Economic Forecast 3/2021: Economic recovery exceeded expectations, part-time jobs bolster employment figures – MuniFin raises its GDP forecast

Domestic demand has recovered rapidly after the COVID shutdown period in March, says Chief Economist Timo Vesala in MuniFin’s third economic forecast this year. Finland’s GDP bounced back to pre-pandemic levels sooner than expected and investing activities have recovered rapidly as well.

As economic growth has exceeded expectations, MuniFin raised its forecast of this year’s GDP growth to 3.2%. MuniFin predicts this year’s GDP growth to carry over and stay at 3.0% in 2022, and slow down to 1.8% in 2023.

Things are looking somewhat less stable globally: forecasts for the global economy estimate that peak growth may already have passed. Vesala points out that this does not automatically imply a dramatic change in the global economic outlook.

”Overall recovery from the pandemic happened in a more front-loaded manner than expected. On the other hand, supply side bottlenecks in global value chains  may have been underestimated”, Vesala explains.

Employment figures boosted by part-time jobs, recovery of overall working hours still underway

Recovering employment has been a positive surprise this year. The trend of the employment rate has already reached the pre-pandemic top level of 72.7%, and a record number of open jobs remain available.

Vesala notes that the employment figures can be explained by growth in part-time jobs. Total working hours still amount for less than before the pandemic. In other words, work is now divided among more people.

As a flipside of rapid economic recovery, significant bottlenecks have developed in the labour market. Many sectors are affected by acute labour shortage hampering growth in production.

“Part of the shortage is due to a skills gap. Jobs lost during the pandemic are being replaced with new, but slightly different ones with different skill requirements”, Vesala observes.

Economic recovery may increase regional differences

The demand for labour has regional differences. Southeast Finland and North Karelia have fewer open jobs per capita than the Finnish average, while South and Central Ostrobothnia, Kainuu and Lapland have more. The demand for labour has grown even faster in municipalities and joint municipal authorities than in the private sector.

Labour shortage is evident especially in Ostrobothnia, where unemployment is substantially lower than the average in Finland. Kainuu and Lapland are suffering from a particularly difficult employment mismatch where many jobs are available, but unemployment remains high.

As the economy recovers, these kinds of regional differences may become larger.

“The regions with an educated and economically active population will reap the most benefits from the economic upswing”, Vesala predicts.

Uncertainty about the health and social services reform

The improving economy has a positive effect on municipal finances as well. Employment and total payroll have grown faster than expected, resulting in more tax income. Esa Kallio, CEO at MuniFin, points out that favourable economic conditions alone will not solve the structural challenges that municipalities struggle with.

“Transforming age structure and dwindling working population continue to threaten the economic sustainability of many municipalities.”

Implementing the health and social services reform is also a burdensome execise for municipalities.

“There is uncertainty about municipality-specific impact assessments and transfer of functions. At the same time, municipalities are expected to determine their post-reform level of taxation for the year 2023. This is a very difficult task. And while the reform reduces some need for municipal investments, it shrinks municipalities’ operations much more in comparison and thus a smaller income base supports investments. Supporting the long-term investing capacity of municipalities is therefore even more important than before”, Kallio summarises.

Additional information:

Heidi Penttinen, Communications Manager
tel. +358 45 139 3229

MuniFin published its half year report for 2021: loan growth normalised and Group results improved

The demand for financing in the municipal sector remained lower than expected due to surprisingly good economic development and the Government’s temporary COVID-19 recovery measures. Financing for non-profit housing production saw modest growth. Overall, the growth of MuniFin’s lending portfolio returned to normal levels from the spike in demand created last year by the COVID-19 pandemic. MuniFin’s new lending for the reporting period totalled EUR 1,601 million, while total long-term funding stood at EUR 28,582 million. The Group’s net operating profit amounted to EUR 127 million.

