1% in 2017 and 1.0% in 2018.
Increasing investment in the euro area will support export growth in 2016. The weakening trend in Finland’s cost-competitiveness will, however, not be turned around during the forecast period, and Finnish exports will not reach the pace of growth in the export markets. At the present moment, factors that have usually facilitated a speedy recovery in exports (such as rapid growth in world trade or especially competitive, new export products) are lacking.
Consumer price inflation will continue to be exceptionally slow in the forecast years, reflecting the sluggish trend in crude oil prices. In April 2015, Finnish inflation dipped below the euro area average, and the difference in price levels relative to the rest of the euro area has slowly begun to narrow. Inflation according to the harmonised index of consumer prices (HICP inflation) will average -0.1% in 2015, picking up to 0.3% in 2016 and 1% in 2017.
Nominal earnings will rise moderately in the forecast period in accordance with the current labour market agreement, and the slow inflation will support growth in real earnings, particularly in the early part of the forecast period. Despite the wage restraint, the growing trend in unit labour costs would appear set to continue at a faster pace than in the rest of the euro area, as productivity growth will continue to be very slow.
Private consumption will increase only moderately in the forecast years, but even weak growth will help sustain private demand. Household incomes have developed in a relatively stable manner during the recession years. This is partly due to the increased significance of current transfers as a source of income, particularly on account of the increase in the retired population. In fact, the growing share of households’ income formation taken by pensions has reduced the sensitivity of private consumption to the business cycle.
During 2015, there were at last some signs of a recovery in investment activity and rising investment expectations. Investment is forecast to enter a period of gentle growth in 2016 and 2017, as gradually strengthening external demand and the projects already underway support an increase in corporate fixed investment.
The steep labour market decline that continued until June 2015 has now bottomed out. Due to the weak first half of the year, however, the number of employed will remain more or less the same as in 2014, while the unemployment rate will rise to 9.4%. The labour market situation will improve only slowly in the forecast period on account of the sluggish growth in the economy and an increase in structural unemployment.
The rapid growth in the number of asylum seekers has also raised questions over the economic impacts of immigration. Over the longer term, the key factor here is how successful immigrants are in finding employment. Most immigrants are of working age, hence immigration could potentially ease the problems related to a contracting labour force. Effective integration can help immigrants find employment.
Finland’s general government fiscal position has been in deficit for six years now, causing a substantial increase in the public debt. During the forecast period, general government debt will exceed 68% of GDP, and in 2017 it will be twice the level of 2008. The pace of debt accumulation is a matter for concern, as Finland’s longer-term growth outlook is weak, on account of the prolonged recession, contraction in the working-age population and the ongoing restructuring of Finnish industry.
Despite the Government’s consolidation measures, the general government structural deficit will show scarcely any improvement in the forecast period, as the surplus on the earnings-related pension funds is continuing to erode due to the rapid increase in pensions expenditure.
The Finnish economy is currently running on debt at the same time as the potential output of the economy continues to decline. This trend is unsustainable.