Economic Prospects Ministry of Finance publications – 32c/2017 Economic Survey Autumn 2017 Economic Survey Autumn 2017 Ministry of Finance, Helsinki 2017 Ministry of Finance publications 32c/2017 Ministry of Finance ISBN: 978-952-251-887-3 (pdf ) Layout: Government Administration Department / Information Support and Publications Unit / Anitta Türkkan Helsinki 2017 Description sheet Published by Ministry of Finance September 2017 Authors Ministry of Finance Title of publication Economic Survey, Autumn 2017 Series and publication number Ministry of Finance publications 32c/2017 Subject Economic Prospects ISBN PDF 978-952-251-887-3 ISSN (PDF) 1797-9714 Website address (URN) http://urn.fi/URN:ISBN:978-952-251-887-3 Pages 96 Language English Keywords Public finance, economic development, draft budget Abstract The Finnish economy is in a phase of rapid growth. In 2017, the Ministry expects the rate of economic growth to clearly outperform that of 2016, after which the projected growth rate will slow to a level of around 2%. According to the forecast, the Finnish economy will continue to show strong growth in 2018 compared with previous years, albeit at a slightly slower rate than this year. The slowing growth is largely due to falling private consumption demand as purchasing power growth will be slower than this year. Employees’ purchasing power will be weakened by accelerating inflation despite at the same time being supported by an upswing in employment. Domestic inflation will accelerate next year and will be seen more broadly across the commodity groups than in 2017. The biggest price increases will be in services. Price rises will also be fuelled by an upward movement from the current low interest rate environment. The rise in prices will be slowed down by the strengthening of the US dollar and the continued moderate oil prices. Moderate growth in gross domestic product (GDP) will impact positively on employment, but the decrease in the number of unemployed persons will still be slow. In 2018, the employment rate will rise to around 70% while the unemployment rate will fall to around 8%. Various regional and occupational mismatch problems stand in the way of more favourable employment development. Export growth will continue at a good rate until the end of the outlook period. The decline in market shares will come to an end and exports are set to grow steadily, driven by growth in world trade. Export growth will continue to arise primarily from exports of goods, which will also increase imports of production inputs. The number of new orders and high confidence reported are indicative of good export prospects. The growth outlook for the global economy and world trade has improved recently. The positive development seen in emerging economies and the United States will continue, and the role of the euro area will be emphasised in the future. Economic growth in the euro area will climb further to just over the 2% mark next year. Finland’s general government finances have been strengthened by the fiscal adjustment decisions taken by the Government and the economic growth triggered last year. Despite this positive development, general government finances will still remain in deficit until the end of the decade. Due to population ageing, the budgetary position should be clearly in surplus at the beginning of the 2020s. Publisher Ministry of Finance Publication sales/ Distributed by Online version: julkaisut.valtioneuvosto.fi Publication sales: julkaisutilaukset.valtioneuvosto.fi Preface This Economic Survey offers projections of economic developments in 2017–2019. In addition to short-term prospects, it includes a medium-term economic outlook extending to 2020. The forecast and trend projections in the survey are prepared independently by the Ministry of Fi- nance Economics Department based on the Act on the implementation of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union and on multi-annual budget- ary frameworks (869/2012). The forecasts are based on national accounts data for 2016 published by Statistics Finland in July 2017 and on other public statistical sources available by 1 September 2017. Helsinki September 2017 Ministry of Finance Economics Department Mikko Spolander Director general Jukka Railavo Marja Paavonen Senior Financial Adviser, Senior Financial Adviser, Head of Macro Forecasting Head of Public Finance The source for all data on materialised developments is Statistics Finland unless otherwise indicated. SYMBOLS AND CONVENTIONS USED - nil 0 less than half the final digit shown .. not available . not pertinent ** forecast CPB CPB Netherlands Bureau for Economic Policy Analysis HWWI Hamburgisches WeltWirtschafts Institut IMF International Monetary Fund MoF Ministry of Finance Each of the figures presented in the tables has been rounded separately. Contents Summary .................................................................................................................................................................................. 9 1 Economic outlook .................................................................................................................................................... 21 1.1 Global economy................................................................................................................................................................. 21 1.2. Foreign trade........................................................................................................................................................................ 28 1.2.1. Exports and imports............................................................................................................................... 28 1.2.2 Prices and current account................................................................................................................. 29 1.3 Domestic demand............................................................................................................................................................ 31 1.3.1 Private consumption.............................................................................................................................. 31 1.3.2 Public consumption ............................................................................................................................... 33 1.3.3 Private investment.................................................................................................................................. 35 1.3.4 Public investment .................................................................................................................................. 38 1.4 Domestic production.................................................................................................................................................... 39 1.4.1 Total output.............................................................................................................................................. 39 1.4.2 Secondary production............................................................................................................................ 41 1.4.3 Services .................................................................................................................................................... 44 1.5 Labour force........................................................................................................................................................................... 48 1.6 Incomes, costs and prices......................................................................................................................................... 50 1.6.1 Wages and salaries................................................................................................................................. 50 1.6.2 Consumer prices ..................................................................................................................................... 51 2 Economic policy and public finances ..................................................................................................... 57 2.1 General government finances............................................................................................................................. 57 2.1.1 Estimates of fiscal policy impact........................................................................................................ 