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

MuniFin´s Chief Economist Timo Vesala.

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