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Date of release: 21 September 2006
Next forecast: March 2007
World economy grows rapidly
Despite expensive oil and increasing interest rates, the rapid growth of the world economy will continue in the forecast period. The global economic growth is boosted, in particular, by the strong growth in China and other rapidly expanding Asian economies. In addition, the growth prospects throughout the euro area seem more optimistic. Both of because the booming export demand and the structural reforms carried out in some of the large member states, unemployment in the euro area has been steadily decreasing. Thus, as both consumers and companies are becoming more confident, domestic consumption and investment demand is also evolving in Germany. The biggest risks for the global economy are posed by the imbalances of the US economy and the future price developments of raw materials. The strong growth of the US economy is likely to decelerate in the forecast period, and it is still possible that the calming housing markets and high oil price, in particular, will cut private consumption more than expected. In addition, the chronic double deficit of the US economy may finally burst, with a rapid fall in the US dollar and a hike in long-term interest rates. The oil price is expected to stay at its current high level, since the global demand for oil will remain strong. In addition, the risk of disruptions in the supply of oil, caused by political conflicts, creates upward pressure on the oil price.
Broadly based growth in Finland
The strong growth of the world economy is reflected in the performance of the Finnish economy. 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. German imports have also grown briskly. In total, exports are expected to grow at the exceptionally high rate of 10% this year and still at 5% next year. However, the high figure partly reflects factors such as the labour dispute in the paper industry last year. The paper and electronics industries, the traditional growth engines of the Finnish exports sector, have grown only moderately when the impact of the labour dispute in 2005 is taken into account. The metal industry and also some smaller industries are, however, booming. Next year, the rapid growth in the exports market is, however, expected to slightly calm down.
The economic growth in Finland will remain broadly based, since household consumption will also grow briskly during the forecast period. Consumers’ confidence is at high level and households’ purchasing power is growing steadily. Consumers’ disposable income is expected to increase in real terms at the rate of 3.1% this year and 2.7% next year. The growth in purchasing power is supported by the improving employment situation and the tax cuts for this and the next year. The purchasing power will not be suppressed by inflation, either, since inflation is forecast to only slowly accelerate from the low figures in 2005. Inflation pressures remain low, mainly because of the low wage increases and the downward pressures in the prices of imported durable and semi-durable goods.
Semi-durable goods, mainly clothing and footwear, are now the fastest growing sub-category in household consumption. Consumption of services is also picking up. The rapid growth in sales of durable goods such as home electronics, telecommunications equipment and furniture is still expanding, but the sales of new cars have been slowing down during the first months of the year. The savings rate of Finnish households turned negative last year and this trend is expected to continue in the forecast period, as consumption will still exceed incomes.
Construction is calming down
Both residential housing investment and construction as a whole are expected to keep growing, although construction is forecast to slightly calm down next year. Investment in machinery and equipment is expected to grow at the rates of 8.0% and 5.5% in 2006 and 2007, respectively. Investments in R&D and human capital will also continue to play an important role in the Finnish economy.
Industrial production will grow at the rate of 10.5% this year and 4.4% in 2007. Since productivity in the Finnish manufacturing has been growing rapidly at the same time, the growth of output has been reflected in employment less than when output growth was mostly boosted by service sector. The high growth forecast of the current year is also partly explained by the labour dispute in the paper industry in 2005, the comparison year.
New jobs in retail sales and services
The rapid improvement in employment in 2005 is slightly slowing down. During the first half of the year, seasonally-adjusted employment grew only moderately. The number of employed is expected to increase by around 41 000 new jobs this year. In 2007, 22 000 new jobs will still be created, as the economy will still be growing at the rate of 3%. The number of jobs will especially increase in construction, retail sales and services. The share of part-time jobs out of all new jobs rapidly increased in 2004 and 2005. The improving employment is also expected to activate people outside the job market to join the labour force again. Thus, the reduction in the rate of unemployment will not be fully matched by the increase in employment.
The central government runs budget surpluses
The central government budget is forecast to display a surplus of about 1300 mil euros this year and 700 mil euros in 2007. The explanation for the strong financial position of the central government lies in the revenue side of the public finances. Tax revenues of the central government are expected to increase despite the cuts in income tax rates that are due to continue next year. Growing tax revenues are due to the booming economy, which increases the tax base. The rapid growth in household consumption especially increases the base for value added tax.
The deficit of the local government sector will be slightly reduced from its level in 2005 and the deficit is expected to settle down at the levels of 700 and 600 million euros in 2006 and 2007, respectively. This year, the tax revenues of the local government sector are forecast to grow a little faster than local government expenses. Increasing tax revenues mainly result from the improving employment and profitability of companies, which increases the base for both personal and corporate taxation. On the expense side of local government finances, the low salary increases of the current year constrain the growth in personnel expenses.
Despite the deficits of the local governments, the balances of the public sector as a whole remain in surplus at around 3% during the forecast period. This is mainly due to the large surpluses run by social security funds. Because of the public sector surplus and the growing economy, the government debt as a proportion of the GDP is forecast to steadily decline in the forecast period.
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/