62 2.1.2 General government debt..................................................................................................................... 66 2.2 Central government....................................................................................................................................................... 70 2.2.1 Central government expenditure ....................................................................................................... 72 2.2.2 Central government revenues ............................................................................................................. 75 2.2.3 On-budget accounts and national accounts ................................................................................... 78 2.3 County finances.................................................................................................................................................................. 80 2.4 Local government............................................................................................................................................................ 83 2.5 Social security funds...................................................................................................................................................... 87 2.5.1 Earnings-related pension schemes.................................................................................................... 87 2.5.2 Other social security funds................................................................................................................... 88 2.6 Long-term sustainability of public finances.......................................................................................... 90 Supplementary statistics ............................................................................................................................................ 93 Boxes: Alternative scenario on effects of higher oil prices...................................................................................... 16 Productivity development by industry..................................................................................................................... 46 Base effects in inflation – What are they and how do they affect inflation forecasts? ............................................................................................................................................................................................ 54 Finland and EU fiscal policy rules.................................................................................................................................... 60 Fiscal stance measurement................................................................................................................................................... 63 Expenditure and tax criteria decided by the government.................................................................... 68 2018 State budget and central government spending limits............................................................ 73 County government in the forecast for general government........................................... 82 9 ECONOMIC SURVEY  –  AUTUMN 2017 Summary Economic outlook for 2017–2019 The Finnish economy is in a phase of rapid growth. In 2017, the Ministry expects the rate of economic growth to clearly outperform that of 2016, after which the projected growth rate slows to a level of around 2%. Over the next few years, economic activity will be driv- en by both domestic and foreign demand. The patterns differ clearly, however. Private consumption and to some extent investment demand growth will slow, but exports will pick up. Improving global demand and business cost competitiveness will boost growth prospects for exports. Household consumption demand will be hampered by subdued purchasing power. Investment growth will be held back by a slowdown in housing con- struction growth but accelerated by major production-related investment projects. Buoyant mood in global economy growing stronger Global economic growth is being upheld by emerging economies in particular, but growth is also gaining strength in industrial countries. World trade has developed favourably since late 2016. Trade has been accelerated by emerging economies in particular, but in the fu- ture the significance of positive development in the euro area will be emphasised. In the next few years, world trade growth will increase at more or less the same rate as global output. The rate of growth in world trade will, however, be much slower than during the most intensive periods of globalisation seen last decade. Positive economic development is still taking place in the United States. The Federal Re- serve is continuing the normalisation of monetary policy, which is reflected in a rise of short-term market interest rates. In Europe, the economic outlook has strengthened this year, and business and consumer confidence is high. Unemployment in the euro area has fallen to its lowest level in eight years. The consolidation of economic growth in the euro area will, however, need to take place on a more permanent basis before any departure from the unconventional monetary policy. The debt crisis in the euro area has been put on the back burner as most crisis countries have exited the economic adjustment programmes and Greece has also finally returned to a growth path. During the current year, the euro has strengthened against the other main currencies, reflecting the positive outlook of the euro area. Over the longer term, however, 10 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 the euro is likely to weaken against the US dollar because the United States will discontin- ue the light monetary policy earlier than the euro area. Positive trend continuing Finland’s GDP growth forecast for 2017 is 2.9%. New signs of the continuation of this pos- itive trend were received early in the year. These include the increase in new orders in manufacturing industry and growth in private service production turnover as well as the sustained strength of construction in growth centres. This year, private consumption growth will continue on the back of improving employment. The focus in private investment is shifting from construction to manufacturing industry’s production-related investments. The growth prospects of exports are bolstered because global demand is increasing and the cost competitiveness of enterprises is improving. For- eign trade will take an upturn supporting GDP growth after years of negative reports. Business tendency surveys indicate that the technology and chemical industries have the best prospects for growth. Forest industry companies anticipate growth to slow towards the end of the year, but the capacity increase in Äänekoski will support forest industry out- put growth starting from next year at the latest. Overall, industrial output will increase by almost 7% this year due to the strong development earlier in the year and the new orders received. Increased production capacity and efforts made by enterprises to improve the competitiveness of their products will boost manufacturing output in the years ahead. The broad-based and rapid strengthening of economic activity has increased employment since the beginning of 2017, but there was hardly any decrease in unemployment over the same period. The unemployment rate trend has remained at 8.7%. The standstill in the decline of the unemployment rate is at least in part due to the activation of the disguised unemployed and other persons outside the labour force to become jobseekers, which is normal in the context of economic rebound. In 2017, earnings development will mainly be determined by the Competitiveness Pact concluded by the social partners, as a result of which there were no increases to negotiat- ed wages and salaries and public sector holiday bonuses were cut by 30%. The net effect of these factors is anticipated to lower the negotiated pay slightly. The earnings level will, however, be increased by other factors, resulting in a 0.3% increase in the index of wage and salary earnings in 2017. Robust economic growth will continue in 2018, despite GDP growth slowing to 2.1%. The slowing growth is largely due to falling private consumption demand, as purchasing power growth will be slower than this year. Employees’ purchasing power will be eroded by acceler- ating inflation despite at the same time being supported by an upward trend in employment. 