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Finnish economy set for brief growth spurt after epidemic, central bank says

The central bank's 2021-2023 forecast predicts the economy will grow by 2.9% in 2021 and by three percentage points in 2022.

Suomen Pankki
Image: Silja Viitala / Yle

As Covid vaccinations advance and epidemic-related restrictions are lifted, increased consumer spending will drive the nation's economy — at least for some time, according to the Bank of Finland.

The central bank issued its forecast for 2021-2023 on Tuesday, saying the economy would grow by 2.9 percent this year and by three full percentage points in 2022.

However, the bank said the growth will begin to slow down the following year, to just 1.3 percent in 2023, explaining that Finland would be facing long-term "challenges of an ageing population and weak productivity growth."

"The economy will grow in the coming years, led particularly by household consumption. Consumers have strong confidence in the economy. Once the Covid situation improves and they can consume more freely, this will give a shot in the arm to the Finnish economy. However, we cannot expect a prolonged period of rapid growth," said Meri Obstbaum, the central bank's forecasting chief.

"The recovery in the global economy, and particularly in the euro area, will also boost demand for Finland’s export goods and services," Obstbaum said.

Obstbaum: It's not over yet

The bank said that most Finnish firms have survived the pandemic "relatively unscathed," but noted that businesses most affected by the epidemic included service firms like restaurants.

However, investments will grow as the pandemic fades, according to the bank, which added that the country's job market was expected to improve as the economy continues to expand.

The epidemic caused a substantial increase in spending by local and national governments. At the same time, governments also saw tax revenues decrease, prompting increased borrowing to fill in the gaps, according to the bank.

It said government debt would continue to grow until 2023 to a point of 73 percent of Finland's GDP.

The bank pointed out that the economic situation could fare better — or worse — than its current outlook, depending on how the epidemic situation evolves as well as the "possibility of positive or negative surprise" in coming years.

"The greatest risks relate to the unpredictability of the Covid pandemic. It will not be over until it has been defeated everywhere in the world," Obstbaum said.

Governor Rehn: Improve jobs, shed debt

Although the Finnish economy is expected to recover quickly from the shock of the pandemic, the central bank's governor, Olli Rehn, said he was concerned about the anticipated slowdown in growth.

According to Rehn, hopes of long-term improvements are hampered by weak labour market developments, low employment rates in the Nordic countries as well as Finland's ageing population compared to previous decades.

"It would be justifiable to improve innovation incentives. Extensive and permanent tax relief for research and development would be a good option. The declining trend in the average education levels of young people, which is worrying in terms of competence, should also be reversed," Rehn suggested.

He also said that employment measures should be boosted, adding that the government should shed its debt levels and budgetary overruns.

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