Interest towards MuniFin’s sustainable finance products continued to grow. At the end of June, MuniFin’s green finance totalled EUR 2,120 million and social finance totalled EUR 833 million. Green finance is granted to investments that generate clear and measurable environmental benefits, while social finance is granted to investments that promote equality and communality. In total, MuniFin’s sustainable finance grew by 24.3% compared to the turn of the year.

“Our customers have been very receptive to the social finance product we introduced to the market last year. Municipalities play a key role in the achievement of climate goals, and they have indeed done innovative work to reduce emissions”, notes Esa Kallio, CEO at MuniFin.

The Finnish Parliament passed the health and social services reform bill this June. In the near future, the reform is not expected to have a major impact on MuniFin’s operations or financial outlook, but Finnish municipalities will be affected by the reform in many ways. Their need for investments is nevertheless expected to remain approximately at the current level, and many structural issues yet remain to be solved.

“Ageing population and migration to growth centres are causing financial difficulties for many municipalities. As new municipal councils begin their term in August, council members are faced with the responsible task of finding new forms of intermunicipal collaboration to tackle challenges caused by these structural problems, while also working to build a more ecologically and socially sustainable municipality”, Kallio points out.

MuniFin raises its GDP forecast as rising courage to invest brightens the outlook after a difficult first quarter

In the first quarter of the year, government restrictions and fear of the COVID-19 spreading suppressed private consumption. Foreign trade also took an ugly turn, with exports falling by roughly five per cent in the first quarter.

“The drop is nothing to worry about, because the decline is explained by the atypical comparison period in late 2020, when maritime transport drove exports up. The underlying trend in exports is one of growth, and exports will be one of the drivers of growth this year”, estimates MuniFin’s Chief Economist Timo Vesala.

As investment courage brightens the outlook, MuniFin increases its GDP forecast

Investments took an upward turn in early 2021. Companies are more confident about the future, reviving their production capacity to respond to the recovering demand.

Thanks to the revived courage to invest and the coronavirus vaccinations proceeding faster than expected, MuniFin is increasing its forecast of this year’s GDP growth from 2.3% to 2.7%. Next year’s growth prospects remain unchanged: in 2022, MuniFin expects Finland’s GDP to grow by 3.0%.

“It looks like economic growth accelerated soon after the lockdown period in early spring. Thanks to a boost in private consumption, mid-year is looking to become stronger than we previously expected”, shares Vesala.

Lack of skilled labour may put the brakes on growth

Finland’s labour market has recovered from the pandemic better than expected: unemployment reached its peak last autumn, and employment has recovered rather briskly ever since, apart from a brief hiatus in the winter. MuniFin’s estimate of this year’s average unemployment rate stands at 7.6%. The figure is expected to come down to 7.1% in 2022.

“The job market has clearly had better pull than we previously expected. People are even more active in the job market than they were before the pandemic”, notes Vesala.

A new economic boom is only starting, but the lack of skilled labour already threatens to limit growth. According to Vesala, skills shortage has furtively become one of the toughest structural problems Finland’s economy has to face.

“There is no quick fix to strengthening the skills base. Solving the labour market mismatch requires long-term investments in education and research. The intention behind raising the compulsory school age is well-meant, but in making the reform, we must ensure that municipalities and the new health and social services counties will have enough means to tackle social exclusion among the young.”

Asynchronous revival of supply and demand accelerates inflation temporarily

The asynchronous revival of supply and demand as well as the recovery of energy and raw material prices cause inflation rates to increase. In recent months, Finland’s inflation has risen above the euro area average, which may undermine competitiveness in the long term. In its economic forecast, MuniFin raised its estimate of this year’s inflation to 1.9%. MuniFin’s inflation estimate for 2022 remains at 1.7%.

Although the rise in inflation is expected to be temporary, the trends are hard to predict.

“Mass psychology and the expectations of different parties play a part in this. It is also not clear how effectively inflation could be slowed down if prices continue to rise and inflation expectations strengthen too much”, Vesala muses.

