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Danske Bank: Modest GDP growth a challenge for new cabinet

An unexpected drop in private consumption could signal trouble for the next government's plans.

Uusia autoja autokaupan esittelyhallissa.
Car purchases are among the areas where consumers seem increasingly cautious. Image: Nella Nuora / Yle

Finland's economy grew more slowly than expected in the first part of the year, mostly due to a dip in private consumption. If the trend keeps up, Finland's next government could have a hard time financing its proposed economic blueprint.

According to preliminary data released by Statistics Finland on Wednesday, gross domestic product (GDP) adjusted for working days grew by 1.2 percent in the January through March period, compared with a year earlier.

Growth from the previous quarter was just two-tenths of a percent.

The figures represent quite a drop from those predicted by Statistics Finland just a few weeks earlier, when it projected that GDP growth in the early part of the year at 2.2 percent. According to Wednesday's figures, GDP growth was actually a full percentage point lower.

"A major factor in explaining this seems to be private consumption, which shrank since the end of last year and compared to a year earlier," Danske Bank's chief economist Pasi Kuoppamäki told the Finnish News Agency STT.

In January through March, private consumption declined by 1.2 percent from the previous quarter and by 0.6 percent from a year earlier. Kuoppamäki said that areas such as retail sales and automotive sales are showing downward trends.

"Households have been slightly cautious. We know that the employment situation has been reasonably good, the wage level rose in the first quarter by 2.5 percent and therefore household purchasing power has been rising steadily," he notes.

Gov programme assumes "normal growth"

Social Democratic Party chair Antti Rinne, who is wrapping up negotiations on forming a new cabinet, said on Tuesday that the next government will expand permanent expenditures by around 1.2 billion euros annually. Rinne said the boost in spending will be bankrolled by employment measures, tax elements and reappropriations as well as selling off state ownership.

Rinne predicted that as long as growth conditions remain normal, the state will not take on extra debt and employment will reach 75 percent during the next four-year legislative term.

According to Statistics Finland, that rate stood at 71.2 percent in April.

As Kuoppamäki sees it, these latest figures throw cold water on Rinne's predictions.

"GDP growth is clearly below the level that was expected," he said.

In an economic forecast last month, the Finance Ministry predicted that private consumption would continue to grow strongly this year, a prospect that now looks unlikely.

"This underlines the fact that the government negotiations must bolster private consumption," Kuoppamäki said.

Rinne was expected to announce the status – and possible conclusion – of government formation talks on Wednesday afternoon.

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