Etla forecast: coronavirus darkens outlook for spring, rest of the year gets brighter


  • The Finnish economy is recovering from the corona crisis, although in the first half of the year growth will continue to stabilize in the wake of the epidemic. According to our forecast, total output will grow by 3.0 per cent this year. Next year, we expect the Finnish economy to grow by 2.4 per cent. For 2023, we forecast 1.7 per cent growth.
  • The economy will grow this year, boosted especially by exports and consumption. Next year, the strengthening of private consumption will be of great importance for economic growth.
  • The biggest risks are related to management of the pandemic. Vaccine coverage may develop more slowly than expected, and new variants of the virus may at least partially circumvent the protection afforded by the vaccine.
  • Finnish exports will grow by almost 4.5 per cent this year. Next year, the recovery in exports will be even more rapid: we forecast exports will grow by about 7 per cent as exports of services also pick up.
  • Private consumption will grow by 2.3 per cent this year and by as much as 4.6 per cent next year. The recovery of private consumption depends on the progress of vaccine coverage. Households will be able to use their accumulated savings when restrictions are lifted and consumption of services is perceived to be safe.
  • Investments will grow by less than 2 per cent in 2021 and by about 2.5 per cent in 2022. Investments in machinery and equipment will grow most strongly. Growth in residential construction will accelerate in 2022.
  • We forecast that the unemployment rate will fall this year and next. We forecast an unemployment rate of 7.5 per cent this year and 7.2 per cent next year. According to our forecast, the employment rate will be 73.0 per cent in 2023, so it appears that the government’s employment rate target will not be achieved.
  • Finnish consumer prices will rise by 1.3 per cent this year and by 1.2 per cent in 2022 and 2023. Consumer prices will rise slightly more slowly than the euro area average.
  • The general government balance will improve in the forecast years, although the starting level will be weak in the wake of the corona crisis. We forecast a general government deficit of 3.8 per cent of GDP this year and 2.3 per cent of GDP next year. The balance of public finances will improve due to economic growth although expenditures will temporary increases due to the corona virus and the elimination of tax cuts.
  • The structural balance of public finances will improve slightly this year and next compared to last year. The government debt-to-GDP ratio will nevertheless increase, albeit slowly, until 2025.

World economy will grow after a gloomy year

The global economy is rebounding to a growth rate of 5.8 per cent this year. Last year, the world economy contracted by 3.5 per cent – roughly as much as in the last year of World War II. Even with the financial crisis, the contraction in GDP in 2009 was only about half of that decline. The recovery is fostered by a very strong fiscal and monetary stimulus. The development of a vaccine in record time is the single most important factor supporting growth. Adequate vaccine coverage will be achieved slowly and not globally until next year. The recovery of services in many countries will thus be postponed to the end of this year as well as next year. We forecast the global economy will grow by 4.0 per cent next year.

Of the developed countries, growth is particularly rapid in the United States this year: we forecast its economy will grow at a rate of 6.3 per cent. Economic growth will be bolstered by the Fed’s interest rate cuts and quantitative easing, but all the more so by a strongly stimulative fiscal policy. The IMF (Fiscal Monitor 2021) estimates that the direct discretionary stimulus provided by the US during the corona crisis has so far been 16.7 per cent of GDP. The calculation does not take into account the new $ 1,900 billion stimulus package from the Biden administration, which has already been approved by Congress. Indeed, the package already raises the US discretionary stimulus to more than 25 per cent of GDP. Next year, we forecast the U.S. economy will grow by 3.0 per cent.

The euro area has also recovered from the corona crisis, but due to the slow progress in vaccine coverage, growth will be slower than, for example, in the United States. Discretionary stimulus will also lag behind the United States. On the other hand, in many euro area countries, the stimulative effect of so-called automatic stabilizers is of key importance. Etla forecasts that euro area GDP will grow by 4.7 per cent this year and by 3.5 per cent in 2022.

The German economy is growing at a slightly slower pace than the euro area average. On the other hand, the German economy also suffered significantly less from the corona crisis than the euro area economies on average: Germany’s GDP fell by 5.3 per cent in 2020 while that of the euro area decreased by 6.8 per cent. Germany indeed benefited from the fact that industrial production, which had already recovered rapidly globally last year, accounts for a larger share of its value added than the euro area average. The biggest deficits were recorded last year in the economies of southern Europe, with the Spanish economy shrinking by 11 per cent and Italy by 8.8 per cent. The French economy also contracted by 8.3 per cent last year. On the other hand, countries with large economic downturns will see favourable growth rates this year, especially in the second half of this year, as tourism will become easier with vaccine coverage in Europe, too.

A politically significant decision was taken last year when EU countries agreed last summer on a total recovery fund of 750 billion euros. The so-called “Next Generation EU” recovery instrument has 390 billion euros in direct aid to member states, while 360 ​​billion euros is loan-based aid. The money is distributed to member countries on the basis of pre-pandemic economic performance and, in part, on the basis of the fall in production caused by the corona crisis (inversely). The package is financed by joint borrowing of EU countries. The recovery instrument will boost growth in EU countries during the forecast period by an average of a few tenths of a per cent.

