The economy is recovering slowly on the back of strengthening domestic demand. However, exports remain weak, the recent pick-up in private consumption was partly due to temporary factors and uncertainty, both domestic and global, is high. Hence, output growth is projected to remain sluggish and unemployment, which is currently stabilising, to stay high.

The euro area monetary policy stance is supporting the recovery, but fiscal consolidation exerts a drag. The government has embarked on an ambitious structural reform programme to enhance competitiveness, labour market flexibility and fiscal sustainability. However, it is facing resistance, which risks delaying growth-enhancing reforms. The uncertainty regarding policy may weigh on the recovery.

Productivity has declined since 2007. Although this mainly results from poor performance in manufacturing and notably information and communication technologies, the service sector has also tended to underperform. Policies need to enhance framework conditions further and support innovation to revive investment and foster inclusive growth.

Growth is picking up slowly

Output growth is driven by private consumption and investment. However, exports are being held back by the recession in Russia, weak global demand and eroded competitiveness. Low inflation is lifting household real disposable income and consumption, although some policies to support consumption in 2015 have expired. Following a long slump, investment is starting to rise again. Low interest rates and migration into growth centres is raising residential construction, while large-scale projects are lifting business investment. Unemployment shows signs of stabilisation, albeit at a high level. The fiscal deficit is back under 3% of GDP, thanks to spending containment and increasing tax revenues.

Trade and investment

Source: OECD Economic Outlook 99 database.

The government is struggling to implement structural reforms

The government is facing opposition to some of its plans to enhance labour market flexibility and improve competitiveness, as well as to some of its intended public spending cuts. Hence, the extent and timing of the reforms remain uncertain. Fiscal consolidation efforts, assumed to be about half a percentage point of GDP per year, exert a drag on growth, even though spending cuts are partly offset by strategic expenditure on key government projects financed through balance-sheet transactions. However, expansionary euro area monetary policy and relatively easy access to credit are supporting growth.

Demand, output and prices

Successful implementation of the government’s programme would raise employment and productivity, thereby fostering inclusive growth. A recently announced entrepreneurship programme will use wage subsidies start-up grants and tax incentives to encourage companies to hire their first employees. The government has initiated social welfare and health care reform to raise public-sector productivity and reduce health and social inequalities. Streamlining land-use planning regulations would improve housing affordability and allow productivity gains in retail trade.

The recovery is facing headwinds

The recovery is being driven by domestic demand but needs further impulse from exports to gather speed, especially as the temporary factors which have been boosting consumption have expired. The investment recovery is broad-based and set to continue. Residential investment is fuelled by low interest rates and high demand in growth centres, while major commercial building projects are underway. Investment in machinery and equipment is rising, including for capacity expansion, as utilisation rates increase, notably in the forest and metal industries. Such investments will raise productivity, which has been lacklustre over recent years. Nevertheless, projected growth will be too weak to markedly reduce unemployment, even if policies enhance labour market flexibility. Inflation is set to remain subdued. The fiscal deficit will decline slowly, as consolidation measures are partly offset by rising ageing-related costs.

As a small open economy, Finland is sensitive to developments in the global economy and particularly in Nordic countries, Germany and Russia, which implies both downside and upside risks. Worsening geopolitical tensions, a further economic slowdown in China or increased volatility in emerging market economies and oil prices could disrupt the recovery. The ability of the government to implement its programme in the face of public resistance conditions medium-term growth and fiscal sustainability. In the short term, uncertainty over reform implementation and potential industrial action could weigh on the recovery.