If the EU recovery policy proves successful, the ECB may be able to start normalising interest rates. According to Vesala’s estimate, the ECB might first start raising interests in 2023.

The health and social services reform may affect the investment capacity of growth municipalities in unexpected ways

After the Constitutional Law Committee’s recent statement, the health and social services reform seems more likely to happen than ever before. The proposed reform’s immediate effects on municipal economy will be small, but the effects may cumulate in the long term.

“Having cost pressures transferred from municipalities to the new health and social services counties and the central government will benefit all municipalities, but the effect will be particularly significant in areas with net emigration, where health and social services form a very large part of net costs”, says Esa Kallio, President and CEO at MuniFin.

The proposed reform will have very different effects on the financing structure of municipalities’ operational economy depending on the region. Municipalities with a strong tax base will lose some of their tax revenue but receive income transfers from the state instead. In these municipalities, the growth prospects and the predictability of the income side  will decrease, possibly causing unexpected effects on the investment capacity of growing municipalities.

“The health and social services reform will eliminate proportionately more running operational costs than investment needs. Municipalities will have less control over maintaining a sufficient annual contribution margin in order to fund necessary investments. As the share of municipal tax revenue decreases, the investment capacity of the financially strongest municipalities may in fact be impaired in the long term”, Kallio points out.

Additional information

Timo Vesala, Chief Economist, MuniFin
Tel. +358 50 5320 702

Esa Kallio, President and CEO, MuniFin
Tel. +358 50 3377 953

Timo Vesala: The pandemic will slow down the Finnish economy in the spring, but the summer is expected to bring new growth

According to newest data releases, Finland’s GDP shrank by 2.8%  in 2020. The shift to remote work was handled successfully, the core functions of the economy have been kept running with relatively few people working at offices, and Finnish industries proved to be surprisingly resilient against the pandemic.

“Finland employed several different strategies to fend off the economic downturn resulting from the COVID‑19 pandemic. The Finnish economy survived the first year of the pandemic better than expected, but now the rising number of active cases and the measures required to slow down the spread of the virus are delaying the revival of domestic demand. It now seems that the economy will start picking up again in the second half of the year”, estimates Timo Vesala, Chief Economist at MuniFin.

“Finnish industries managed to avoid major pandemic disasters. At first, production kept running thanks to long order books, and then demand started to pick up again towards the end of the year. Industries were expected to suffer heavily from COVID-19, but thankfully that did not happen”, Vesala comments.

Exports acted as a buffer for economic downtrend, and Finland’s shrinking GDP in 2020 was purely due to the suppression of domestic consumption and investment. Employment rates recovered rapidly during the summer, but the growing trend dwindled in late autumn. The COVID-19 situation has worsened recently, creating a risk of increased lay-offs and long-term unemployment.

Domestic market recovery delayed – possible boost from exports

As the COVID-19 situation escalates and calls for increased shut-down measures, economic recovery is delayed. The domestic market can fully recover only after risk groups have been vaccinated.

Once the pent-up demand is released, private consumption will begin to drive economic recovery. Another cornerstone of economic recovery is exports, which will benefit from revitalised global economy. As more people are vaccinated, companies become more confident in making investments.

Although there is still plenty of uncertainty about how the course of the pandemic will play out, the upside and downside risks in the forecasts are now better balanced than before.

“The substantial growth expectation in the US may speed up the global economy and perhaps surprise us positively here in Finland as well”, Vesala notes.

On the other hand, heavy recovery measures in the US also raise concerns of economic overheating and inflation. In the euro area, these risks are substantially smaller because the European recovery measures are moderate compared to the US and also not as intensely focused on stimulating consumption. In Europe, the risk of permanently accelerating inflation is much smaller, and the fundamentals of the euro area economy do not provoke rapid increases in interest rates.

Record year gave municipalities tools to manage the pandemic after-effects

Esa Kallio

Municipal economy strengthened substantially in 2020, largely because of governmental support measures. With the year turning out better than anticipated, municipalities are now in a place where they have better ground for managing the after-effects of the pandemic.

