Finnish GDP is predicted to have grown faster in 2016 than earlier expected. Finnish GDP growth came in at around 1.6%. Output growth was broad-based, but clearly driven by domestic demand. Especially private investment and construction investment increased. Exports grew only modestly in 2016. In the coming years, the Competitiveness Pact agreement reached by the labour market will improve the price competitiveness of Finnish business and industry, thus providing stimulus to Finnish exports. Public finances remained in deficit also in 2016 and there is no clear change to be expected in the coming years.
The Finnish economy is expected to have grown by 1.6% in 2016. Private investment and construction investment, in particular, increased in 2016 while export growth remained sluggish. In 2017, GDP growth is predicted to be 0.9%. Public consumption will contract in 2017 as the government’s adjustment measures lower the operational costs of the central and local government, thereby contributing negatively to GDP growth. The unemployment rate is projected to decline to 8.5% while inflation will tick up to 1.3% in 2017
Industrial output growth was broad-based in 2016, with only primary production declining. Export growth was around 1% in 2016. Rebounding investment and consumption have driven imports to stronger growth than exports, and therefore foreign trade had a negative impact on GDP. In 2017, export growth will accelerate to 2.4%. Private investment growth will slow temporarily in 2017 with the turnaround in the growth of construction investment. Also private consumption growth will slow because of accelerating inflation and the slowdown of growth in real household income.
The current account has improved moderately in recent years, but it will still remain in deficit in the near future. The main reason for the deficit is the service account keeping the foreign trade balance in deficit. Net exports will have a slightly negative effect on the current account over the coming years.
The projected rate of economic growth will not alone be enough to correct the imbalance in public finances. The central government and the local government are firmly in deficit, the earnings-related pension institutions are running a surplus and other social security funds are marginally in deficit. In contrast to the public sector, Finnish corporations are clearly in surplus.
Finnish general government finances have long been in deficit and therefore the general government debt burden has grown rapidly. Public debt exceeds the 60% reference value and will continue to rise. Sluggish economic growth is not generating enough tax revenue to finance public expenditure, which is increasing with population ageing. However, the fiscal adjustment efforts of successive governments have managed to curb the growth of the deficit.
Central government revenue increased in 2016 with the rebounding economy and the deficit shrank. The 2017 central government budget will still show a deficit. Reduced social security contributions and cuts to holiday bonuses as set out under the Competitiveness Pact will reduce labour costs. Furthermore, longer working hours will reduce central government spending on employee compensations. On the other hand, tax cuts will have the effect of reducing central government tax revenue.
The text is based on the Economic Survey of the Ministry of Finance (Winter 2016) released on 22 December 2016. All figures for 2016–2018 are forecasts by the Ministry of Finance.