Finnish growth slowed sharply to 1.7% in 2018 (from 3% in 2017) and is expected to slow again this year. After rising 0.5% q/q in the first and second quarters, GDP is expected to increase by nearly 1.4% this year and by 1.3% in 2020.
A less favourable international environment
Finland will continue to reap the benefits of reforms to boost competitiveness[1] implemented in recent years. Its openness to world trade, however, exposes it to protectionist trade policies and the slowdown in the economic growth of its main trading partners, especially Germany[2]. The deterioration of the international cyclical environment and the resulting sluggishness of non-resident investment will strain goods export momentum in the months ahead, especially since nearly a third of exports are comprised of capital goods. Moreover, there is still uncertainty over Brexit, the terms of which are still unknown.
Growth and inflationNon-resident investment will slow in the months ahead due to the slowdown in exports. Residential investment provided major support for growth between 2016 and early 2018, but will now grow more moderately due to the slowdown in real estate price increases. Private household consumption should slow down slightly. Job creations grew at a hefty pace of 2.7% y/y in 2018, but should slow this year due to the slowdown in economic growth. Consumer spending, in contrast, will still be one of the main growth engines. Even a small decline in the unemployment rate should ensure a slight upturn in wages, which have long been contained by the “Competitiveness Pact”. Job market pressures have increased, and the unemployment rate, at 6.6% in July, has returned close to NAWRU[3], which the European Commission estimates at 6.5% in 2019. The growth of household disposable income will apparently offset the very slight acceleration in the inflation rate. Higher taxes on cigarettes and beverages should boost price inflation this year and in 2020. Yet these upside pressures will remain limited. Consequently, consumer price inflation, which was 1% y/y in August, should hold below the threshold of 2% y/y in 2019 and 2020.
In recent years, Finland managed to clean up its public finances thanks to fiscal consolidation measures and a rebound in economic growth. The fiscal deficit is expected to contract slightly again this year (from -0.7% of GDP in 2018). Ongoing growth and the increase in indirect taxes should help offset the decline in income taxes and social security contributions. The arrival of a coalition government led by the Social Democrats in June 2019 could change matters as of next year. Wanting to end austerity, they plan to increase spending significantly. Yet new tax increases and privatisation schemes will probably not suffice to totally offset the increase in spending at a time of slowing growth. Public debt fell back below the 60% threshold in 2018 (to 58.9% of GDP), and should diminish again in 2019 thanks to a primary surplus, low interest rates and nominal GDP growth. Thereafter, it could decline more slowly than expected.
