Influence and cooperation
3.2 Forecasting of the Finnish economy
The Bank of Finland published two macroeconomic forecasts for the Finnish economy in 2018. The Finnish economy is booming for the first time in many years, but growth will slow noticeably in the next few years.
The Bank of Finland draws up forecasts primarily to support monetary policy preparation and decision-making. Ongoing monitoring of domestic economic trends and analysis of economic structures are also key elements of the Bank’s forecasting activities.
Forecasts are essential in monetary policy preparation
The key objectives of monetary policy are euro area price stability and balanced real economic developments. The preparation of euro area monetary policy and analysis of the related effects necessitate independent, analytical assessment of economic developments in the immediate years ahead. The short-term inflation forecast for the euro area is a key indicator in assessing euro area price stability and the stance of monetary policy.
The requirements of the single monetary policy in the euro area lay the foundation for forecasting at the Bank of Finland and the forecast for the Finnish economy is produced as part of the Eurosystem’s macroeconomic projections.
The Bank of Finland’s Monetary Policy and Research department is responsible for the domestic forecast in cooperation with the ECB and the Eurosystem.
Finland’s economy booming
In June 2018, the Bank of Finland projected that economic growth would continue and remain broadly based. At the same time, Finland was moving from an upswing to a boom. Investment and exports are fuelling growth, while higher employment and purchasing power are supporting consumption.
In its June forecast, the Bank of Finland estimated economic growth would strengthen to 2.9% in 2018. Growth was anticipated to slow to 2.2% in 2019, and further, to 1.7% in 2020, reflecting Finland’s subdued long-term growth prospects.
Economic growth stemmed from strong global demand, improved cost-competitiveness, robust employment growth and an accommodative monetary policy. Brisk growth in the global economy and strong momentum in the euro area have increased investments in export markets of importance to Finland.
Growth fuelled by domestic demand
In December 2018, the Bank of Finland projected slower growth compared with the June forecast. The Bank stressed that the boom was continuing and that the fundamentals for continued economic expansion remained in place, as euro area monetary policy was underpinning growth.
According to the December forecast, economic growth had passed its peak and GDP growth would moderate to 2.7% in 2018. In 2019, GDP growth would ease to 1.9%, after which it would abate further and converge towards its long-term potential rate, i.e. to 1.4%, by 2021.
According to the December forecast, growth was fuelled by domestic demand. Private consumption was particularly strong due to robust employment growth. Export growth, in turn, would slow noticeably and fall behind growth in the export markets. The weakening of the international operating environment began to show in several short-term economic indicators during 2018. Lower residential construction was expected to markedly dampen investment growth.
The Bank of Finland produced a short-term inflation forecast as part of the euro area four times in 2018. The inflation forecast is also a key element of the macroeconomic forecast. According to the inflation forecasts, the rise in the general level of prices will remain moderate in the immediate years ahead.
In the forecasts for the Finnish economy, the key downside risks stemmed from the weakening of the global operating environment and rising protectionism. Political uncertainty increased and the outlook for the euro area economy deteriorated towards the end of the year. Overall, concerns about global economic developments increased noticeably during 2018.
The importance of model forecasts and economic analyses
The Bank of Finland draws up its forecasts for the Finnish economy using the Aino model as its main forecasting tool. The model captures interdependencies between the key Finnish macroeconomic variables.
Development of the Aino model is an ongoing process. In 2018, the Bank of Finland continued the project established in 2017 to better incorporate Finnish housing markets and banks’ housing loans to households into the model. The revised Aino is scheduled for introduction in 2019.
In preparing its forecasts, the Bank of Finland also drew heavily on short-term indicator models which nowcast short-term GDP developments.
The Bank of Finland also participated in the ECB’s project groups and seminars, the findings of which were utilised in domestic economic forecasts and analyses. In addition, the Monetary Policy and Research department participated actively in the production of monitoring and analysis reports on the Finnish economy published on the Bank of Finland Bulletin website.
The website was also used for publishing several calculations and articles assessing the effects of both domestic and global factors on the Finnish economy. These paid particular attention to the labour market and productivity developments. Analysis relating to households has also been important.
The Bank of Finland actively provided information on the Finnish economy to different media, including social media. Presentations given to the Bank’s various domestic and foreign stakeholders were also important.