11 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 ECONOMIC SURVEY  –  AUTUMN 2017 Acquisitions of machinery and equipment will result in slightly higher investment increase compared to this year. Strong growth will also continue in construction investment, de- spite a slowdown in residential housing construction growth. The rate of export growth will hold up well. The decline in market shares will come to an end and exports are set to growth steadily, driven by growth in world trade. Export growth will continue to come primarily from exports of goods, which will also increase imports of pro- duction inputs. Increasing demand in consumer and investment goods will also result in an increase in imports, reducing the positive contribution of net exports to economic growth. The fact that manufacturing companies have received one fifth more new orders since the start of this year compared with last year is indicative of good export prospects. The high- est number of orders has been won by the shipbuilding industry, but growing order books have also been reported by the chemical and forest industries. Industrial output growth will be bolstered by the expansion of production capacity and increasing demand in the forest industry. Service output growth will still be based on increasing business demand. Retaining the reasonably rapid rate of GDP growth will have a positive effect on employ- ment, but the decrease in the number of unemployed persons will still be slow. The unem- ployment rate will fall to 8.1% in 2018. In recent years, obstacles to an improvement in the employment situation have been presented by various regional and occupational mis- match problems between unemployed job seekers and job vacancies. A slight decrease in these mismatch problems has been seen due to the stronger economic growth. In 2018, prices will rise more broadly than in the current year across the commodity groups, but the rise in service prices will continue to have the greatest impact on overall inflation. The moderately increasing price of oil, the strengthening of the US dollar and the low, yet rising, interest rate level are anticipated to accelerate inflation. In 2019, GDP will grow by 1.8%. Private consumption growth will slow down due to the slowdown in the growth of household real income. Private investment growth will hold up well as production-related investments will increase due to developments including major projects planned by the forest industry. Employment will continue to improve, but the rate will be slightly slower than earlier. The rise in consumer prices will level off to 1.5% in 2019. Overall, the economic growth outlook for the 2017–2019 period is more positive than in previous years. The general conditions for economic growth and the structures deter- mining these have not, however, changed to such an extent as to increase the economy’s growth potential. In 2020 and 2021, the Finnish economy will only grow at an estimated average rate of less than 1½% per year. Economic growth based on a strong increase in labour productivity will keep the rate of improvement in the employment situation mod- erate. The supply of labour will not on the whole restrict employment growth during the 12 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 outlook period as the number of the unemployed and disguised unemployed will still ex- ceed 400,000 persons. Nevertheless, a shortage of labour can already be discerned in cer- tain occupational groups. Despite the economic upswing, Finland’s general government finances are showing a deficit The general government deficit has decreased gradually in recent years. General govern- ment finances have been strengthened by the fiscal adjustment decisions taken by the Government and the economic growth triggered last year. The deficit will also continue to shrink gradually in the coming years. The economic upswing will not, however, eliminate the structural problems of general government finances. Despite the positive cyclical posi- tion, general government finances will continue to show a deficit. Public debt has more than doubled since 2008. The rapid growth in GDP and the decrease in deficit will lower the debt-to-GDP ratio in the next few years. Due to the ageing of the population, however, an imbalance between revenue and expenditure will persist in gen- eral government finances over the long term. There is a sustainability gap in general gov- ernment finances due to which the debt-to-GDP ratio will return to an upward trajectory in the coming decades. Economic development risks The rather optimistic global economic outlook is overshadowed by the threat of protec- tionism and pressures directed at the multilateral trading system. In the euro area, too, the risks remain skewed to the downside. Furthermore, the weak financial solidity of some Eu- ropean banks and the large volume of bad loans remain a cause for concern. A positive risk worthy of note is the prospect of stronger-than-expected growth in in- dustrial countries. This applies particularly to the euro area, but also to countries such as Japan. Growth in demand at a rate faster than anticipated in the euro area would increase inflationary pressures and, consequently, speed up the return to normal monetary policy. Faster-than-projected growth in world trade is also a positive risk. The domestic risks are related to confidence and the labour market. As there will only be slight growth in household purchasing power, consumption growth will be based on strong confi- dence that may also be quickly eroded. As regards wages and salaries, the forecast assumes that collectively agreed pay rises will be very modest in 2018 and 2019. Pay rises for 2018 will be negotiated sector-specifically, which increases the uncertainty of the pay forecast. High- er-than-anticipated pay rises may weaken export and employment growth. As regards invest- ment, there is uncertainty arising from potential delays in the major projects planned. 13 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 ECONOMIC SURVEY  –  AUTUMN 2017 Table 1. Key forecast figures 2016 EUR bn 2014 2015 2016 2017** 2018** 2019** change in volume, % GDP at market prices 216 -0.6 0.0 1.9 2.9 2.1 1.8 Imports 79 -1.3 3.2 4.4 2.9 2.6 3.1 Total supply 294 -0.8 0.9 2.6 2.9 2.2 2.2 Exports 76 -2.7 0.8 1.3 4.7 3.7 4.1 Consumption 171 0.4 1.1 1.6 1.6 1.2 1.0 private 119 0.8 1.7 1.8 2.4 1.4 1.2 public 52 -0.5 0.0 1.2 -0.3 0.8 0.4 Investment 46 -2.6 0.7 7.2 4.7 3.7 3.5 private 38 -3.4 2.2 7.9 5.5 4.0 4.1 public 9 0.9 -5.2 3.9 1.0 2.1 0.9 Total demand 294 -0.8 1.1 2.2 2.7 2.1 2.0 domestic demand 218 -0.1 1.2 2.5 2.0 1.5 1.3 2014 2015 2016 2017** 2018** 2019** GDP, EUR bn 205 210 216 224 232 241 Services, change in volume, % -0.4 0.2 1.3 2.0 1.5 1.4 Industry, change in volume, % -0.2 -1.6 1.1 6.8 2.8 3.0 Labour productivity, change, % 0.1 0.1 1.2 2.1 1.3 1.5 Employed labour force, change, % -0.4 -0.4 0.5 0.7 0.8 0.5 Employment rate, % 68.3 68.1 68.7 69.4 70.1 70.5 Unemployment rate, % 8.7 9.4 8.8 8.6 8.1 7.8 Consumer price index, change, % 1.0 -0.2 0.4 0.9 1.5 1.5 Index of wage and salary earnings, change, % 1.4 1.4 1.1 0.3 1.4 1.6 Current account, EUR bn -2.6 -1.2 -2.3 -3.0 -3.2 -3.3 Current account, relative to GDP, % -1.3 -0.6 -1.1 -1.3 -1.4 -1.4 Short-term interest rates (3-month Euribor), % 0.2 0.0 -0.3 -0.3 -0.2 0.0 Long-term interest rates (10-year govt. bonds), % 1.5 0.7 0.4 0.5 0.9 1.4 General government expenditure, relative to GDP, % 58.1 56.9 55.8 54.1 53.1 52.2 Tax ratio, relative to GDP, % 43.9 44.0 44.1 43.2 42.2 41.8 General government net lending, relative to GDP, % -3.2 -2.7 -1.8 -1.2 -1.4 -1.0 Central government net lending, relative to GDP, % -3.8 -3.0 -2.7 -2.3 -2.0 -1.4 General government gross debt, relative to GDP, % 60.2 63.6 63.1 62.5 61.9 61.1 Central government debt, relative to GDP, % 46.3 47.6 47.5 47.7 47.5 46.9 14 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 Medium-term outlook Finnish GDP growth accelerated to almost 2% last year, after several years of weak eco- nomic development. This year, economic growth is expected to accelerate to almost 3% before slowing in the 2018–2019 period to a more moderate level of around 2%. In the medium term in the 