“A financial buffer may prove useful. Government pandemic support will eventually end, and if prolonged, the pandemic may push unemployment into a new upward trend. The financial buffer gained last year needs to suffice also for handling the after-effects of the pandemic, such as care debt”, says Esa Kallio, President and CEO at MuniFin.

Municipal income is already returning to the normal level. The need for investments is expected to continue as usual, and municipalities are expected to start borrowing again.

Due to Finland’s age structure and the trends of internal migration, municipalities are pushed to collaborate even more closely. New cooperation models must be developed in order to mitigate certain risks: for example, the unit costs of early childhood education and basic education may rise significantly due to falling birth rates.

“Municipalities compete against each other for the active population, which is proportionally shrinking, and this may lead to a zero-sum game that needlessly bloats the service structure. Municipalities should focus more on cooperation and less on competition”, Kallio summarises.

Additional information

Timo Vesala, Chief Economist, MuniFin
Tel. +358 50 5320 702

Esa Kallio, President and CEO, MuniFin
Tel. +358 50 3377 953

Photos: Sami Lamberg

The pandemic highlighted MuniFin’s role in 2020 – Annual Report and Sustainable Bonds Impact Report published

MuniFin’s CEO Esa Kallio and Executive Vice President Aku Dunderfelt discuss the year 2020 at MuniFin.

Overall growth and very strong investor interest in social finance

In 2020, the demand for funding among MuniFin customers increased substantially. Our finance for new projects totalled EUR 4,699 million, increasing by as much as 52% from 2019.

The COVID-19 pandemic prompted us to quickly adapt to remote work, but we were able to serve our customers without interruptions by creating new customer service channels and expanding our digital services.

“The economic reports by our chief economist and the training on our digital services have been highly popular”, Kallio notes.

The social finance we launched in early 2020 received a highly positive reception, and we granted a total of 589 million euros across 27 projects. We also issued the first Nordic social bond in the SSA category for international investors. The social bond had a EUR 500 million issue size and was overbooked by nearly four times, signalling overwhelming demand for this product.

Even though capital markets were unstable, particularly in the spring, our own funding continued without interruption throughout 2020. Our long-term funding rose to EUR 11 billion.

“The success of our benchmark bonds during this period of uncertainty shows that we have a successful funding strategy and good reputation in the international capital market. The year 2020 further highlighted MuniFin’s core mandate”, says Kallio happily.

In 2020, we continued to reform our organisation and operating practices. We will continue to further develop our operations and digital services.

“In all we do, we aim to provide even better and even more efficient service for our customers”, Kallio concludes.

Further information:

Heidi Penttinen, Communications Specialist, Tel. +358 45 2139 3229

Timo Vesala: The economy will recover in 2021, but the pandemic will make the first months challenging

The outlook for 2021 is hopeful even though the winter months will see a race between vaccination programmes and the quickly spreading variants of the coronavirus.

“As more and more people are vaccinated, confidence in the economy will gradually increase. The second half of 2021 could see very rapid economic growth if households no longer hold back their spending”, Vesala predicts.

Joe Biden’s presidency in the USA is expected to restore a sense of stability and predictability in international relations. The Democratic Party’s majority in the Senate will also offer Biden more freedom to manage the pandemic’s economic effects, which, according to Vesala, should reflect positively in the global economy.

The corona crisis appears to have affected the Finnish industries less than anticipated. New factory orders are already coming in.

“For once, our industrial structure seems to be in our favour, because our most important export markets – China, the USA, Germany and Sweden – have survived the pandemic relatively well”, Vesala notes.

In Europe, the European Central Bank has implemented large-scale recovery measures to revitalise the economy. In relation to the borrowing demand of European countries, the ECB’s monetary policy is expected to push the recovery even more in 2021 than in 2020. This will have a significant effect on interest rate predictions.