The Chinese economy is forecast to grow by 8.0 per cent this year. Growth is among the fastest in the world, and shows that China has overcome the coronary crisis in an excellent fashion. For next year, we forecast 5.8 per cent growth for China.

The light financial conditions facilitated by the monetary policy of developed countries will support growth over the forecast period. We expect the ECB to keep its main key interest rate at zero until at least 2023. The tightening of monetary policy will start with reductions in purchases of securities at the earliest at the end of the forecast period. In the United States, where a strongly stimulative fiscal policy is already boosting inflation this year, we expect the Fed to raise its target interest rate in 2023.

There are several risks, however, to the economic outlook. The main risks relate to management of the pandemic, slower-than-expected progress in global vaccine coverage, and new more contagious viral variants that at least partially circumvent the protection provided by vaccines. There are also risks to the outlook for world trade. The relationship between the US and China remains tense, and this may result in cross-border tariffs or regulatory changes that also affect the trading costs of companies located in EU countries. In addition, high levels of government debt and the associated indirect risks, especially in certain countries, will be a factor of uncertainty for the coming years.

Finland’s GDP will recover this year and next

According to preliminary national accounts data, Finland’s gross domestic product fell by 2.9 per cent last year. According to preliminary figures, private consumption fell by as much as 4.9 per cent. Exports decreased by 6.3 per cent. At the same time, imports contracted by 6.6 per cent, so net exports contributed (slightly) positively to economic growth. Investments decreased by 2.8 per cent. Last year’s GDP data are nevertheless more uncertain than normally because of the impact of corona.

We forecast that Finland’s total output will grow by 3.0 per cent this year. The growth rate has thus been reduced by 0.2 per centage points since last September. The reduction in the growth rate is the result of slower-than-expected progress in vaccine coverage and thus a weaker outlook for private consumption than in the previous forecast. Net exports will clearly contribute positively to economic growth this year. We forecast 2.4 per cent economic growth next year, when private consumption will be of pivotal importance for growth.

According to our forecast, exports will grow by almost 4.5 per cent this year and by just over 7 per cent next year. Investment will grow by less than 2 per cent this year and by about 2.5 per cent in 2022. Private consumption will increase to just under 2.5 per cent this year as the restrictions caused by the epidemic are gradually relaxed over the summer. Next year, we forecast private consumption will grow by just over 4.5 per cent. In 2023, we expect Finland’s GDP will grow by 1.7 per cent, which is slightly faster than our potential output growth rate.

We estimate the output gap will be negative this year. This year, the output of Finnish economy is still below its potential. We estimate that the output gap will be only slightly negative next year, when production will have almost reached its potential level.

Service exports will accelerate next year

We forecast that the volume of exports will grow by 4.4 per cent this year. Exports of goods will grow by 4.2 per cent and exports of services only slightly more. Exports of services plummeted as much as 15 per cent last year, so there is a long way to go for a full recovery. The exports especially of the electrical and electronics industry and the transportation vehicle industry will grow strongly this year. The demand situation in the automotive industry is very good, and a large cruiser and two smaller vessels will be delivered by the shipyards. The growth of exports of goods, in turn, will be slowed down this year by a prolonged maintenance shutdown at an oil refinery.

Next year, the volume of exports is forecast to grow by 7.2 per cent. Exports will continue to benefit from the recovery of the international economy, while vaccine coverage will also allow for a strong recovery in tourism. Exports of services are forecast to grow by almost 15 per cent next year. In 2023, export growth is expected to level off at 2.8 per cent. The weakening of cost competitiveness this year and next will slow the recovery of exports over the forecast period (see the special theme on page 66 and the article on page 79).

Investment in machinery and equipment is increasing

Investment is forecast to grow by 1.8 per cent this year. Growth is fostered by a clear increase in companies’ investments in machinery and equipment. Residential construction is forecast to grow at a rate of one per cent.

In 2022, investment growth will strengthen slightly to 2.4 per cent. Growth in residential construction will double from the current year’s one per cent rate. Non-residential investment is forecast to increase by more than four per cent. The growth of productive investments is bolstered by the government’s decision to double the rate for depreciation allowances on machinery and equipment purchases. In addition to investments in machinery and equipment, significant industrial investment projects are also reflected in solid growth in civil engineering towards the end of the forecast period. Industrial investment will also boost the growth of R&D investment over the forecast period.

Government’s employment and deficit targets unlikely to be achieved

The labour market has survived the corona crisis with less damage than expected: the unemployment rate measured by Statistics Finland rose from 6.7 per cent to only 7.8 per cent. However, a significant number of service workers were laid off. The number of employees is forecast to increase by about 29,000 this year. Growth will be weighted toward the second half of this year. The labour force is also expected to continue to grow slightly, with the result that the unemployment rate will fall to 7.5 per cent. At the same time, the employment rate is forecast to rise to an average of 72.3 per cent this year.