2020–2021 period, economic growth is projected to return to the lev- el of potential output growth, that is, a little over 1%.1 The slowness of potential growth is due to structural factors in the economy. On the one hand, the shrinking of the working-age population and the persistence of relatively high structural unemployment maintain zero growth in labour input despite the more active participation of older age cohorts in particular in the labour market. On the other hand, productivity growth has slowed as the output of high-productivity sectors has declined significantly and the overall structure of the economy has shifted towards services. In ad- dition, the low investment rate that has continued for several years has slowed the genera- tion of new productive capital. However, the rise in investment rates that started in 2016 is gradually beginning to improve the situation. The 2017 estimate is that the output gap will stand at just over -½% of potential output.2 When GDP growth clearly exceeds its potential, the output gap will close already in 2018. In 2019, the output gap is expected to be just under +½% and remain at that level in the medium term. The output gap will close in the next period of economic decline. The rebound of economic growth will decrease the deficit in general government financ- es, but it is nowhere near enough to bridge it fully as at the same time general govern- ment finances will be weakened by population ageing. In addition, the tax concessions introduced under the Competitiveness Pact will lower tax revenue, while on the other hand the adjustment measures adopted by the Government will slow expenditure growth. In the long term, general government revenue will no longer be enough to sustain all the structures and functions of the public sector that were created on the foundations of a more favourable demographic structure. 1 The medium-term outlook can be examined on the basis of potential output, because this is thought to deter- mine the economy’s growth prospects. In its assessments of potential output, the Ministry of Finance uses the pro- duction function method as developed jointly by the European Commission and Member States, in which potential output growth is divided between projections of potential labour input, capital and total factor productivity. Poten- tial output and output gap are latent variables, the assessment of which involves uncertainties, particularly during a strong economic cycle and under conditions of rapid changes in the production structure. 2 The output gap, i.e. the difference between total actual output and potential output, is negative when actual output is lower than potential output. This means there is idle capacity in the economy and output can grow more rapidly than potential output without creating price pressures. 15 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 ECONOMIC SURVEY  –  AUTUMN 2017 Table 2. Key forecast figures for the medium term 2015 2016 2017** 2018** 2019** 2020** 2021** GDP at market prices, change in volume, % 0.0 1.9 2.9 2.1 1.8 1.3 1.1 Consumer price index, change, % -0.2 0.4 0.9 1.5 1.5 1.8 2.0 Unemployment rate, % 9.4 8.8 8.6 8.1 7.8 7.5 7.3 Employment rate, % 68.1 68.7 69.4 70.1 70.5 70.9 71.2 General government net lending, relative to GDP, % -2.7 -1.8 -1.2 -1.4 -1.0 -0.9 -1.2 Central government -3.0 -2.7 -2.3 -2.0 -1.4 -1.1 -1.3 County government -0.3 -0.3 Local government -0.6 -0.4 -0.1 -0.3 -0.4 -0.2 -0.2 Social security funds 0.9 1.3 1.1 0.9 0.8 0.6 0.6 Structural balance, relative to GDP, % -0.8 -0.4 -0.8 -1.3 -1.4 -1.1 -1.4 General government gross debt, relative to GDP, % 63.6 63.1 62.5 61.9 61.1 60.2 59.9 Central government debt, relative to GDP, % 47.6 47.5 47.7 47.5 46.9 46.3 46.1 Output gap, % of potential output 1 -3.4 -2.3 -0.7 0.0 0.4 0.4 0.4 1 Estimated according the method developed jointly by the EU Commission and Member States -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 02 04 06 08 10 12 14 16 18 20 Total Central govt. County govt. Local govt. Social security funds The financial balance of general government Sources: Statistics Finland, MoF relative to GDP, % VM34098 16 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 A LT E R N AT I V E S C E N A R I O O N E F F E C T S O F H I G H E R O I L P R I C E S The long slide in oil prices has ended and prices have started to move up. Oil price fluctuations will still play a role as regards inflation, and the impact of energy on consumer prices may take a quick turn from a lowering to a raising effect. This alternative calculation covers the impacts of an acceleration in the rising trend of oil prices on Finland’s economic growth. Oil price movements have in recent years deviated from forecasts. Oil prices have fallen more rapidly than anticipated and are currently around 50% below the level seen in late 2014. Low oil prices have had direct and indirect impacts restraining the rise of consumer prices. Low oil prices and the resulting fall in fuel prices have contributed towards growth in household consumption and reductions in business costs. An estimated EUR 3 billion1 has become available for other uses as fuel prices have been lower than prior to 2014. The recent decline in oil prices is thought to result on the one hand from sluggish demand during a slowdown in economic growth and on the other from an increase in oil production itself. Despite production cuts, oil prices have not shown a rapid escalation. The forecast, however, anticipates a slight upturn in oil prices. In 2021, the price of oil is predicted to be around USD 63 a barrel. Inflation will be driven in 2017 by the price of crude oil, which is at a much higher level than in 2016. It is predicted that the average price of oil in 2017 will be up by around USD 7 a barrel on the average of USD 45 seen in 2016. Historically there has been a strong correlation between oil price movements and global economic outlook. Low oil prices have had a strong stimulating effect on the global economy in recent years. This text box examines calculations prepared using the Ministry of Finance Economics Department’s macroeconomic model (Kooma) giving oil prices from the first quarter of 2018 onwards at a level 20% higher than predicted in the baseline scenario. This takes the predicted price of oil above USD 75 per barrel for 2021. The calculation also examines a 1 The estimate is based on changes in the value of net imports of petroleum products. -3 -2 -1 0 1 2 3 4 5 -3 -2 -1 0 1 2 3 4 5 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 Total factor productivity Capital Labour Potential growth Contributions to potential growth Sources: Statistics Finland, MoF according to EU method, % VM34170 17 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 ECONOMIC SURVEY  –  AUTUMN 2017 situation where oil price is assumed to increase by 50% and end up at almost USD 100 a barrel in 2021. The channels of influence in the calculations are the same, but the differences in the figures depicting the change illustrate the significance of the impact of oil price increases. Oil prices have a direct impact on consumer prices as well as on export producers’ marginal costs. Consequently, the most important channels of influence are consumption and exports. The impacts of oil price increases are diverse. At the global level, rising oil prices generate stronger increases in production costs, which has a slowing effect on global economic growth. The calculation assumes an equal slowdown in the growth of production costs in Finland and Finland’s export markets. In that case, Finland’s export price development will hardly differ from that of rival countries. Oil price rises are strongly reflected in import prices, the increases of which can be seen as a deterioration of the terms of trade. Rising oil prices accelerate the increase in domestic production costs and consumer prices and therefore slow growth in domestic demand. In addition to direct impacts, multiplier effects also play a major role. When consumer prices increase, households seek to offset part of the increased costs by nominal wage and salary growth. Export prices will also rise and export growth slow compared with the baseline. Investment growth will slow. Import growth will also slow as the movement in relative prices will shift demand from imported to domestic commodities. Due to the high propensity to import in domestic demand and exports, the decrease in domestic production will be relatively small. 