5.2 Finland’s economic boom over – slower growth ahead

In 2019, the Bank of Finland published two extensive macroeconomic forecasts for the Finnish economy. The forecasts suggested that Finland’s economic boom was subsiding and growth was losing momentum.

The global economic outlook continued to weaken during 2019 and the heightened uncertainty was increasingly holding back Finland’s economic growth.

Monetary policy preparation necessitates economic forecasts

Monetary policy measures often affect inflation and other macroeconomic phenomena with a time lag. For this reason, monetary policy decision-makers need an informed view of how decisions taken now would affect the economic situation in months’ or even years’ time. Therefore, 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 Bank of Finland’s Monetary Policy and Research department is responsible for the domestic economic forecast in cooperation with the ECB and the Eurosystem.

The Bank of Finland prepares forecasts primarily to support preparation of the single monetary policy and related decision-making. For this reason, the macroeconomic forecast for the Finnish economy is produced as part of the Eurosystem’s macroeconomic projections. The macroeconomic forecast is also closely linked to the forecast for the public finances and the short-term inflation forecast.

Boom subsides and Finland’s economic growth loses momentum

In its forecasts prepared in 2019, the Bank of Finland assessed that the boom was subsiding and economic growth was losing momentum. The most significant factors putting a brake on Finland’s economic growth were global uncertainties and slower growth in Finland’s main export markets.

In June 2019, the Bank of Finland forecast that economic growth would slow to 1.6% in 2019. In 2020, GDP growth would be 1.5%, and in 2021 it would slow further, to 1.3%. Uncertainties in the global economy were expected to reduce investment, which would weaken global demand for Finnish exports.

The Bank assessed that the conditions for economic growth were still favourable, as monetary policy was conducive to growth in the euro area and positive employment developments had improved consumers’ purchasing power.

In December 2019, the Bank of Finland revised down its forecast for growth in response to a further weakening of the outlook for the euro area and other main export markets. Business and household confidence also declined further towards the end of the year. The Finnish economy was forecast to grow by 1.3% in 2019. In 2020, growth was expected to slow further, to 0.9%.

However, the Bank expected that the economic slowdown in Finland’s main trading partners would be a temporary phenomenon. The gradual recovery in both the euro area and the global economy would exert a pull on the Finnish economy, too. According to the December forecast, economic growth would pick up to 1.1% in 2021 and 1.3% in 2022.

Domestic demand to drive growth in immediate years ahead

Despite the pick-up in the export markets, domestic demand will be the main driver of Finland’s economic growth in the immediate years ahead. The impact of net exports on economic growth, in turn, will remain modest on average.

Household purchasing power will be strengthened by the still good employment situation and higher earnings. Although private investment will begin to support growth at the end of the forecast period, overall it will remain subdued. Housing construction will decline and growth in corporate fixed investment will remain sluggish. On the other hand, public demand will support growth in the next few years.

Inflation is forecast to remain subdued. Slower economic growth and the expansionary fiscal policy will deepen the general government deficit and add to public debt.

Conditions favourable for continued growth

Even though the boom is subsiding and economic growth is slowing, the conditions for continued growth remain favourable. Monetary policy is accommodative and fiscal policy has been adjusted in an increasingly expansionary direction.

The Bank of Finland forecasts published in 2019 are surrounded by heightened uncertainty stemming from the global economy. Export market growth may remain slower than expected. On the other hand, domestic factors, such as investments and private consumption, may develop more favourably than anticipated.

Models an integral part of forecasting and economic analysis

The Bank of Finland has a long tradition of using models of the national economy in the preparation of forecasts and assessment of different policy options. The Bank draws up its forecasts for the Finnish economy using the Aino model as its main forecasting tool.

Aino is a stochastic general equilibrium model that simulates the Finnish economy. It is built on economic theory and is estimated based on Finland’s national accounts data. The model consists of a group of mathematical equations that are implemented in a computer code. The equations illustrate interdependencies between the key Finnish economic variables.

The project established in 2017 to upgrade Aino continued in 2019. The purpose of the project is to better incorporate Finnish housing markets and banks’ housing loans to households into the model. The continuous development of models is a key part of forecasting work at the Bank of Finland.

In preparing its forecasts and monitoring economic developments, the Bank also drew heavily on short-term indicator models used in nowcasting short-term GDP developments.

Bank of Finland forecasts draw media attention

The Bank of Finland Bulletin website is the Bank’s main channel for publishing forecasts and other topical articles related to the Finnish economy.

In support of the forecast, the Bank of Finland regularly publishes a report on recent developments in the Finnish economy. In addition, in 2019, the Bank published topical articles supporting forecasting and economic monitoring. The articles concerned, for example, the public finances, housing markets, investments, labour markets, productivity developments and households.

In addition to the forecasts, during 2019, the Bank of Finland actively provided information on the Finnish economy to different media, including social media. There was a great interest in the Bank’s forecasts. During the year, the forecasts were widely discussed in both the national media and social media.

The several presentations on the Finnish economy given to the various domestic and foreign stakeholders in 2019 were also important in sharing information on the economy and increasing the Bank of Finland’s media visibility.