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(English) PTT's macroeconomic forecast, spring 2008

7.huhtikuu 2008

  • Business cycle passed its peak, but the economic climate remains favourable

    The long period of extraordinarily rapid growth of the Finnish economy will reach its end this year. According to the forecast of PTT, the GDP of Finland will grow at the rate of 2.9% this year and 2.5% next year. Labour shortage will not, however, be the limiting factor for the near term growth prospects. Rather, the near term growth potential of the Finnish economy will depend on the developments in Finnish export markets and the competitiveness of Finnish companies. In the short and medium term it is also important to support consumers’ confidence in the stability of the economy by means of economic policy. The long-term growth potential of the Finnish economy will, however, solely be determined by the growth trend of productivity.  

    The growth of the world economy peaked in 2007 and it will slightly slow down this year, as the effects of the financial turmoil in the US spread across the rest of the world. The effects of the crisis will not be dramatic, however. The decrease in US imports will slightly reduce the growth rate of world trade, which is still supported by the strong demand from the rapidly-developing Asian countries. The crisis in the financial markets has led to deterioration in the financial conditions in the rest of the developed world, because the higher uncertainty in the markets has increased the risk premiums of market interest rates and corporate debt. There are still many unknowns in the US financial sector, and we cannot even rule out the possibility of a full-blown financial crisis. However, our baseline scenario of the US economy expects that it will gradually start to recover at the beginning of 2009, thanks to the accommodating monetary and fiscal policies and the weak dollar, which boosts US export demand.

    The growth in the euro area has been driven by investment and exports, while the growth of private consumption has stalled, despite steadily improving employment. This year, the growth rate of the euro area will slow down to 1.5%, but the recovery of the world economy will boost the euro area growth rate to nearly 2% in 2009.

    The economic growth in Finland still remains broadly based. Domestic demand is supported by both household consumption and private investment. The purchasing power of consumers is currently strengthened by the rapid wage increases in 2007. However, the rise in real incomes in 2008 will largely be eroded by accelerating inflation. Consumers’ confidence regarding their own economic conditions has remained good, although expectations for the overall development of the Finnish economy have slightly deteriorated in the past few months. Investment demand is boosted by investments in machinery and equipment, as well as construction. Since the housing boom in Finland is already cooling, residential investment is calming down and construction is mostly driven by industrial construction.

    Finnish exports are forecast continue growing briskly, although the peak in growth was passed last year. The US debt crisis seems to have a rather small negative effect on the main exports markets of Finland, in particular in the euro area, Sweden, Russia and China. The appreciation of the euro, as well as the increasing unit labour costs, somewhat weaken the competitiveness of the Finnish export sector. However, the strong currency is not considered a major problem to the Finnish export sector. Exports to the euro area already account for 30% of all Finnish exports. The strong euro has also provided a shield against the price increases of oil and other raw materials. 

    Inflation started to accelerate in the latter half of 2007 and the growth rate of consumer prices is expected to peak this year at 3.5% in annual terms. The rapid inflation mainly results from temporary factors such as increases in prices of food and energy and the increases of some commodity taxes at the beginning of the year. Inflation is expected to settle down next year.

    Improving employment does not decrease unemployment the same way everywhere

    No labour shortage is in sight, but the weakening demand conditions will gradually slow down the increase in employment. Nevertheless, 45 000 new jobs are still expected to be created in 2008 and 20 000 more in 2009.

    The supply of labour has followed the increasing labour demand in the past few years. An increase in the average retirement age has significantly contributed to the increase of the total labour supply. The 55- to 64-year-olds form the only age group in which the participation rate now exceeds its level at the end of the 1980s. There is, however, still potential to improve employment in all age groups, despite the cohorts at the youngest end of the working age population.

    Because the demand for labour continues to be favourable, employment is also improving among people of retirement age. During the past two years, employment among people older than 64 has improved by more than 10 000. In the coming years, the share of people working after the retirement age will continue to increase. The share could be further increased by loosening the wage taxation of  retirees.

    The strong growth has created larger surpluses in public finances than expected. The surpluses in the public economy will allow larger tax cuts than originally planned to boost demand if the business cycle rapidly deteriorates, since there now seems to be less danger of overheating of the economy. Moreover, when the tax rate schedules for 2008 were adjusted, the rapid growth of both consumer prices and wages was not fully anticipated. Thus, the modest tax cuts promised by the government for 2008 will not prevent the average income tax rate from increasing. Lower tax rates on wages would not even erode the long-term balance of public finances. Lower income taxes tend to stimulate the demand for labour, which increases the number of contributors to the work pension system.

      

    For further information:
    Research Director Raija Volk, tel. +358 9 34 888 417, E-mail: raija.volk@ptt.fi
    Economist Janne Huovari , tel. +358 9-3488 8421, E-mail: janne.huovari@ptt.fi Economist Petri Mäki-Fränti, tel. +358 99-3488 8420, E-mail: petri.maki-franti@ptt.fi   Managing Director Pasi Holm, tel. +358 9 34 888 400, E-mail: pasi.holm@ptt.fi

    Key forecast variables

     

    2007

    Bill. €

    2007
    change in
    volume %

    20081
    change in
    volume %

    20091
    change in
    volume %

    Gross domestic product,
    in purchasers’ value

    178,8

    4,4

    2,9

    2,5

    Imports, goods and services

    71,8

    4,1

    4,3

    4,2

    Exports, goods and services

    80,1

    4,8

    4,2

    4,6

    Consumption:

    128,4

    2,8

    2,5

    2,4

    - private

    90,5

    3,7

    3,0

    2,8

    - public

    37,9

    0,8

    1,5

    1,5

    Investment:

    36,3

    7,6

    4,4

    2,1

    - private

    31,9

    8,1

    4,2

    2,3

    - public

    4,4

    3,4

    5,5

    1,0

    Stockbuilding and
    statistical discrepancy2

    5,7

    0,0

    0,0

    0,0

    Inflation, change in consumer price index, %

    2,5

    3,5

    2,4

    Unemployment rate, %

    6,9

    6,1

    5,7

    Employment rate, %3

    69,9

    70,7

    70,9

    Central government net lending, % of GDP

    2,0

    1,6

    1,2

    Local government net lending % of GDP

    -0,1

    0,1

    0,1

    General government net lending, % of GDP

    5,2

    4,6

    4,1

    Current balance, bill. €

    7,8

    2,5

    6,2

    1 PTT projection
    2 Contribution to GDP growth, percentage points
    3 Employment per 15- to 64-year-old