2018 2019 2020 2021 2 3 4 5 Import price level 2018 2019 2020 2021 0.5 1 1.5 2 2.5 Price level 2018 2019 2020 2021 −0.6 −0.4 −0.2 0 Output 2018 2019 2020 2021 −1.4 −1.2 −1 −0.8 −0.6 −0.4 −0.2 Export 2018 2019 2020 2021 0.5 1 1.5 2 Nominal wage 2018 2019 2020 2021 −0.8 −0.6 −0.4 −0.2 Private consumption 2018 2019 2020 2021 −0.4 −0.2 0 Employment 2018 2019 2020 2021 −2 −1.5 −1 −0.5 Import 20% 50% E�ects of higher oil prices 18 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 Fiscal Policy The Finnish economy is experiencing a strong upswing. The outlook for the next few years is also bright. The economy is clearly growing faster than its potential, and capacity utili- sation rates are high. Export markets are growing, companies are receiving plenty of new orders and exports are performing well. Confidence in the future is strong among enter- prises and households. The labour market is recovering, employment is picking up and unemployment falling. The long-awaited economic growth is also improving the state of general government finances. Tax revenue is increasing and the decline in unemployment is reducing unem- ployment expenditure. The economic rebound does not, however, eliminate the structural factors weakening general government finances, with the most important of these being population ageing, which increases growth in pension, care and nursing expenditure and therefore slows down improvements in general government finances. Despite the eco- nomic recovery, general government expenditure clearly exceeds revenue. The bright economic news does not give grounds for a change in Finland’s fiscal poli- cy aiming at balancing general government finances. In its Government Programme, the Government of Prime Minister Juha Sipilä has set itself the target of the GDP-to-debt ratio levelling off by the end of the government term and living on debt coming to an end in 2021. While robust GDP growth will set the debt ratio on a downward trajectory in the next few years, central government indebtedness will still continue in 2021. To complement the debt objective, the Government has set specific targets for the general government budgetary position concerning each general government sector, that is, cen- tral government, local government, and social security funds. For these the targets to be reached, general government finances will need to be more or less in balance at the end of the government term. To achieve the targets and to ensure the long-term stability of general government financ- es, it is important that the revenue generated by economic recovery be used to balance general government finances and reduce central government borrowing. The double-dip recession experienced over the past eight years has left its mark on gen- eral government finances. The public debt-to-GDP ratio has doubled and general govern- ment gross debt increased by well over EUR 70 billion since 2008. At the onset of the fi- nancial crisis in 2008, there was still a surplus that could be utilised to cushion the impacts of the crisis. Today the situation is different. If the economic recovery is not utilised to strengthen general government finances, the expenditure pressures and any future reces- sions will have to be faced in a situation where the management of general government finances is based on budgets that are already in deficit. 19 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 ECONOMIC SURVEY  –  AUTUMN 2017 Furthermore, the additional revenue generated by the upturn is temporary. Without meas- ures to improve the conditions for growth, economic growth is set to be in the 1% to 1.5% range in the long term. Population ageing will shrink the working-age population, and economic growth will be reliant on productivity growth. Productivity growth has, in turn, been slowed by the growth in the relative importance of services in the economy. To generate permanently more robust economic growth requires a reorganisation of soci- etal structures for them to better support growth in the economy’s production potential, employment and productivity. Higher production potential would create space for the economy to grow faster without increased price and cost pressures. An economic recovery is a good time for economic restructuring and strengthening of conditions for growth. Strong economic growth helps attenuate any unfavourable impacts arising from restructuring in the short term. The cornerstone of the fiscal policy outlined in the Government Programme is bridging the sustainability gap. The sustainability of general government finances will be strength- ened not only through direct measures to improve general government finances and measures to boost growth and employment but also through general government re- forms. One of the most important of these reforms is the health, social services and re- gional government reform due to enter into force on 1 January 2020. As regards employment, the Government has set the target of increasing the employment rate to 72% and the number of employed persons by 110,000 during its term in office. The labour market situation is going to improve in the next few years but, in the light of the forecast, the employment target is not going to be met. The Government aims to strengthen conditions for employment and economic growth through structural reforms as well as taxation measures. The supply of labour will be strengthened through measures including eliminating incentive traps, increasing labour mobility, reforming the unemployment security system and public employment servic- es, and ensuring that employees’ income taxes do not increase. The Competitiveness Pact that entered into force this year will, in turn, improve the competitiveness of Finnish enter- prises and increase the demand for labour. The materialisation of the rise in employment enabled by the Pact requires, however, that the competitive advantage gained through the Pact will be taken care of in the wage and salary settlements of the coming years. 20 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 21 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 ECONOMIC SURVEY  –  AUTUMN 2017 1 Economic outlook 1.1 Global economy Global economic outlook has improved The buoyant mood in the global economy has grown stronger during the current year. Economic growth is being maintained by emerging economies in particular, but growth is also gaining strength in industrial countries. The global economy will grow by 3.5% this year, accelerating to 3.7% in 2018 and 3.8% in 2019. -6 -4 -2 0 2 4 6 8 10 12 14 16 -6 -4 -2 0 2 4 6 8 10 12 14 16 06 07 08 09 10 11 12 13 14 15 16 17 18 19 China (not seasonally adjusted) United States (seasonally adjusted) Euro area (seasonally adjusted) Gross domestic product Sources: Statistical authorities, MoF change in volume, % VM34170 22 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 According to some indicators, stock market volatility is at a record low, reflecting the positive outlook. Particularly in the USA, the Dow Jones stock market index keeps soar- ing to new all-time highs. In the debt markets, yields are low and prices high, indicating a calm situation. On the other hand, this is also attributable to the policy of quantitative easing, that is, purchases made by central banks in the debt markets. In Europe, a shad- ow over the prospects in some countries is cast by the high level of non-performing loans, reducing confidence in the soundness of these countries’ banking systems. The positive economic development of the United States continues. New industry or- ders are on the increase, and unemployment has further contracted. The Federal Re- serve is continuing the normalisation of monetary policy, which is reflected in a rise in short market rates. In contradiction to this, the US dollar has recently weakened consid- erably against the euro. This may be against a backdrop of positive conditions in Europe as well as the uncertainty relating to the economic policy of the US administration. In addition, the expectations of US businesses and consumers concerning future econom- ic development are cautious. These factors will be among those curbing the accelera- tion of growth in the next few years from the current year’s 2.3%. In Continental Europe the economic outlook has strengthened this year. Business and consumer confidence is high. The growth figures reported so far for this year are strong, and growth has been more broad-based than earlier. Unemployment in the euro area has fallen to its lowest level in eight years. The European Central Bank has indicated that unconventional monetary policy measures will continue until economic growth in the euro area becomes more firmly rooted. 