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The Ministry of Finance forecast indicates that total output will decrease by 6% this year and grow
by less than ½% in 2010. There will be over 90,000 fewer employed people this year than last year, and the employment
rate will edge down below 68%. The unemployment rate will climb to an average of 9% this year. In 2010 the demand for
labour will continue to slow by around 70,000 persons, with the employment rate falling to around 66% and the
unemployment rate will rising to an average of 10½%.
The general government balance has been in surplus since 1998, but this year it will slide sharply
into deficit, and the deficit will continue to deepen in 2010. Current predictions are that the budgetary position in
general government will deteriorate by almost EUR 13 billion from last year, or by 7 percentage points relative to GDP.
For Finland this is a steeper drop than at the height of the previous recession in 1991. Fiscal policy will remain
expansionary both this year and next.
The global economy contracted very sharply in the latter half of 2008 and fell into a deep recession in
early 2009. The recession in the real economy was triggered by a crisis in the financial market, which remains in a
state of disequilibrium despite a slight improvement in bank balance sheets. Risk premiums, which are reflected in
lending and interest rates, have declined but still remain at a high level. In the near future both banks and
businesses will continue to have difficulty securing long-term financing.
The global economy will begin to recover towards the end of the year. In Finland, however, it will take some time for recovery to take hold. Even though the fall in output has now slowed, the national economy will contract 6% this year and show only marginal growth in 2010. The unemployment rate will continue to rise. Public finances will deteriorate sharply. It is projected that the budgetary position in general government will slip into deficit for the first time in more than ten years and net lending to drop to -4.5% of GDP in 2010.
Effect of stimulus to dampen
In many countries the stimulus measures adopted in response to the global recession have been unprecedented in magnitude. Governments have provided state guarantees and taken various other measures to help stabilize the ailing financial system, and central banks have pursued expansionary monetary policies. As for fiscal policy measures, moves have been made to increase public consumption and to launch investment programmes. Although it is still too early to pass judgement on the effectiveness of these massive public stimulus measures, it is reasonable to assume that they have contributed to the recent encouraging news on economic activity both at home and abroad. Looking ahead over the next few years, it is important to bear in mind that fiscal policy will need to be tightened because of the high levels of debts on national budgets. Furthermore, over time, stimulatory fiscal policy will lose some of its strength. To return to a sustainable growth track, confidence will first have to be restored and market-driven growth resumed. It is particularly critical to ensure that public interventions do not lead to protectionism, nor suppress or discourage private sector activity and initiative and the growth potential stemming from that activity.
International economy signalling a turn
After six months of sharp decline, the fall in output slackened in the second quarter of 2009, and the problems in the financial markets continued to ease. Both business and household expectations have become more optimistic. Ever since the spring the international stock market has shown signs of an economic rebound. Prices of production supplies and oil have started to edge back up as inventories have been adjusted in line with the lower level of demand.
However, is reason to expect that global economic recovery will be a slow process, as the growth of unemployment and other trends in industrial countries are causing households to remain cautious. Economic recovery is also hampered by the global reach of the crisis. Furthermore, it seems that the timing and strength of the rebound will vary across different countries and regions. The situation is the best in Asia's large emerging economies, which will gradually help to pull up the Japanese economy as well. In the United States it is expected that the economic situation will stabilize by the end of the year. In Europe, it seems that recovery may get under way somewhat later than elsewhere. World trade is set to decrease by as much as about 10% this year and the global economy to contract over 1%. In 2010, both are expected to grow by a couple of per cent, i.e. well below the average for the past decade.
Export industry faces major challenges
The recession brought to an end a sustained period of export-driven economic growth. In 2008, the exports to GDP ratio climbed to a record high of 47%. In the first half of 2009 the value of goods exports fell by over one-third compared to the corresponding period last year. As the cyclical outlook is expected to improve towards the end of the year in Germany and Sweden, for instance, and as the normalization of raw material prices is supporting gradual economic recovery in Russia, there are good grounds to expect that Finnish exports will strengthen in the latter half of the year. Nonetheless exports will decline by 22% in the whole of 2009, and export prices will fall considerably. In 2010, it is projected that the volume of exports will rise very slightly at around 2%.
Imports of raw materials and production necessities will fall considerably in 2009, closely reflecting the outlook for industrial output and exports. The adjustment of inventories to better match demand will also contribute to reducing imports. Imports of machinery and equipment will decline sharply as businesses postpone purchases.
This year, the volume of imports will fall by around one-fifth and import prices will drop by almost 10%. Imports will remain weak in 2010, falling by one per cent. In 2009 the current account surplus to GDP ratio will fall to around 1.5% from an average of 6% over the past decade.
Investment still falling
Investment will decrease by some 10% in 2009. Investment will be down in all manufacturing industries,
most sharply so in the forest, machinery and metal products industry. Residential construction investment will also
decline this year, but probably no longer in 2010. Civil engineering investment will fall in 2009, but begin to edge up
in 2010. Investment in machinery and equipment will decrease both this year and next. Overall investment will still
fall by 5-6% in 2010
Household caution reflected in higher savings rate
Household consumption expenditure began to fall a year ago, and this trend accelerated in early 2009.
The slowdown has been widespread, affecting purchases of both goods and services. However, as real wages increased in
early 2009 by nearly 3% from last year and household purchasing power strengthened, consumer saving has risen
significantly. On the other hand household indebtedness continued to increase in the early part of the year, albeit
more slowly than a year ago.
