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Economic growth to gradually decline

21 May 2019, 18:21 ( 4 Months ago) | updated: 22 May 2019, 08:27 ( 4 Months ago)

DF Report
Photo source:Port of Helsinki.

The global economy recovered in the first quarter from the end of last year. Equity markets rose, confidence firmed up and economic growth gathered pace from the last quarter of last year, said Osuuspanki (OP) in a press release.

The economic sentiment was not equally strong in all areas, however, with especially manufacturing and world trade remaining muted. Moreover, new obstacles to trade have been introduced and trade policy uncertainty has increased.

OP’s economists estimate that the overall global economic growth will not deviate from their previous forecast. The economists predict a deceleration of growth this year to 3.3% from 3.6% last year and further to 3.0% in 2020.

“Tightening trade policies burden the global economy but, balancing this, economic policies appear to be remaining lighter than previously estimated in many other aspects, and the economy has partially strengthened. Our views on the global economy have been more conservative than the mainstream and, as pessimists, we were not disappointed. Our conservative forecast did not require any adjustments”, said Reijo Heiskanen, OP’s Chief Economist.

The economists estimate that the risks to their forecast are balanced on the whole. The greatest uncertainty still relates to trade policies, where the turns can be both positive and negative.

The stable, healthy growth of the Finnish economy continued early this year. OP’s economists estimate that the rate of growth will gradually go down but that the overall economic situation will remain reasonably good for the most part.

OP’s economists maintain their forecast that Finland’s GDP will grow this year by 1.6% and by 0.8% in 2020. Despite the sluggish growth, the unemployment rate is likely to remain at its lowest level since the early 1990s in 2020 as well, at just 6.2%. The employment rate rises in their forecast to 73.5% in 2020.

Exports will be reasonably good this year still, driven by ship deliveries among other things, but in 2020 the pace will decelerate.

“Escalation of the trade war weakens the outlook more for the export-dependent Finland than for other countries. With improving cost competitiveness no longer providing a boost, slowing market demand will hit Finland at full force”, Heiskanen pointed out.

Home market consumption still has good growth potential, but weakening confidence means that consumption is poised to grow less than incomes. Investment growth slowed down noticeably in 2018 already and in 2020 contracting construction will keep investment development modest.

“Many factors still support households. Employment is improving, moderate inflation supports real incomes and expectations for loan interest rates are even more moderate than before. Yet the weakening economic situation is making also households more cautious, which is already visible in the higher saving ratio, estimated Senior Economist Henna Mikkonen.

The Finnish economy should narrowly avoid twin deficits this year and the next, for the first time since 2010. Finland will run a current account deficit but the fiscal side should be in balance.

“In view of the economic cycle, the current account deficit is worrying. If the external balance is shaken due to an escalating trade war, for instance, this would quickly add to pressures to improve competitiveness, of which no-one seems to care much now“, said Chief Economist Heiskanen.

OP’s economists estimate that the forecast risks are in balance. The biggest risks relate to export markets and, in particular, trade policies.