4 5 6 7 8 9 10 11 12 13 4 5 6 7 8 9 10 11 12 13 06 07 08 09 10 11 12 13 14 15 16 17 Euro area Finland Sweden United States Germany Sources: Macrobond, statistical authorities Unemployment rate seasonally adjusted, % VM34170 23 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 ECONOMIC SURVEY  –  AUTUMN 2017 The debt crisis in the euro area has subsided as most crisis countries have exited the economic adjustment programmes and Greece has also finally returned to a growth path. Concern is mainly caused by risks relating to the balance sheets of some European banks. During the current year, the euro has strengthened against the other main cur- rencies, reflecting the positive outlook of the euro area. Over the longer term, however, the euro is likely to weaken against the US dollar, reflecting the differences in monetary policy. The euro area is growing around 2% this year, and growth will accelerate in 2018 and 2019. The United Kingdom’s economic outlook is overshadowed by the uncertainty relating to Brexit. Consumer confidence is weakening, and business investment is characterised by general caution. The country’s economic growth is anticipated to remain weak in the next few years as well. The strong economic development of recent years is continuing in Sweden, but leading indicators show that the economy is currently at its strongest growth phase. The Pur- chasing Managers’ Indexes for the manufacturing industry as well as the service sector took a slight downturn early in the year, albeit still indicating clear economic growth. In the second quarter of the current year, Sweden’s economic growth was very fast and is likely to remain close to 3% throughout the current year as well as the next few years. -25 0 25 50 75 100 125 150 175 200 225 -25 0 25 50 75 100 125 150 175 200 225 06 07 08 09 10 11 12 13 14 15 16 17 12-month 3-month difference between secured and unsecured interest rates, basis points Source: Macrobond Banking system risks VM34170 24 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 Japan’s economic growth soared in the second quarter of the current year in particular, but it is still uncertain whether the economy will transition to a sustainable growth tra- jectory. Japan’s deflationary concerns are yet to disappear permanently, and the Bank of Japan is continuing its ultra-easy monetary policy. Wage developments play a key role as regards rising inflation. Employment is high and recent indexes have indicated strong consumer confidence. Growth in the Japanese economy will, however, be slow this year and in 2018. The outlook of the Russian economy is largely dependent on development in the en- ergy sector. The rise in crude oil prices early in the year accelerated economic growth in early 2017. The rouble has made gains against the US dollar following the rise in oil prices from the rock bottom seen in early 2016, but this trend appears to have been reversed recently due to greater fluctuation in prices. The Russian economy’s growth potential is weakened by the need for major economic restructuring in which progress is yet to take place. For these reasons, Russia’s economic growth will remain subdued in the next few years. 65 70 75 80 85 90 95 100 105 110 115 120 125 65 70 75 80 85 90 95 100 105 110 115 120 125 130 07 08 09 10 11 12 13 14 15 16 17 Spain Germany Italy Sweden Finland Sources: Macrobond, MoF Market share in goods exports¹ 2007=100, trend (HP) ¹ Ratio of goods exports growth to world trade growth VM34170 25 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 ECONOMIC SURVEY  –  AUTUMN 2017 The first months of 2017 were a strong period for the Chinese economy, but the out- look of slowing growth for the coming years remains unchanged. Economic growth has been maintained by expansionary fiscal policy as China has set an ambitious total output target for the end of this decade. The transition of the Chinese economy from an export-driven model to a consumption-driven one is slowing economic growth, which increases the risks arising from the economy’s considerable debt burden. The outlooks of other emerging economies are predominantly positive. The Indian economy remains on a strong growth track. Despite problems, the outlook for Brazil is turning more positive and the same applies to South Africa. World trade growth accelerating World trade has also developed favourably since late 2016. Trade has been accelerated by emerging economies in particular, but in the future the significance of positive develop- ment in the euro area will be emphasised. This year in particular will be a year of growth in world trade due to strong performance early in the year. In the next few years, world trade growth will increase more or less at the same rate as global output. The rate of growth will, however, be much slower than during the most intensive periods of globalisation seen last decade. 20 30 40 50 60 70 80 90 100 110 70 80 90 100 110 120 130 140 150 160 06 07 08 09 10 11 12 13 14 15 16 17 18 19 EUR/barrel 2015=100 Industrial raw material index, euro area (left scale) Crude oil (Brent, global spot price, right scale) Sources: Hamburgisches WeltWirtschafts Institut, Macrobond, MoF Raw materials prices EUR VM34170 26 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 Risks still mainly to the downside There are, however, major risks relating to the positive outlook of the global economy. The key risks are the spillover effects of the gradual normalisation of US monetary policy on the global economy, the indebtedness of the Chinese economy in the context of slowing growth, the increased threat of protectionism to world trade, and rising geopolitical ten- sions. US monetary policy normalisation will widen interest rate spreads between key economies and strengthen the dollar against the other main currencies over the longer term. Normal- isation may have spillover effects on the global economy, as was the case a few years ago in conjunction with the “taper tantrum” episode. The risks are related in particular to the weakening of currencies of developing countries with external debt, which would result in a reduction in their debt servicing capacity. The heavy leverage of Chinese enterprises and, more broadly, the indebtedness of the en- tire economy is a key risk in the global economy. When economic growth slows, the risks arising from indebtedness will increase, regardless of the fact that China also has sizable buffers. The growing risk was reflected by the downgrading of China’s credit rating for the first time in 30 years that took place in March 2017. Measures relating to the trade policy of large countries, such as the threat of protec- tionism that still continues to loom, pose a risk to the positive basic view of world trade growth. The recent escalation in geopolitical tensions has resulted in a rise in the price of gold, which is regarded as a safe-haven asset. -24 -20 -16 -12 -8 -4 0 4 8 12 16 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 -24 -20 -16 -12 -8 -4 0 4 8 12 16 World trade Finnish exports World trade Sources: CPB Netherlands Bureau for Economic Policy Analysis, Statistics Finland, MoF change in volume, % VM34170 27 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 ECONOMIC SURVEY  –  AUTUMN 2017 Table 3. Gross domestic product 2014 2015 2016 2017** 2018** 2019** change in volume, % World (PPP) 3.2 3.3 3.2 3.5 3.7 3.8 Euro area 1.0 2.2 1.7 2.0 2.3 2.4 EU 1.4 1.6 1.7 1.9 2.1 2.2 Germany 1.6 1.5 1.8 2.0 2.3 2.4 France 0.2 1.2 1.1 1.6 1.9 2.1 Sweden 2.0 3.9 3.0 3.2 3.0 2.9 United Kingdom 2.9 2.2 1.8 1.5 1.3 1.2 United States 2.4 2.6 1.6 2.3 2.4 2.6 Japan -0.1 1.1 1.0 0.8 1.0 1.0 China 7.3 6.9 6.7 6.5 6.3 6.1 Russia 0.6 -3.7 -0.2 1.2 1.4 1.4 Sources: Eurostat, statistical authorities, IMF, MoF Table 4. Background assumptions 2014 2015 2016 2017** 2018** 2019** World trade growth, % 2.8 2.0 1.6 3.5 3.8 3.8 EUR/USD 1.30 1.10 1.10 1.12 1.09 1.02 Industrial raw material price index, EA, € (2015=100) 112.6 100.1 