Economy recovering rapidly from COVID-19, but the period of fastest growth is over

The Finnish economy will continue to grow at a rate of 2.9% in 2022 following recovery from the COVID-19 pandemic, estimates the Ministry of Finance in its Economic Survey published on 27 September.

The economy has been recovering rapidly from the COVID-19 pandemic since spring this year. The growth spurt was triggered by the release of pent-up demand in a situation where the vaccination programme is progressing rapidly, restrictions on business activities are eased, and both households and companies are optimistic about the future.

Economic recovery will continue in the autumn, especially in the sectors that are currently subject to COVID-19 restrictions. As a result, economic growth will remain strong during the second half of the year and will continue in 2022. Gross domestic product (GDP) is forecast to grow by 3.3% this year, by 2.9% in 2022 and by 1.4% in 2023.  

In the forecast, economic recovery is not expected to slow down in the event of potential deterioration of the COVID-19 situation, even if the re-opening of society was slower than anticipated in the summer forecast. Uncertainties arising from the COVID-19 scenarios, virus mutations and vaccination coverage add to the uncertainty of the forecast.

The imbalance in general government finances will narrow this year and next as the economy grows rapidly and the expenditure needs arising from the epidemic decrease. However, general government finances will still remain in deficit after a short period of economic upturn. 

“The upturn is part of the natural economic cycle following a dramatic blow and recovery from it. In the longer term, it is essential to use structural policy instruments to support employment, investments, productivity, competitiveness and stable public finances,” says Mikko Spolander, Director General of the Budget Department of the Ministry of Finance.

Global economy will continue on a rapid growth path

Helped by fiscal stimulus, release of pent-up consumption demand and progress in vaccinations, the global economy will recover rapidly from the COVID-19 pandemic. Rapid growth will continue in the euro area as the restrictions are eased and the demand for services is increasing. In the United States, strong stimulus measures have led to a rapid increase in private consumption.

The quick recovery in world goods trade can be largely attributed to last year’s low reference level. However, trade is hampered by a shortage of industrial components and problems with container transport logistics, which has resulted in temporary supply shortage and price increases. 

Rapid growth in investments throughout the forecast period

GDP growth is estimated to reach 3.3% in 2021. Faster than average growth is expected to continue until next summer. GDP is projected to increase by 2.0% in 2022, and growth is expected to slow down to 1.4% in 2023. The short period of strong growth driven by global stimulus and the recovery from the COVID-19 pandemic will be over, and the economy will again face the growth constraints identified before the crisis.

Private investment will recover significantly, prompted by domestic projects and better growth prospects in the global economy. Funding from the EU’s Recovery and Resilience Facility (RRF) will boost private investment between 2021 and 2023. Housing construction will contract slowly as the number of new housing starts will remain on the long-term average level. A high savings rate and optimism among consumers will create a basis for a rapid growth in private consumption. The savings rate will, however, remain positive throughout the forecast period as consumption will remain lower than disposable income.

Global economic recovery, stimulus measures and the demand for Finnish exports in important trade areas will boost exports. Goods export will drive growth this year. Foreign trade in services is expected to show sharp growth in 2022, driven by high activity in pandemic-stricken industries such as travel and tourism once restrictions are lifted and uncertainty fades. 

Growth in employment has significantly accelerated in the first half of the year. Demand for labour, fuelled by economic growth, can be met in the short term with the large number of unemployed persons and government measures to increase the supply of labour. Earnings growth is expected to accelerate in 2022-2023. Inflation picked up in the first half of the year due to rising energy prices, but prices are rising on a wider scale. Rise in wages will be gradually passed on to prices of services, which will accelerate inflation.

Economic recovery will not eliminate the structural imbalance in public finances

The general government deficit will shrink significantly this year and next year due to brisk economic and employment growth. Similarly, COVID-19 related spending and support measures will be wound down, which will strengthen general government finances next year. 

A temporary economic recovery will not, however, eliminate the structural imbalance affecting Finland’s public finances. As the economic cycle stabilises, the strengthening of the general government budgetary position will slow down and Finland’s public finances will remain in deficit by more than EUR 3 billion in the mid-2020s. 

The public debt-to-GDP ratio increased by 10 percentage points in 2020 to nearly 70%. During the forecast period, the indebtedness rate will decelerate considerably, and in the mid-2020s, the debt ratio is expected to temporarily stabilise at just over 73 %. However, the growth in health and long-term care expenditure associated with the ageing of the population threatens to put the debt-to-GDP ratio back on a growth path. 

Economic recovery still linked to the COVID-19 pandemic

The main risks in the forecast are still related to the COVID-19 pandemic and the restrictions introduced to manage it. A failure to manage the pandemic in developing countries would weaken their economies, which would significantly hamper global economic growth.

A prolonged epidemic would reduce private consumption and especially demand for services, which would undermine economic recovery. Deterioration of the COVID-19 situation translates into growing uncertainty in the investment environment, which may result in investments being postponed or cancelled.

Private investment relative to GDP will increase to nearly 20% during the forecast period. Funding from the EU’s Recovery and Resilience Facility (RRF) may boost private investment to a greater extent than assumed in the forecast. 

Inquiries:

Mikko Spolander, Director General, tel. +358 2955 30006, mikko.spolander(at)gov.fi
Jukka Railavo, Senior Ministerial Adviser, tel. +358 2955 30540, jukka.railavo(at)gov.fi (real economy)
Marja Paavonen, Senior Financial Adviser, tel. +358 2955 30187, marja.paavonen(at)gov.fi (general government finances)