“The economy is starting to grow again, which generally pushes long-term interest rates upward. Thanks to the ECB’s actions, however, the interest rates in Europe are not likely to rise much. The situation is different in the USA, where growth and inflation may cause long-term interest rates to rise much more rapidly”, Vesala observes.

COVID-19 will leave scars but perhaps also stimulate new growth

The pandemic will scar Finland’s production structure and create repair debt, which will slow down economic recovery after the initial growth spurt. It will take time until companies will fully regain their ability to make investments and get the wheels of the economy turning normally.

“The pandemic may eventually help us find new growth. Finland has survived the corona crisis fairly well, in part thanks to our level of digital technology. Although some organisations may have been forced to adopt new technology, these investments may later prove useful in bridging the sustainability gap”, Vesala concludes on an optimistic note.

Government support bolstered municipal economies temporarily

After a weak year in 2019, Finland’s municipal economy has grown stronger because the Finnish government has carried most of the pandemic’s economic burden. However, the structural imbalances in municipal economy remain very much the same, and the work in tackling these long-term issues must continue as soon as the worst of the corona crisis has been dealt with.

Timo Vesala

The writer is the Chief Economist at Municipality Finance (MuniFin).

Photo: Sami Lamberg

Timo Vesala: Second pandemic round challenges Finland’s economy – impact has remained relatively mild compared to European peers

The initial impact of the corona crisis was relatively muted in Finland. According to the latest GDP estimates, output fell by 5.7 percent in the first half of the year. That is considerably less than the 15 percent contraction in Eurozone over the same period – not to mention the most severely hit economies, like the UK and Spain, where GDP has declined over 20 percent in the first two quarters of the year.

The first wave of the pandemic never led to a serious health crisis in Finland and a complete lockdown of the economy was avoided. Private consumption dropped but not as badly as in many other European countries. Factories remained open, which supported employment and industrial production. 

In the second half of the year, the key uncertainties relate to the indirect effects coming from declining world trade and weaker investment spending. Swings in external demand and global investment cycle are typically transmitted to Finnish production with a few months delay. These lagging second round effects are likely to keep the pace of economic recovery slower in Finland than in the wider Euro Area.  

The latest economic projections look slightly better than the previous forecasts published in the summer. The consensus now expects Finnish GDP to contract by about 4-5 percent this year and grow about 2-3 percent in 2021. Risks of the macroeconomic outlook are still tilted to the downside, however. Another wide spread escalation of the pandemic could halt the recovery and lead to a renewed drop in global output. Countries that have experienced a significant second wave of Covid-19 infections have already witnessed much slower pace of recovery, especially in the service sector. Fading government support could also pile up corporate bankruptcies and cause spikes in unemployment.

So far, Finnish employment has held up surprisingly well. Transition to remote work has been successful. Finnish legislation on temporary lay-offs has also enabled employers to save in labor costs while avoiding permanent loss of potential workforce. However, as the ongoing recession will inevitably cause some long-term damage to productive capacity, unemployment is likely to increase in the future. The Ministry of Finance expects Finnish unemployment rate to reach its cyclical peak at 9.0 percent in 2021, which would be clearly higher than the pre-crisis level of 6.7 percent.   

Financial support to private enterprises, households and municipalities has substantially increased public spending this year. There will also be a significant drop in tax revenues. Therefore, general government deficit is expected to rise to about 8 to 9 percent of GDP in 2020 and remain elevated at more than 5 percent in 2021. Finnish public debt/GDP was below 60 percent in 2019. It will most likely rise above 70 percent this year and it is on track to rise close to 80 percent over the next 4 to 5 years. Despite such a steep rise, it would still be a relatively low debt-to-GDP-ratio compared to many European peer economies.  

The writer is the Chief Economist at Municipality Finance (MuniFin).

