PTT forecast spring 2018: Shadow of financial crisis recedes – strong growth for Finnish economy in 2018 and 2019

  • Robust growth of the world economy will also give a boost to Finland, according to the national economic forecast of Pellervo Economic Research Institute. The growth will be 2.8 percent this year and next, and employment will increase by almost 90,000. The favourable development could be stopped by a trade war, however. As interest rates rise, mortgage holders must stay vigilant.

    The world economy is seeing the first widespread boost since the financial crisis, which will have favourable repercussions for Finland as well. The upswing shows no signs of slowing down and will also continue robustly in 2019. As a result, the Finnish GDP is set to grow by 2.8 percent this year and the next, and Finnish exports will grow up to 6 percent.

    The growth in exports is due to investments that continue to be strong. Investments in machinery and equipment have grown at a rate of over 10 percent in the previous two years. The Competitiveness Pact (kilpailukykysopimus) and modest pay raises have markedly improved the competitiveness of Finland.

    The greatest risks to the world economy originate from the USA, with Trump’s administration raising fears of a trade war. Individual tariffs would backfire on America, but escalating retaliations would endanger the entire economic upswing. “The EU would do well not to raise its own tariffs. It would be best to let the US bluster alone and continue to develop international trade with other countries”, says Janne Huovari, Head of Forecasting at PTT.

    Interest rates are set to rise

    Interest rates, which have continued to be extremely low, are set to rise during this forecasting period. Long-term interests have shown signs of life even in the Eurozone, and the shorter Euribor rates will take an upswing during this year. The ECB can be expected to raise its key interest rate in early 2019.

    Low-interest loans, low prospective yields on bonds and high demand for rental apartments have all increased the popularity of investments in the housing market. An increasing number of private investors have become landlords. According to statistics from the Finnish tax administration, the number of private individuals who received rental income in the ten-year period 2006–2016 grew by about 76,500.

    “Rising interest rates do not pose serious systemic risks for the Finnish housing and finance market, although it does carry clear risks for the ability of some private actors to service their loans”, says PTT economist Eeva Alho.

    The Government set to reach its employment target

    The robust economic activity has clearly boosted the growth of employment in Finland. The number of employed increased by 25,000 last year. The growth will be 50,000 this year and about 35,000 the next. This means that the Government is set to reach its target of a 72 percent employment rate in 2019. The development is due both to positive growth of the world economy and to recent policy measures at home.

    Decrease in the employment rate remains fairly small. This is not a sign of structural unemployment eating away at the growth but of such an influx of new job seekers on the market that the unemployment rate has not yet reacted. In the forecast, unemployment rate is expected to decrease to 8 percent this year and to 7.4 percent the next.

    Along with improved employment and pay raises, real disposable income is expected to grow 2.6 percent this year, faster than at any time in the 2010s. Private consumption is set to grow this year and the next by over 2 percent.

    The Government needs to resist the temptation of an election budget

    As a result of sound economic development, the public deficit is decreasing rapidly. The public finances will be more or less in balance in 2019, and the Government is expected to nearly attain the goal of a budget deficit of 0.5 percent of GDP.

    “Although current finance policy may be considered too lax in the light of current rapid growth, Finland continues to have deficits to fill. Purse strings do not need to be tightened, however; it is enough for the Government to avoid increasing expenditure and tax cuts for the remainder of its term”, says Huovari.

    The PTT national economy forecast in Finnish can be accessed in its entirety at the Pellervo Economic Research Institute website, http://www.ptt.fi/ennusteet/kansantalous-ja-asuntomarkkinat.html



    Janne Huovari, Head of Forecasting, tel. +358 40 164 8141 janne.huovari@ptt.fi