96.3 112.4 115.3 131.3 Crude oil (Brent), €/barrel 76.4 48.6 40.8 45.9 50.2 56.6 3-month Euribor, % 0.2 0.0 -0.3 -0.3 -0.2 0.0 Government bonds (10-year), % 1.5 0.7 0.4 0.5 0.9 1.4 Export market share (2000=100) 1 91.2 90.2 90.2 91.2 91.1 91.3 Import prices, % -1.6 -4.2 -2.8 4.9 2.5 2.7 1 Ratio of export growth to world trade growth Sources: Statistical authorities, CPB, HWWI, Reuters, MoF A positive risk worthy of note is the stronger-than-expected economic growth in industri- al countries. This applies particularly to the euro area but also to countries such as Japan. Growth in domestic demand at a faster rate than anticipated would increase inflation- ary pressures and, consequently, speed up the return to normal monetary policy. Fast- er-than-projected growth in world trade is also a positive risk. 28 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 1.2. Foreign trade Finland’s foreign trade has picked up since the start of the year, with growth seen in ex- ports as well as imports. This reinvigoration can be attributed above all to the positive eco- nomic development in Finland’s export markets early in the year. 1.2.1. Exports and imports Finnish exports increased by 1.3% last year and the rate accelerated clearly in the first quarter of 2017 due to growth in exports in goods. The rapid growth in exports is mainly due to the rebound of demand in the export markets. Growth was seen across the board in all traditionally significant export products, such as mechanical engineering and chemical industry products. The volume of goods exports increased by as much as 12.7% during the first quarter of this year compared with the corresponding period a year ear- lier. According to Finnish Customs statistics on goods exports, January and May were particularly strong months. The volume increase of the first quarter is also explained by the low level reported for the comparison quarter. Service exports, by contrast, remained almost unchanged in early 2017, whereby the total volume of Finnish exports increased by 8.8% in the first quarter. The imports growth figure for 2016 was revised in national accounts data for July, with imports growing by as much as 4.4%. This growth was largely based on imports of goods, up 6.5%, while service imports remained almost unchanged. The growth in goods imports was also broad-based and mainly took place in industrial products. The positive imports trend also continued in the early months of the year as the increase in the first quarter was 3.6% year on year. Table 5. Foreign trade 2014 2015 2016 2017** 2018** 2019** change in volume, % Exports of goods and services -2.7 0.8 1.3 4.7 3.7 4.1 Imports of goods and services -1.3 3.2 4.4 2.9 2.6 3.1 change in price, % Exports of goods and services -0.4 -0.9 -1.9 2.5 1.3 1.5 Imports of goods and services -1.6 -4.2 -2.8 4.9 2.5 2.7 29 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 ECONOMIC SURVEY  –  AUTUMN 2017 1.2.2 Prices and current account In 2016, both export and import prices fell, but the decrease in import prices was smaller than that in export prices. Despite the fall in import prices, the value of imports increased due to an increase in the volume of imports, and imports at current prices exceeded ex- ports by EUR 2.6 billion. Import prices rose strongly in early 2017 due to rises in raw mate- rial prices. There has also been upwards pressure on export prices, but the rate of increase has been slower than that seen in import prices. Both import and export prices will rise over the forecast horizon due to higher energy prices. Import prices will also be driven upwards by the strengthening of the US dollar towards the end of the period. In the cur- rent year, export growth will outperform the growth in world trade and the long period of declining market shares will end. Exports will grow driven by export demand in 2018 and 2019, albeit at a steadier rate than this year. Exports will continue to be mainly driven by goods exports, which will require imported inputs. In addition to demand in imported in- puts, imports will also be increased by other sectors, such as wholesale and retail trade. Despite the stronger growth in exports, the current account will remain in deficit through- out the forecast period. This is, above all, due to the deficit in the service account and the secondary income account and the stronger increase in import prices than in export prices. -4 -2 0 2 4 6 8 10 -4 -2 0 2 4 6 8 10 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 Current account Balance of goods and services Sources: Statistics Finland, MoF Current account relative to GDP, % VM34170 30 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 Table 6. Current account 2014 2015 2016 2017** 2018** 2019** EUR bn Balance of goods and services -1.9 -1.1 -2.6 -3.3 -3.6 -4.1 Factor incomes and income transfers, net -1.3 -1.2 -0.2 0.3 0.4 0.8 Current account -2.6 -1.2 -2.3 -3.0 -3.2 -3.3 Current account, relative to GDP, % -1.3 -0.6 -1.1 -1.3 -1.4 -1.4 The negative risks in the forecast are primarily related to risks concerning international market development, such as an increase in protectionism hampering world trade. The positive risk forecast is related to, among other things, the development of the geograph- ical distribution of exports. Currently focusing on developed economies, and mainly on Europe, exports may gather speed in the markets of emerging economies such as China. There is also a positive risk relating to the structure of exports if growth in service exports exceeds the rate anticipated.> 96 100 104 108 112 116 120 124 128 132 136 96 100 104 108 112 116 120 124 128 132 136 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 Finland Sweden¹ Germany¹ Euro area¹ Unit labour costs Sources: European Commission, Statistics Finland, MoF 2005=100, nominal ¹ European Commission forecast VM34170 31 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 ECONOMIC SURVEY  –  AUTUMN 2017 1.3 Domestic demand 1.3.1 Private consumption Consumption growth still strong The growth in household consumption is upholding the growth of private consumption. Purchasing power is boosted by an increase of more than 2% in real disposable income as inflation will only accelerate a little due to the moderate development of energy prices. Growth in private consumption is also supported by improving employment. Although slowing towards the end of 2017, private consumption growth will reach 2.4% this year. The Consumer Survey indicates that general confidence in the economy’s performance has clearly improved in the past year. Confidence in the outlook for the Finnish economy has improved even more strongly than perceptions of personal finances. Expectations of declining unemployment over time have also increased. According to Statistics Finland’s national accounts data published in July, private con- sumption grew by 1.8% in 2016. In addition to services, private consumption growth was bolstered by purchases of durables, with car sales being a particularly major factor. The household savings rate has fallen almost without interruption since 2010 and in 2016 end- ed at -0.9%. The fall in the savings rate is also reflected in the growth of household indebt- edness, which in 2016 climbed to over 126% of disposable income. -40 -30 -20 -10 0 10 20 30 -40 -30 -20 -10 0 10 20 30 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Industry Consumers Long-term average (industry) Long-term average (consumers) Source: European Commission Industry and consumer confidence balance, seasonally adjusted VM34170 32 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 In 2018, employment growth will provide a particular boost to private consumption growth. Increases in labour input and the earnings level will accelerate the increase in the sum of wages and salaries to 2.2%. The growth of household disposable income will be only slightly more subdued than in 2017. Social transfers will continue to grow, despite the gradually falling unemployment rate. Growth in current transfers will be maintained by the increase in pensions as pensions account for almost half of current transfers. Property income will also continue to increase reasonably rapidly as the economy rebounds. However, accelerating inflation will slow the growth in household disposable real income, decelerating the growth of private consumption. The savings rate will remain