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PTT's macroeconomic forecast 2007-2008
Date of release: 26 March 2007
Next forecast: September 2007
The business cycle has reached its peak in Finland. Although the Finnish economy will continue to steadily grow in the forecast period, the growth rate will converge towards its long-term trend as the booming world economy gradually begins to calm down.
The Finnish economy will grow steadily
According to the forecast of PTT, the GDP of Finland will grow at the rate of 3.2% this year and at 2.8% next year. The economic growth in Finland will remain broadly based. Household consumption will grow briskly as consumer confidence remains high. Finnish exports are supported by the relatively strong developments in the main export markets of Finland, especially in Russia and the new member states of the EU. Exports to Germany have also grown briskly. Export demand is expanding especially rapidly in the metal industry, oil-refining and ship-building. Investment demand is expected to continue growing in machinery and equipment, but investment in residential housing has stalled. Some industries, such as construction and the metal industry, are facing problems in recruiting new personnel and signs of overheating can be seen in the housing markets of the Helsinki metropolitan area. No severe imbalances can be found in the Finnish economy, however, as consumer price inflation will also remain at the level of 1.7%.
The rapid economic growth will create 30 000 new jobs in 2007 and a further 22 000 jobs in 2008, so that the rate of employment will already exceed 70% this year. The growth in employment is boosted, in particular, by construction, retail sales and services. However, the new jobs have not been distributed uniformly across the country, as almost half of them were created in Uusimaa and Varsinais-Suomi last year. The same trend is expected to continue in the near future. The solid growth of employment in these two regions is partly supported by their diverse economic structures. At the same time, employment in regions dominated by primary production will grow at a slower pace. Jobs in forestry are expected to increase this year, but the forest industry is still downsizing its work force, which will also be reflected in other industries dependent on the forest industry.
There is no change in sight regarding the migration between the regions of Finland. Approximately 20 districts win in migration each year such that the annual increase in their population totals 10 000 people. Immigration has steadily been increasing, and almost half of the population growth of Finland now results from immigration.
Is Finland facing a labour shortage?
Some industries, such as construction and the manufacture of machinery, have been complaining about a shortage of skilled labour, which already limits their productive capacity. However, the complaints largely reflect the current favourable business cycle and the rapid increase in the labour force already witnessed in these industries. As the share of employed people still remains at less than 70 per cent of the working age population, it is too early to give up attempts to further improve employment. During the past few years, new jobs have mainly been filled from outside the labour force, instead of among the unemployed. From now on, however, the unemployed should be encouraged to seek work more actively. They should also more effectively be matched with potential employers. The official number of unemployed in Finland is currently 200 000. In addition, there are 90 000 hidden unemployed buried in the statistics who no longer actively seek work. According to a survey by PTT, 60 per cent of the long-term unemployed considered themselves as possessing a good or satisfactory work ability. Moreover, young adults form the single most important sub-group of the unemployed.
Measures to make labour market work more efficiently are called for. These actions include improving the regional and vocational mobility of the labour force, making the educational system better match the needs of employers and developing employment agencies to better serve the needs of job seekers.
The surpluses in public economy should be used to boost growth
There is no unambiguously correct level for the balance of the public sector. During the next few decades there will be a danger of a sharp rise in the overall tax rate because of the likely future increases in pension fees. One might therefore argue that the public finances of Finland are not currently following a balanced path. Some economists have even suggested that the public sector should run as large a surplus as possible in the next few years to avoid the rapid tightening of taxation in the future. PTT here takes a contrasting view, however. Instead of tightening the fiscal stance, the government should ensure the long-run sustainability of the public sector by supporting economic growth and helping the private sector to create more jobs.
If the GDP continues to grow at the expected rate of 2.5 per cent per year, the annual government surplus is estimated to reach the level of 5 billion euros by 2011. If the government uses its surpluses to finance measures that further support employment growth, there will also be more payers of taxes and pension fees in Finland in the future. Measures that support both the supply of and demand for labour are needed.
The assets of Finnish social security funds are currently worth 100 billion euros. As the demographic pressures to raise pension fees eventually increase, some of these funds might also be used to alleviate these pressures.
Key forecast variables
Gross domestic product,
Imports, goods and services
Exports, goods and services
Inflation, change in consumer price index, %
Unemployment rate, %
Employment rate, %3
Central government net lending, % of GDP
Local government net lending % of GDP
General government net lending, % of GDP
Current balance, bill. €
1 PTT projection
For further information:
Managing Director Pasi Holm Tel. +358 9 34 888 400 E-mail: firstname.lastname@example.org
Research Director Raija Volk Tel. +358 9 34 888 417 E-mail: email@example.com
The forecast figures can be downloaded from http://www.ptt.fi/