Press release 19 December 2023 11:00 AM

A thriving Finland needs a robust economy

The global economic and political environment in which Finland operates has quickly become more difficult, and the Finnish economy is now in recession. “The weak economic conditions underline the importance of a sustainable and long-term economic policy,” says Deputy Governor of the Bank of Finland Marja Nykänen.

Inflation has continued to slow down, in line with the monetary policy objectives of the European Central Bank (ECB). The ECB has tightened its monetary policy by raising key interest rates and reducing its asset purchase programmes. At its December meeting, the ECB’s Governing Council decided to keep the key interest rates unchanged. The main policy interest rate is now at 4%.

Finland’s industrial structure is more heavily weighted towards manufacturing and construction, sectors that are sensitive to interest rate movements. In addition, Finnish mortgages are mainly variable rate loans, which astens the monetary policy transmission in the economy. The key factor determining the strength of these effects is how much financial flexibility households have to manage their higher loan servicing costs.

Finland’s general government deficit is growing despite the fiscal adjustments. The Bank of Finland’s estimate of the sustainability gap has increased to approximately 4.5% of gross domestic product (GDP). The increase in the debt ratio, above all, is a cause for concern. Public spending is subject not only to pressure from the rise in age-related expenditure but also from expenditure on defence and other contingency preparations.

“Rebalancing the public finances requires concrete measures affecting revenue and expenditure, and also structural reforms in support of economic growth,” says Marja Nykänen. She adds: “Finland has every opportunity to succeed if we make debt sustainability a common priority and firmly commit to it across parliamentary terms.”

In the years ahead, growth in Finland’s economy will be hampered by a reduction in the size of the working-age population, poor productivity performance, a halt in the rising level of educational attainment and a deterioration in learning outcomes.

The employment level has been supported by a rise in the labour force participation rate and by the reforms undertaken. As these favourable trends weaken, new measures to boost the labour supply will become increasingly important. “Reforms to increase the total labour input in the economy remain necessary,” says Nykänen.

By investing in high-quality education, Finland can strengthen its ability to innovate and to make effective use of innovations. The innovation, research and development that lead to investment in new technologies will not be possible without an appropriately educated workforce. Skilled workers will also be needed to ensure new ideas and practices are taken up on a large scale.