6.2 Prolongation of the pandemic brought about uncertainty in economic forecasts in 2021

The Bank of Finland published two extensive forecasts for the Finnish economy in 2021. The forecasts suggested that Finland would recover rapidly from the economic contraction caused by the COVID-19 pandemic. Economic growth would, however, be overshadowed by the prolongation of the pandemic, supply bottlenecks and higher inflation.

For monetary policy preparation and decision-making, the Eurosystem needs an informed view of the economic situation in its Member States and how it is about to evolve. This necessitates independent and analytical assessment of economic developments for the immediate years ahead.

The Bank of Finland’s Monetary Policy and Research department is responsible for the economic forecast for Finland in cooperation with the ECB and the Eurosystem.

The forecast for the Finnish economy is drawn up as part of the Eurosystem’s macroeconomic projections. Forecasts for the public finances and short-term inflation forecasts are also produced as part of the Eurosystem’s projections.

March interim forecast pointed to stronger growth and gradual receding of the pandemic

In the March 2021 interim forecast, the Bank of Finland estimated that economic growth would pick up more than previously projected.

GDP growth was forecast to accelerate to 2.6% in 2021. The improved outlook was seen to stem primarily from the recovery of private consumption.

GDP growth would continue to gather pace in 2022 and reach 2.7%, reflecting a gradual rebound in investment. In 2023, economic growth would slow to close to 1%.

The forecast was based on the assumption that, as vaccination coverage increases, containment measures could be gradually lifted and economic growth would gain momentum.

Growth would also be underpinned by the stronger-than-expected economic developments in 2021 and strengthening of export markets.

Extensive June forecast expected economic growth to pick up with the easing of the pandemic

In the extensive June 2021 forecast, the Finnish economy was projected to grow 2.9% in 2021 and 3.0% in 2022. However, the fast pace of growth was anticipated to remain transient.

In 2023, GDP growth would slow to 1.3%, reflecting the lacklustre long-term growth prospects of an ageing economy.

The June forecast projected economic growth to gather pace across the board as the pandemic eases. Strong consumer confidence, together with the release of pent-up demand, would support household consumption.

With the recovery of the export markets, Finnish exports would rapidly rise back towards pre-pandemic levels. Economic growth would also be bolstered by investments.

The forecast also emphasised that the favourable international economic operating environment would support Finnish exports. The world economy continued to recover, and global monetary and fiscal policy stimulus were supporting the conditions for growth.

Finnish exports were swiftly bouncing back to pre-pandemic levels on the back of a considerable strengthening of global demand.

The ECB continued to pursue strong monetary accommodation, and the low level of funding costs would underpin household consumption and corporate investment over the forecast years.

A rise in commodity prices and stronger consumer demand were foreseen to push up inflation notably in 2021, threatening to curb growth worldwide. The forecast suggested, however, that the strong rise in prices would be temporary.

Growth for 2021 was revised up in the September interim forecast

The autumn 2021 interim forecast pointed to a better outlook for economic growth than had been assessed in the spring.

Economic growth in spring 2021 had been notably faster than anticipated. Corporate and household confidence was improving as vaccinations progressed and restrictions were lifted.

GDP was forecast to grow 3.5% in 2021 and 2.8% in 2022. Driven by strong economic growth, employment also grew faster in the summer than previously expected.

Fuelled by rapid economic growth, consumer price inflation picked up especially on account of rising energy prices.

December forecast saw growth overshadowed by supply disruptions and the pandemic

In the December 2021 forecast, the Bank of Finland stressed the importance of the deteriorating COVID-19 situation, supply disruptions and rapidly rising raw material prices as factors overshadowing Finland’s economic growth (Chart 29).

Economic growth was expected to remain weaker than forecast, should global supply-side disruptions persist or the pandemic situation deteriorate further.

According to the December forecast, Finland’s economic growth would be 3.5% in 2021, after which it would moderate to 2.6% in 2022.

Supply bottlenecks and high raw material prices, however, were expected to blunt growth in the economy and fuel inflation.

Growth was projected to slow to 1.3% by 2024, reflecting the muted longer-term growth potential of Finland’s ageing economy.

The pandemic, supply disruptions and rapid rise in prices brought about uncertainty in forecasts

The Bank of Finland systematically revised up its forecasts in 2021. The inflation forecast was also revised up due to rising energy prices.

The greatest uncertainty associated with the forecasts produced in 2021 continued to relate, particularly in the short term, to the development of the pandemic situation.

The Bank of Finland emphasised, for example, that as long as the pandemic was not brought under control everywhere in the world, it had the potential of disrupting production chains and holding back global economic growth.

Global supply-side disruptions were also creating great uncertainty in the forecasts. It was difficult to predict the duration of the supply problems or all their effects, especially in a situation where recurrent infection waves kept slowing down the global recovery from the pandemic.

The inflation outlook was also surrounded by significant risks, although at the end of 2021 these risks were anticipated to remain transitory.

Even though the forecasts were also subject to positive risks, especially as regards household consumption turning out to be stronger than expected, as a whole the risks to the forecast were tilted to the downside.

The Bank of Finland produced a new long-term growth forecast for Finland

The Bank of Finland produced a new long-term growth forecast for the period 2021–2070.

The forecast suggested that, over the next two decades, long-term economic growth would remain roughly at 1.2% per annum and would thereafter slow further.

Finland’s growth prospects would be hampered by an ageing population and a weak productivity trend. In addition to age demographics, growth opportunities would also be threatened, in particular, by declining human capital.

The Bank of Finland’s new forecasting framework for long-term economic growth is based on endogenous growth theory and was drawn up in cooperation with the National Audit Office of Finland (NAOF).

The Bank of Finland’s forecasts were widely discussed on social media

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

During the year, the Bank of Finland’s forecasts were also widely discussed in both the national media and also social media. Interest in the Bank’s forecasts remained high.

Economic monitoring, analysis and development of forecasting models are important

In support of the Bank of Finland forecast, the Bank regularly publishes a report on recent developments in the Finnish economy.

In 2021, the Bank also published topical articles supporting forecasting and economic monitoring on the Bank of Finland Bulletin website. The articles concerned, for example, the public finances, supply bottlenecks, households and non-financial corporations.

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

The continuous development of forecasting models is a key part of forecasting work at the Bank of Finland. In 2021, work continued on developing the models simulating the Finnish macroeconomy – Aino 2.0 and Aino 3.0 – and the data systems related to their use.