Finland’s GDP likely to shrink by almost 10 percent this year

On March 17th we estimated that Finland’s GDP will shrink by 1–5 per cent this year because of the COVID-19 pandemic and the resulting economic lockdown.

Since mid-March, the situation has deteriorated by several indicators, although a gradual lifting of the lockdown should also start soon. Restrictive measures have been extended in Finland by closing schools, restaurants, and cafés (excluding take-away), while Uusimaa (metropolitan area) has been isolated from the rest of the country.

Globally, the pandemic worsened in March, especially in Europe and the United States, where lockdowns have been tightened too. Stock markets have calmed down but estimates of global economic growth have fallen sharply – the world economy is now projected to contract sharply this year, for the first time since 1945. The International Monetary Fund estimates that 170 of the world’s 189 countries will have their GDP per capita shrinking this year.

The Finnish economy began its lockdown from mid-March by restricting large gatherings. The measures were tightened at the end of March and most of those, except for the isolation of Uusimaa, are likely to remain in force until the end of May.

Economic closures would thus take at least more than two months in Finland.

At present, it seems that coronavirus infections are relatively well under control in Finland. Thus, the lockdown will be lifted from June, although gradually (schools will open slightly earlier). It can be roughly estimated that the Finnish economy will be under lockdowns for at least 2-3 months this year. The OECD estimates that one-month lockdown will cost about 2 percent of annual GDP. Thus, based on the calculated effects of the closure measures alone, the Finnish economy would shrink by 4–6 per cent this year.

The OECD calculation estimates the cost of economic closures per month. When the calculation is mechanically converted to an annual GDP effect, it is implicitly assumed that the pandemic will not affect economic performance in the months following the lockdown. Therefore, for the contraction of the Finnish economy to remain at the above-mentioned 4–6 per cent, GDP should return to its former trajectory as soon as the restriction measures are lifted. This is however unlikely to happen.

At least some people have been frightened by the pandemic to the point that they are only slowly and gradually returning to their old consumption habits. For example, according to a recent survey in the United States, 24 percent of people do not find the idea of ​​going to the mall for at least six months pleasant. Eric Rosengren, president of the Federal Reserve Bank of Boston, summed up the situation well in an interview with the Wall Street Journal: “The economy can’t recover until Americans are comfortable holding the subway pole.”

Several bankruptcies will also be seen during the spring, which means that we will lose production capacity in the Finnish economy despite the government’s packages to support companies. For example, while new restaurants are likely to emerge quickly after the crisis, it will take time for capacity and employment to return to their previous levels.

A completely different story is still how the pandemic is progressing globally.

Even if Finland and other developed countries get a grip on this disease by the summer, the situation may still worsen considerably in developing countries in South America and Africa. Capital has already been withdrawn from developing economies at a record pace. Prices for oil and other commodities have plummeted, further weakening the outlook for developing economies. The situation in emerging economies will also affect Finland’s export potential and may thus slow down the otherwise well-started recovery towards the end of the year.

It is therefore very likely that Finland’s GDP will shrink by at least 5 per cent this year and probably closer to 10 per cent, as the economy will not start to recover significantly until the last quarter of this year. At the same time, public debt will rise to well over 70% of GDP and the unemployment rate to over 9% this year.

This is probable even though we would soon get rid of the severest health-threatening phase of the coronavirus pandemic. Fiscal and monetary policies have effectively reduced the possibility of a systemic crisis, but we cannot really do much about the global evolution of the virus or human psychology.