Wednesday July 17, 2024

Govt forecasts growth in 2025 but finances to remain in deficit

Published : 18 Jun 2024, 01:40

Updated : 18 Jun 2024, 01:43

  DF Report
Ministry of Finance published its economic forecast on Monday. Photo: Ministry of Finance.

The economic recession is receding, and growth is gradually resuming. but general government finances will, however, remain in deficit and debt will accumulate further, according to the forecast published by the Ministry of Finance on Monday.

The Finnish economy grew slightly in the first quarter of 2024, and growth is projected to strengthen towards the end of the year.

Gross domestic product (GDP) will not, however, show growth at the annual level in 2024. In 2025, GDP is projected to grow by 1.6% and in 2026 by 1.5%.

Growth of private consumption will strengthen as inflation slows and interest rates fall.

Investments will increase as construction recovers from its sharp decline and investments related to the energy transition and security increase.

The government’s measures to strengthen general government finances will increase prices, reduce domestic demand and slow economic growth in 2025 and 2026.

“Growth is slowly resuming, but concern is caused by general government finances. Although a lot depends on the economic upturn, it must also be ensured that the decisions made and local government’s own plans to curb expenditure growth will be implemented and will strengthen general government finances to the full extent,” said Director General Mikko Spolander.

The global economic outlook has improved. World trade is recovering, with Finnish exports growing in its wake. Growth will be supported by Finland’s good cost competitiveness. Finnish exports will, however, continue to decline this year, partly due to the strikes seen earlier in the year.

Private consumption has grown regardless of rising prices and interest rates. In 2025, private consumption will grow rapidly as interest rates fall, the employment situation improves and consumer confidence in the economy picks up despite the Government’s adjustment measures weakening real income growth.

Inflation has slowed considerably, and price increases are now only seen in services and owner-occupied housing. Prices will be increased by the upcoming value-added tax rate hike, but inflation will remain low. Inflation is projected to fall to 1.8% this year and to remain at around 2% in the following years.

Construction has declined to an exceptional extent and will continue to decline this year. The housing market will rebound as interest rates fall, but no recovery in construction will be seen until next year.

There are plans for a record amount of investments relating to the energy transition in Finland, and machinery and equipment investments have continued to grow despite high interest rates.

Employment will decline this year but will resume growth again once the economy recovers and the supply of labour is increased by government’s employment measures and by immigration.

By 2026, the employment rate will rise by around 1% each year, with the employment rate for the 15–64 age group rising to 73.9%.

In 2024, unemployment will increase to 7.9% as jobs are lost in construction and manufacturing. When output growth recovers, unemployment will take a downturn. In 2026, the unemployment rate will fall to 6.9%.

When the economy recovers from the recession, the general government deficits will gradually start to become smaller. General government finances will also be strengthened by the measures decided by the government and in its session on spending limits.

However, recent data on taxation points to tax revenue for this year turning out to be lower than projected. At the same time, expenditure growth, particularly in the wellbeing services counties and in municipal administration, has been faster than expected. Because of these, the forecast for general government finances has deteriorated since the spring.

The general government deficit is projected to be 3.7% of GDP this year, whereas the figure provided in the spring was 3.5% of GDP. The deficit is projected to be 3.1% next year and 2.6% in 2026.

The deepening of the deficits has also resulted in a slightly bleaker projection concerning the debt-to-GDP ratio. The central and local government deficits together with the economy’s zero growth rate will increase the general government debt-to-GDP ratio this year to more than 80%.

Decreasing deficits and resumed economic growth will slow the growth of the debt-to-GDP ratio from 2025 onwards regardless of the ratio remaining on an upward trajectory throughout the outlook period.

The forecast takes account of just under EUR 8 billion of the general government adjustment package of around EUR 9 billion decided by the government.

If the package is implemented to the extent planned and within the time frame set, the deficits will decrease and debt accumulation will be slower than projected. On the other hand, if the economy shows weaker growth than projected, the general government deficits will exceed the forecast figures. The same applies if the effects of the adjustment measures are delayed or turn out to be smaller than projected or planned.

In the short term, the risks underlying the slower-than-forecast economic growth relate to, among other things, the recovery of export markets, the knock-on effects of the crises experienced, and geopolitical tensions.

The key downside risks in the Finnish economy relate to construction and private consumption. Investments may provide a surprise in either direction.