Economic forecast by OP's economists: The economy will grow only slightly but conditions for recession are not yet in place
OP’s economists have revised down their growth forecast and anticipate only a 1.2 per cent economic growth for the current year. Next year, growth is expected to slow down further and employment growth in Finland is predicted to almost come to a standstill.
Based on the most recent information, Finnish economic growth slowed down clearly already last winter. GDP will this year grow more slowly than expected earlier and the pace is expected to abate further in 2020. OP’s economists forecast that Finland’s GDP will grow this year by 1.2 per cent and by only 0.5 per cent next year. Last spring, they forecast a growth rate of 1.6 per cent for 2019 and 0.8 per cent for 2020.
Finnish exports have so far gone fairly strong through existing export orders, but a downward trend in export markets is gradually beginning to be felt more clearly. Industrial production important to Finland has remained tepid, and no turn for the better is seen on the horizon in the shadow of the trade war.
The growth rate of domestic markets too is slowing down. Growth in consumer spending is expected to remain lower than that in personal income, this year and next year. The saving ratio is set to rise next year for the third year in a row. This is mostly explained by normal cyclical fluctuations although some more long-standing reasons may also lie behind this, such as population ageing.
Fixed investments are gradually running out of steam, as construction activity is set to shrink. Other capital expenditure is expected to increase slightly next year too, but the level of corporate investments has remained low.
“Faltering export markets are weighing down Finland but the outlook for domestic markets is lukewarm. Economic growth will fall to a crawling pace but the conditions for recession are not yet in place. The overall economic situation will also remain fairly good from the perspective of both the corporate sector and households," tells Reijo Heiskanen, OP’s Chief Economist.
Employment growth is predicted to almost come to a standstill next year, as economic growth slows down. The employment rate is expected to rise only slightly from its current level. OP’s economists expect the employment rate to be 72.6 per cent this year and 72.9 per cent next year. In 2020, the unemployment rate is set to remain on average at the same 6.5 per cent as this year.
OP’s economists forecast that the fiscal balance will deteriorate next year mainly as a result of the measures presented in the government programme. Economic growth too will slightly increase government deficit. A fall in government debt is set to almost come to a halt next year.
“A slightly expansionary fiscal policy fits in with the economic situation for the next couple of years, but this would need to be supported by measures with long-term effects that would improve the sustainability of public finances and would bring flexibility to the labour market,” states Heiskanen.
Faded hopes for a world economic pickup
OP’s economists expect that world economic growth will remain slightly slower this year than the long-term average. World trade is set to grow only slightly. Next year, economic growth will slow down further and world trade will hardly grow.
“The world economy picked up a bit in early 2019 but budding optimism faded in the spring when the trade war escalated again. World economic growth is bound to slow down. Even next year, subdued growth both in the USA and the euro area is, however, expected to be more likely than a recession,” explains Heiskanen.
Economic growth in the euro area has slowed down this year in the wake of export slowdown. The economic pickup early in the year was transient and growth prospects for the autumn and next year are poor in the view of OP’s economists. Nevertheless, domestic demand is set to maintain slow growth in the euro area.
In July, the European Central Bank announced that it would keep its key interest rates at their present or lower levels at least through the first half of 2020 and that it would prepare new accommodative monetary policy measures. The more accommodative policy is likely to keep the euro quite weak, which should enhance export competitiveness in the euro area.
“The ECB has painted itself into a corner so that it has no choice but to use monetary accommodation. Markets are not very strongly confident about the effectiveness of such measures,” states Chief Economist Heiskanen.
Risks to the forecast are balanced. Favourable development in trade policy and the accommodative policy could keep the economy on a better track. Similarly, the escalation of the trade war may plunge global markets into a recession in the view of OP’s economists.
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