Construction and exports likely to drive Finland’s economic growth in 2016

Finland’s GDP in 2016 is expected to expand 0.7%, mainly driven by construction and exports. Slow rebound in purchasing power and austere fiscal policy has weakened domestic demand. The economic growth has been revised slightly higher on the public debt-to GDP ratio that is likely to reach 67.4% by late 2017.

According to the first full-year national accounts, the Finnish economy grew 0.5% in 2015. Growth surpassed expectations on increasing services exports, stronger private consumption and rebounding manufacturing investment in Q4. The GDP figure might be revised later; however, it is assumed that the Finnish economy finally rose from a three-year long decline.

In 2016, the negative impact of Russia on exports is reducing and a moderate growth in exports to the western markets is expected. Decline in consumer prices has boosted the purchasing power of consumers. In January-February, inflation was in negative territory; however, inflation for entire 2016 is likely to accelerate to 0.4%.

Meanwhile, Finland’s jobless rate is expected to grow to 9.6%, whereas the purchasing power is likely to be almost flat in 2016-2017 due to a very moderate wage agreement. At present, the labor market environment is tense, while talks continue to take place to reach a competitiveness package with lower labor costs. An agreement on the package might be finally reached by the end of May.

In 2015, investments continued to decline; however, it is likely to grow 2.5% in 2016, mainly because of construction. Investment is expected to bottom out in equipment, machinery and transport equipment; however, expenditure is likely to decline further.

According to the first estimate, in 2015, Finland crossed the 60% debt-to GDP limit (63.1%); however it did not cross the 3% deficit. The European Union commission has given the Finnish government a warning, but it still sees Finland complying with the Stability and Growth Pact. In 2017, debt-to-GDP is expected to reach 67.4%. If the Finnish GDP growth disappoints or the pace of structural reforms slows or the ambition to cut deficit falls, the country’s sovereign credit ratings are at stake.

On 18 March, Standard & Poor’s kept the ‘AA+’ with negative outlook. Moody’s is expected to review the last ‘Aaa’ rating on 3 June, and a downgrade is possible unless the country’s economic performance rebounds before the summer.