Next year, employment growth will continue to be subdued. The unemployment rate will still fall slightly to 7.2 per cent. The employment rate is expected to improve to 72.8 per cent next year, as employment for persons aged 15-64 increases while their numbers fall. Weak demand will reduce employment growth this year, but the availability of skilled labor will be a major barrier to growth as early as next year. We forecast that the employment rate will rise to 73.0 per cent by 2023. The 75 per cent employment rate target of the Marin government is therefore unlikely to be achieved unless new very significant employment measures are taken.

In our special theme article on page 56, we also compare the employment measures of the Sipilä and Marin governments and their objectives. Sipilä’s government achieved its most important goals, while Marin’s government still has work to do to achieve its goals.

Consumer demand will boost GDP, especially next year

Growth in real earnings and other income, and to some extent employment, will boost consumption this year and next. However, the decline in the savings rate will have a more significant effect than the income trend over the forecast period. The key factor in reducing consumption is the coronavirus pandemic and the restrictions it causes. Consumption of services will not recover until adequate vaccine coverage is achieved.

Private consumption is forecast to grow by 2.3 per cent this year and by 4.6 per cent next year, of which a significant part is the so-called growth carry-over effect for the current year. At the same time, the aggregate savings rate of households and non-profit institutions serving households is slowly declining from its high level of the exception year 2020 towards the so-called normal. The savings rate will be close to zero at the end of the forecast period.

In 2023, private consumption is projected to grow by 2.5 per cent, which is slightly faster than real purchasing power growth. According to our forecast, the nominal earnings level will rise by 2.2 per cent this year and by 2.1 per cent next year. In 2023, earnings will continue to rise by 2.1 per cent.

Inflation accelerating only slightly

Consumer prices are forecast to rise by one percentage point faster this year than last year, i.e. 1.3 per cent. Inflation will be boosted this year by rising prices for alcohol and tobacco products, transport and housing. Rising energy prices will play a significant role. Next year, the rise in consumer prices will slow slightly, to 1.2 per cent, when consumer prices will be raised by rising prices for alcohol and tobacco products, housing and food. In 2023, consumer prices will continue to rise by 1.2 per cent in our forecast.

Public sector debt is increasing

The general government deficit will decrease over the forecast period after the difficult corona year of 2020. Last year, the public sector deficit was still 5.5 per cent of GDP. Discretionary fiscal policy was strongly stimulative last year – some of the decisions made will also affect this year. This year’s general government deficit is projected to be 3.8 per cent of GDP and next year’s deficit will be 2.3 per cent of GDP. The balance of public finances will improve as the effects of economic growth and the temporary decisions related to the corona crisis disappear.

However, public sector EDP debt will increase over the forecast horizon. We forecast it will rise to 69.4 per cent this year. We forecast a slightly better realization for next year’s public sector EDP debt, 68.8 per cent, but we foresee a rise again in 2023 to 69.4 per cent. In our baseline forecast, public sector EDP debt will rise to 69.9 per cent of GDP by 2025. The state budget balance will improve in the forecast years after last year’s decline. Social security funds will remain slightly in surplus. Our expectations for the government debt-to-GDP ratio have declined slightly compared to the September forecast. This is mainly due to the smaller-than-expected decrease in GDP last year and thus to a better public finance position. However, the actual development will continue to be very sensitive to changes in the value of GDP. There are also big questions about whether the incumbent government will be able to take other policy measures that will significantly increase the employment rate in addition to eliminating the so-called pension tube, i.e. the right of an elderly long-term unemployed person to receive additional days of unemployment security, on the basis of which earnings-related unemployment benefits can be paid until the person can receive an old-age pension. Another question is whether they will improve the financial position of the public sector.

 According to our forecast, the structural balance of public finances will take a turn for the better this year and next. The structural deficit for 2020 is estimated at around 3.8 per cent of GDP. The structural deficit will shrink in absolute terms to 3.2 per cent of GDP in 2021 and still to 2.3 per cent of GDP in 2022.

As a result of the exceptional economic circumstances created by the coronavirus, the European Union has introduced a general exemption clause in EU fiscal rules. On this basis, the rules do not currently limit Member States’ response to the immediate response to the crisis. According to current information, the rules will not go back into force until 2023.

In the medium term, rule-based fiscal guidance will in any case be re-launched. Based on Etla’s fiscal forecast and weak debt and deficit developments, it is quite clear that Finland needs to adjust its fiscal policy in the medium term in order to avoid breaching the rules. The developments projected for 2020-2022 indicate an improvement in the structural balance, and the path should be continued towards the Medium- Term Budgetary Objectives, i.e. a level where the structural deficit does not exceed half a per cent of the output level.