The coronavirus vaccine will be instrumental in halting the decline of the economy next year. If vaccinations proceed as expected, they will rejuvenate Finland’s economy by the summer, estimates ETLA. After this, economic policy will shift from stimulus to adjustment. The transition is unlikely to be easy in a political sense, but it is essential for long-term debt sustainability. The government may time the adjustment measures to coincide with the coming economic upswing. In global economics, the changing of the guard in the US will create a more stable operating environment for companies.
At the end of 2020, ETLA Economic Research asked its researchers to discuss their expectations of the course of development and phenomena that will arise in 2021, having been amplified or stifled by the year of the coronavirus. ETLA expects 2021 to mark the end of the coronavirus crisis: the economic downturn will end and recovery will begin on the back of the vaccination and the EU recovery facility. “A happy start to the 2020s is ahead of us, spurred on by recovery in monetary and fiscal policy,” says ETLA’s Managing Director, Aki Kangasharju.
– It is natural for recovery to be accompanied by a rush to fill the bars and jet off to Gran Canaria, so hardware and electronics stores will undergo a quieter period. However, in terms of growth factors, the honeymoon phase will quickly end. Finland’s long-term growth potential is only about 1.5 per cent. Unless this can be boosted, we will face a painful realignment of the public sector, summarises Dr. Kangasharju.
Finland’s economy will begin to pick up by the summer thanks to the vaccines. Fiscal policy will then shift from stimulus to adjustment. “The transition is unlikely to be easy in a political sense, but it is essential for long-term debt sustainability,” says Tero Kuusi, Research Director. Kuusi is responsible for ETLA’s research on macroeconomics and fiscal policy.
– It would be sensible to time the adjustment measures to coincide with the coming economic upswing. Economic growth will accelerate significantly on a global scale as the coronavirus crisis abates, and this will underpin Finland’s growth. However, the lack of synchronisation in the administration of vaccines will accentuate regional differences, Kuusi says.
The coronavirus vaccine is rightly being hailed as the decisive factor in halting the economic decline. Without a vaccine that is considered reliable, people’s behaviour will remain enveloped in an “impenetrable fog of uncertainty”. ETLA’s researchers also rate the vaccine as the most positive news of the past year.
– It is an amazing thing that the anti-vaccination movement had already begun to tail off in Finland before the coronavirus outbreak. The authorities have maintained an incredible level of calm and worked with patience, and this is bearing fruit. The social significance is now becoming apparent to everyone – suddenly and retrospectively, says Martti Kulvik MD, ETLA’s Chief Research Scientist.
Overall, Finland’s economy made it through the coronavirus year better than expected. According to ETLA’s forecasting group, Finland’s economic contraction was among the smallest in Europe over the past year. Industry fared better than expected: production in the electrical and electronics industry has remained on the rise while the industrial manufacturing of machinery and equipment has performed better than the European reference group.
– The forestry industry is in a state of reinvention as paper production declines but cardboard and paperboard production capacity increases. Entirely new products are also to be expected. The COVID-19 vaccination will also be the saviour of the shipbuilding industry, says Markku Lehmus, ETLA’s Head of Forecasting.
The coronavirus outbreak in the spring had an unexpected effect on municipal finances: they actually became stronger. Municipal tax revenues increased year-on-year while expenditure did not rise during the coronavirus epidemic. At the moment, it seems that the government overcompensated some municipalities and undercompensated others when it granted coronavirus support. It will be possible to evaluate the allocation of coronavirus support granted by the government in the light of statistics in February 2021, just in time for the municipal elections.
In the coming year, ETLA also foresees clear advances in productivity as a result of the digital progress seen across various sectors of the economy. Finland’s digital economy grew as remote work and e-commerce stepped up development.
-Furthermore, European companies will be better placed to compete in markets when both the EU and the USA take decisive action to curb the abuse of the dominant market positions held by the technology giants, says Heli Koski, Research Director at ETLA.
The success of the EU’s recovery facility in seeding economic growth across Europe will have a crucial impact on the European economy as a whole. The member states will submit their recovery plans to the Commission for evaluation by April 2021. ETLA’s crystal ball cannot foresee whether the member states will be able to allocate the recovery facility funds towards investments and structural reforms that will underpin economic growth while promoting digitalisation and the green transition. There will be plenty of challenges, in any case.
Next year, decisions should also be made concerning how the debt for the recovery facility will be repaid, and the Commission will set out its proposals for the sources of revenue by June.
– Decisions on new sources of revenue for the EU, such as a digital tax or the emission trading system, are also of significance to the EU’s future. The European Union will continue to develop in other ways in 2021 as the Commission launches a conference to discuss the future of Europe, says Päivi Puonti, Researcher at ETLA.
As part of its climate policy, the EU will also decide on the introduction of carbon tariffs to curb carbon leakage. “The EU is under pressure to make a decision on this, but tariffs are an unwieldy tool in both a political and technical sense. As the EU’s key trading partners, China and the USA, are also in the process of tightening up their own climate policies, the tariff may be implemented in a more stripped-back form for the time being,” says Tero Kuusi.
In addition to an easing of the coronavirus situation, ETLA’s researchers expect to see changes in the development of globalisation next year. Joe Biden’s new administration in the USA will repair relations with old allies and will likely have a better relationship with the EU. Post-Brexit, the UK will find itself in a challenging position in many ways next year – the country may feel the squeeze of the détente between the EU and the USA.
The departure of Donald Trump can be seen as one of the most positive events of 2020. At least Biden’s presidency and the new administration will provide companies with a more stable operating environment in 2021, according to ETLA’s researchers. The USA will also re-ratify the Paris climate agreement. As China, Japan and Russia have also set out their own ambitions towards climate and carbon neutrality, a green innovation boom seems to be on the horizon.
– Massive investments will be made in developing and disseminating green innovations. Finnish companies also have the expertise and international markets to engage in this phenomenon, says Heli Koski from ETLA.
The Phenomena2021 summary was written by Aki Kangasharju, Antti Kauhanen, Heli Koski, Martti Kulvik, Tero Kuusi, Markku Lehmus, Päivi Puonti and Hanna Virtanen at ETLA.