Further information:

Timo Vesala

Chief Economist, MuniFin

Tel. +358 50 5320 702

MuniFin’s half year results webcast on 14 August 2020

Municipality Finance Plc will publish its half year report for January–June 2020 on 14 August 2020. A webcast for investors and other stakeholders will be arranged in English on 14 August at 1:00 pm CET / 2:00 pm EET and broadcast live at


  • Esa Kallio, President and CEO
  • Timo Vesala, Chief Economist
  • Joakim Holmström, Head of Capital Markets

There will be an opportunity to ask questions via chat channel after the presentations.

You can register for the webcast in advance or just before the live broadcast time. Registration and viewing are accessible from the same link at A recording is available after the webcast at the same address.

Further information:

Soili Helminen, Manager, Communications & CSR, MuniFin
tel. + 358 400 204 853

Timo Vesala: Finland’s economy is pulling through the corona crisis surprisingly well – second-round effects remain to be seen

The outbreak of coronavirus has led to a sharp decline in global economic activity in the first half of 2020. Amid the most vicious phase of the epidemic in March-April, many countries had to shut down large parts of their societies in order to contain the spread of the virus. These lockdowns caused serious damage to many businesses, most notably to firms providing services to consumers. The most affected countries have already experienced a significant spike in unemployment.

Many timely indicators suggest, however, that activity is already recovering as countries gradually open their economies. Central banks and governments have reacted strongly to limit the risk of a prolonged economic crisis.  Monetary authorities have supported flow of credit to the real economy and maintained adequate liquidity in financial markets. Governments, in turn, have undertaken various measures to prevent broad-based insolvency in the corporate sector and to avoid unnecessary lay-offs.

Finland’s early measures softened the blow

In Finland, the corona epidemic never escalated into a serious health crisis as early containment measures – such as restrictions on gatherings and shut down of schools and restaurants – helped flatten the infection curve. Private consumption took a hit but not as badly as in many other European countries. Finland’s relatively strong and diversified industrial base probably mitigated the initial impact of the virus.

However, there will also be indirect effects coming from declining world trade and weaker investment spending. As a small open economy, Finland is particularly dependent on external demand and global investment cycle. These second-round effects of the pandemic are likely to keep the pace of recovery somewhat slower in Finland than in wider Euro Area. There is also a risk that a slowdown in domestic construction could contribute negatively to growth over the next couple of years.

According to the latest macroeconomic projections by the Ministry of Finance, Finnish GDP will contract by about 6 percent in 2020, which is a clearly milder scenario than for example the ECB base line forecast for the whole Euro Area (ca. -9 %). In longer time horizon, The Ministry of Finance expects the Finnish economy to grow 2.5 percent in 2021 and around 1.5 percent in 2022–2023.

Given the magnitude of the shock, Finnish employment has held up surprisingly well. Transition to remote work has been successful. Finnish legislation on temporary lay-offs has also enabled employers to save in labor costs while avoiding permanent loss of potential workforce. The ongoing recession will nevertheless cause some long-term damage to productive capacity and unemployment is likely to increase in the future. The Ministry of Finance expects Finnish unemployment rate to reach its cyclical peak at 9.0 percent in 2021, which would be clearly higher than the pre-crisis level of 6.7 percent.

Promoting structural growth in employment has been a top priority in Finnish economic policy since 2015. This priority will undoubtedly resume once the pandemic is contained.

As in all countries, there will be a drop in tax revenues due to the corona crisis. Broad-based government support to private enterprises, households and municipalities will also be needed to mitigate the negative impact of coronavirus. Therefore, general government net borrowing is expected to rise to 8.2 percent of GDP in 2020 and remain elevated at 5.1 percent in 2021. Finnish public debt/GDP was below 60 percent in 2019. In 2020, it will most likely rise above 70 percent, which would still be a relatively low ratio in international comparison.

The writer is the Chief Economist at Municipality Finance (MuniFin).

Further information:

Timo Vesala

Chief Economist, MuniFin

Tel. +358 50 5320 702