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Bank of Finland: Economy to shrink 7% in 2020, no sign of speedy recovery

The central bank said that recovery will be gradual and driven by private consumption.

Asiakas maksaa ostoksiaan kaupan kassalla.
Bank of Finland Governor Olli Rehn said the country needs investments to support future growth opportunities, product development and employment. Image: Lauri Rautavuori / Yle

Economic activity in Finland will decline sharply as a result of the coronavirus pandemic, the Bank of Finland said in a fresh 2020-2022 economic forecast released on Tuesday.

According to the forecast, the local economy will contract by about seven percent this year. However the central bank projected growth of around three percent in 2021 and 2022, adding the disclaimer that the forecast involved an exceptionally large degree of uncertainty.

The Bank said that the economic activity slowed as a result of the pandemic’s effect on the global economy as well as emergency measures implemented domestically.

Looking ahead, the central bank said that foreign trade will not come to the rescue of the local economy in the next few years. Global investments have slowed because of the public health crisis and Finland’s weakening cost-competitiveness will not serve the export sector. Moreover, uncertainty about the future will put a brake on the growth of consumption and investments, even after all epidemic-related restrictions are dismantled.

A reduction in tax revenues coupled with an increase in unemployment-related costs and other forms of assistance as well as other actions to soften the blow of emergency measures will weaken public finances. This will cause government debt to rise to unprecedented levels in a short time, the Bank noted.

Debt to GDP ratio to rise

According to the central bank, the employment rate will fall by about two percentage points between 2020 and 2021, but will partially recover in 2022.

The general government deficit to GDP ratio will rise to eight percent and the debt to GDP ratio will climb to 71 percent this year and will surge further to 75 percent in 2022 and continue to grow even after that, the Bank said.

The forecasters said that the acute phase of the crisis will gradually wane and that the economy will slowly begin to recover, driven by private consumption.

Bank of Finland Governor Olli Rehn said in a statement that there is no reason to use the coronavirus crisis as a cover to increase public spending that will exacerbate the sustainability gap. According to Rehn, what Finland needs now are investments that will above all support future growth opportunities, product development and employment.

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