Owing to deteriorating job prospects, households' combined disposable income will not increase in 2009,
even though average earnings will continue to grow and state income taxes have been cut. While the saving rate is
rising, consumption will drop by almost 3% this year. Purchasing power is likely to begin slowly to strengthen next
year, but with unemployment continuing to escalate, households will probably remain cautious and consumption will
continue to decrease slightly.
Unemployment rate up to an average of 10½%
This year many jobs will be lost mainly as a result of declining exports, but increasingly because of
dwindling domestic demand. There will be more than 90,000 fewer people in employment than last year, and the employment
rate will fall below 68%. This year the unemployment rate will rise to an average of 9%.
In 2010 the demand for labour will continue to slow by around 70,000 persons, with the employment rate
falling to around 66%, the same level recorded ten years ago. The unemployment rate will climb to an average of 10½%,
and some 280,000 people will be out of work. A serious problem is presented by the continuing increase in the duration
of unemployment periods and the consequent growth of structural unemployment.
Moderate price rises
Raw material prices have been slowly rising again following a sharp fall towards the end of last year.
Monthly indicators for producer and import prices in manufacturing are expected gradually take the same path as raw
material prices. The rise in consumer prices has effectively come to a halt, and for some months the consumer price
index will show negative change compared to the previous month. In the third quarter of this year, inflation will still
be negative at the annual level, as prices are still being depressed by lower interest rates, house and fuel prices,
but a turnaround later in the year is now in sight. The increase in excise taxes on alcohol and tobacco products early
in the year will push up price levels by almost half a per cent. Taxes on alcohol will be increased once again in
October, whereas the VAT rate on food will be lowered by five percentage points. Nonetheless, the consumer price index
annual average will rise by no more than 0.1% this year.
In 2010 import and production prices will continue to rise slowly, as will labour costs. House prices
and interest rates will no longer fall. It is predicted that consumer prices will rise by just over one per cent.
Recession pushing public finances into precarious position
Public finances in Finland are slipping into a precarious position as a result of the economic crisis.
The government has made various interventions in an attempt to step up economic activity while at the same time having
to voice greater concern about the longer term sustainability of the budgetary position in general government.
The sharp increase in public debt is effectively limiting the government's room for manoeuvre in fiscal
policy. The longer the effects of the crisis impact general government finances, the more it will be necessary for
fiscal policy decision-making to focus the budgetary position in general government at the expense of other fiscal
policy objectives
Financial balance in general government to slide into deficit
The general government balance has been in surplus since 1998, but this year it will slide sharply into
deficit, and the deficit will continue to deepen in 2010. Current predictions are that the budgetary position in
general government will deteriorate by almost EUR 13 billion from last year, or by 7 percentage points relative to GDP.
For Finland this is a steeper drop than at the height of the previous recession in 1991. Roughly half consists of
discretionary changes, such as tax cuts and higher spending, and the other half of automatic decreases in cyclically
sensitive tax receipts and the growth of unemployment benefits and other cyclically sensitive public expenditure items.
Despite the slight improvement in the cyclical outlook for 2010, the general government budgetary position will
deteriorate further by some EUR 3.3 billion. The general government deficit-to-GDP ratio will breach the Stability and
Growth Pact's 3% limit for the first time since Finland joined the EMU. Fiscal policy will still be expansionary next
year.
Contracting tax base but growing expenditure
Over the next couple of years Finland's budgetary position, according to national accounts, will
deteriorate by 7 percentage points relative to GDP. This is the result of stimulus decisions to cut taxes, the sharp
fall in tax bases, the rise in expenditures that follows automatically with economic downturn and due to expansionary
spending measures. The contraction in the tax base, such as decreasing business profitability, private consumption,
capital gains and earned income, is reflected in a fall in tax accrual. At the same time, government spending is
continuing to grow quite fast.
Central government debt stood at EUR 54 billion at the end of 2008. In nominal terms, the volume of
debt has decreased by EUR 10 billion in the past five years. This year and next, the economic crisis will swell central
government debt in all by EUR 23 billion.
Further deterioration in local government finances
Finances in local government, and particularly in municipalities heavily dependent on corporate taxes,
tightened in early 2009 with the sudden collapse of corporate tax revenue. The year 2010 will be extremely difficult
for the whole of local government, with the municipal tax base remaining weak as a result of rising unemployment. Apart
from the effects of dwindling tax receipts, local government finances will also be burdened both this year and next by
the rise in negotiated wages and the growth of unemployment-related expenditure. Local government net lending will drop
to around -0.5% of GDP this year.
The achievement of financial balance in 2010 will largely depend on decisions taken by local
authorities on municipal and real estate taxes and on measures to curb expenditure growth. The outcome of the next
round of collective bargaining will also have a significant impact on local government finances. Despite the slowdown
of expenditure growth and the substantial interventions by central government, local government net lending will remain
at -0.5% in 2010.
More comprehensive version of the forecast available on the Internet at www.vm.fi as of 15 September 2009.
Inquiries:
Mr Mika Kuismanen, Head of Forecasting Unit, tel. 358 9 160 34865 or 358 40 5025107
Mr Harri Kähkönen, Senior Adviser, tel. 358 9 160 33194
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Ministry of Finance P.O BOX 28 FIN-00023 GOVERNMENT Tel. +358 9 160 01 E-mail: valtiovarainministerio@vm.fi