OECD Economic Outlook, Volume 2021 Issue 2

Finland

Economic growth is projected to slow from 3.5% in 2021 and 2.9% in 2022 to a more sustainable rate of 1.5% by 2023. Private consumption expenditure will slow as support from a declining saving rate diminishes and government expenditure will fall as COVID-19-related support terminates. The unemployment rate will fall below the pre-COVID-19 rate by 2022, but the inflation rate will remain considerably higher. The main downside risk to the outlook is that vaccination rates, booster shots for vulnerable groups and intensive-care-unit capacity do not turn out to be sufficient to avoid future containment measures.

To increase the employment rate, incentives for early retirement on disability benefit should be removed and activation services strengthened. The transition between secondary and tertiary education should be eased to reduce skills shortages and increase productivity. To reduce greenhouse gas emissions, heat production using peat should be subject to the same tax regime as other fossil fuels used for heat production, whereas agricultural subsidies should be progressively replaced by subsidies for environmental benefits.

The economy has strongly rebounded from the COVID-19 shock

Following a strong rebound from the coronavirus shock, real GDP exceeded the pre‑COVID‑19 level by the second quarter of 2021 and continued to grow, albeit more slowly, in the third quarter. The fourth coronavirus wave has slowed growth since then, but the effect has been smaller than during past waves thanks to high vaccination rates. Retail sales growth has slowed in recent months, despite buoyant earnings and excess household savings. In contrast, housing starts remain strong and business investment is picking up. The employment rate and job vacancies have returned to pre‑COVID‑19 levels and the unemployment rate has fallen to 7½ per cent, one percentage point higher than before the pandemic. Nominal wages have accelerated, with a rise of 2.4% in the year to the third quarter. Consumer price inflation increased to 3.2% in the year to October, driven mainly by increases in housing-related costs and petrol and diesel prices. Consumer and industry confidence have increased to high levels.

Finland: Vaccination and labour market indicators

1. Fully vaccinated, in per cent of population aged 12 or over.

2. Statistics Finland trend series, which are adjusted for both seasonal and random variation.

Source: Finnish Institute for Health and Welfare; and Statistics Finland.

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Finland: Demand, output and prices

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The number of serious coronavirus cases has increased but remains lower than during the first half of the year. The vaccination rate reached 81% of the population aged 12 or over in mid-November, but is now increasing only slowly. The government announced in early September that its hybrid COVID-19 strategy with national restrictions and comprehensive recommendations would be waived when 80% of the target population had been vaccinated or had the opportunity to be vaccinated, in favour of regionally determined measures. The regional phasing out of restrictive measures started in late September.

Fiscal policy will tighten as COVID-19 measures unwind

Fiscal policy is set to tighten, with discretionary fiscal measures falling from 3.8% of GDP in 2020 to 0.7% of GDP in 2023 mostly owing to the termination of COVID-19 measures in 2021 and 2022 and of future‑oriented investments and other temporary measures in 2023. The large increase in public investment that took place in 2020 will start to unwind in 2023 when a hospital construction and modernisation programme draws to a close and some transport infrastructure projects are completed. The underlying primary balance is projected to increase by 0.3 and 0.6 percentage points of GDP in 2022 and 2023, respectively. This takes account of grants from the EU Recovery and Resilience Facility of 0.2 percentage points of GDP in 2022 and 2023 that will be channelled to investment grants, subsidies, public consumption and investment. The temporary layoff scheme remains an important non-discretionary instrument to protect jobs in the event of a sharp downturn.

Economic growth will slow to more sustainable rates

Economic growth is projected to slow from 3.5% in 2021 to 1.5% in 2023 as the effects of the rebound from the COVID-19 shock fade. Consumption expenditure will slow as earnings growth weakens and, with household saving approaching desired levels, declines in the saving rate diminish. Government consumption and investment will fall as temporary increases to counter the COVID‑19 shock terminate. The unemployment rate should fall to around 6¼ per cent in 2023 and wages should accelerate as the labour market tightens and workers get compensation for higher inflation, which is projected only to ease to 1.8% in 2023. The main downside risk to the outlook is that vaccination rates, booster shots for vulnerable groups and intensive-care-unit capacity would turn out not to be sufficient to avoid future containment measures. An upside risk is that the Recovery and Resilience Facility encourages more private investment than assumed.

Structural reforms would increase sustainable growth

To increase the employment rate towards rates in other Nordic countries, conditions for awarding disability benefit for persons aged 60 or over should be aligned with those for other applicants, and public employment service resources and efficiency enhanced. Easing the transition between secondary and tertiary education by reforming the highly selective tertiary education admission system and increasing the number of study places available would help to reduce skills shortages and increase productivity. To reduce greenhouse gas emissions in the burden-sharing sector efficiently, a comprehensive package of price and complementary measures should be implemented, including subjecting heat production using peat to the same tax regime as for other fossil fuels used for heat production and by progressively replacing agricultural subsidies with subsidies for environmental benefits.