negative, and households will continue to add to their debt. In 2019, the sum of wages and salaries will continue to rise steadily as employment picks up. Real income growth will continue to accelerate despite rising inflation, which togeth- er with the easing of taxes will strengthen purchasing power. Private consumption growth will remain sluggish as the negative household savings rate restricts consumption oppor- tunities. The household savings rate will remain in negative territory during the forecast horizon, despite the slowdown of consumption growth. Low interest rates and ready access to loans have increased borrowing. Long-standing low interest rates coupled with loan re- payment holidays have further fuelled the growth of household debt. A negative savings rate together with an increased household debt burden presents a clear downside risk to the forecast for private consumption. Confidence-driven consump- tion growth is sensitive to bad news. -6 -4 -2 0 2 4 6 8 10 -6 -4 -2 0 2 4 6 8 10 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 Wages Social transfers Other income, net Property income, net Taxes Social contributions Disposable income Sources: Statistics Finland, MoF Households´ disposable income change and growth impact, % VM34170 33 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 ECONOMIC SURVEY  –  AUTUMN 2017 1.3.2 Public consumption Public consumption has accounted for just over 24% of GDP in recent years. This figure is anticipated to drop during the outlook period as the value of GDP will increase more rapidly than consumption expenditure by government. The amount of public consumption is also anticipated to grow more slowly than GDP or private consumption volume. The largest items of consumption expenditure by government are personnel expenses and intermediate consumption, that is, goods and services purchased. Consumption ex- penditure by government is divided into individual and collective consumption expend- iture. Individual consumption expenditure includes expenditure directly serving citizens, such as education, health, social and cultural services. Collective consumption expend- iture includes expenditure relating to administration, defence and public order. Of con- sumption expenditure by government, two thirds is of the individual and one third of the collective type. In 2016, central government spending growth was mainly driven by expenditure on asy- lum seeker reception centres. This year and also next year this expenditure will be reduced considerably, despite the slight increase from the amount included in the spring spending limits decision budgeted for 2018. Consumption expenditure will also be cut by the reduc- tion in social security contributions as set out under the Competitiveness Pact. Further- more, the introduction of longer working hours will reduce central government operating expenditure due to the smaller number of employees. Local government consumption expenditure has increased quite moderately in recent years. During the current year, consumption expenditure will even shrink due to measures such as those under the Competitiveness Pact, the 2017 pension reform that will reduce 40 60 80 100 120 140 -4 0 4 8 12 16 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 Saving ratio (left scale) Debt ratio (right scale) Household savings and debt Sources: Statistics Finland, MoF % of disposible income VM34170 34 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 Table 7. Consumption 2016 share, % 2014 2015 2016 2017** 2018** 2019** Change in volume, % Private consumption 100.0 0.8 1.7 1.8 2.4 1.4 1.2 Households 95.3 0.3 1.9 1.9 2.5 1.4 1.2 Durables 8.1 1.9 2.8 5.8 4.1 2.3 2.2 Semi-durables 7.9 0.3 0.9 2.4 0.3 0.9 0.8 Non-durable goods 25.7 -0.2 0.7 0.6 1.4 1.2 1.1 Services 52.7 0.4 1.3 1.7 3.1 1.4 1.3 Consumption by non-profit institutions 4.7 3.8 -2.0 1.0 0.5 0.5 0.5 Public consumption 100.0 -0.5 0.0 1.2 -0.3 0.8 0.4 TOTAL 0.4 1.1 1.6 1.6 1.2 1.0 Individual consumption expenditure in general government -0.5 0.9 0.2 -0.2 1.0 0.4 Total individual consumption expenditure 0.4 1.5 1.5 2.4 1.2 1.1 Households´ disposable income 0.5 1.7 1.8 2.6 2.8 2.4 Private consumption deflator 1.3 0.3 0.9 1.0 1.3 1.5 Households´ real disposable income -0.8 1.4 0.9 1.6 1.4 0.9 % Consumption as proportion of GDP (at current prices) 80.0 79.7 79.2 77.9 77.1 76.2 Household savings ratio 0.6 0.1 -0.9 -1.8 -1.8 -2.1 Household debt ratio 1) 121.5 124.2 126.4 127.5 128.8 130.0 1) Household debt at end-year in relation to disposable income. municipal employers’ pension contributions as well as adjustment measures introduced by municipalities themselves and by the Government. Consumption expenditure growth will, however, already continue next year as the rising service needs resulting from population ageing will increase the need for care and nursing services and, consequently, add to local government expenditure pressures. The lowering of early childhood education fees from the beginning of 2018 will also have an increasing effect on consumption expenditure. Consumption expenditure by social security funds consists mainly of social benefits in kind paid out by the Social Insurance Institution of Finland (Kela), which comprise reim- bursements for medicines and travel and rehabilitation allowances, as well as of wages and salaries. Savings measures announced by the Government will continue to reduce expenditure on social benefits in kind in the current year as they did last year. Thereafter, expenditure is expected to return to moderate growth. 35 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 ECONOMIC SURVEY  –  AUTUMN 2017 1.3.3 Private investment Investment growth broadly based The positive international economic development and the entry of Europe onto a growth trajectory have further improved the cyclically sensitive investment readiness of enterpris- es. In addition, at home the favourable employment development has boosted consumer confidence, which can be seen in developments including a growing interest in buying residential property. The various construction investment sub-items have so far grown al- most at the same rate, but this year and next the fastest growth will be seen in investment in residential housing construction. The growth of production-related investment will also continue to be good. Private investment growth during the outlook period will average 4.5% per year. Increased investment will raise GDP growth by an average of almost 1 per- centage point a year. The rapid growth in private investment will restore its rate relative to GDP to the level of around 19% prevailing before the financial crisis. The national accounts published in July confirmed that last year’s investment growth had been even stronger than earlier as the growth in private investment was almost 8% in 2016. The accounts show that the first quarter of the current year was also very strong. The volume of investment in machinery, equipment and transport equipment in particular was high, which is likely to be partly due to the exceptionally large investment project im- plemented in Äänekoski last year. 0 5 10 15 20 25 30 0 5 10 15 20 25 30 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 Construction Machinery and equipment R & D Investments relative to GDP, % Sources: Statistics Finland, MoF VM34170 36 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 The rate of new residential building projects started has risen to a record level. Construc- tion of apartment blocks started has never been at a such a high level since 1995, al- though last year was already very active. The start rate is, however, expected to slow to- wards the end of the year. In addition to investors, residential building construction is cur- rently supported by consumer interest in buying residential property. The forecast shows investment in repair construction to increase at an annual rate of 1½% to 2% throughout the outlook period. Last year saw the start of many long-term production-related building construction invest- ment projects, such as commercial buildings, storage buildings and hospitals, with these raising last year’s investment figures. The number of new starts is, however, anticipated to be lower than earlier. Construction investment is expected to pick up again towards the end of next year as, for example, the launch of a few major projects is scheduled for 2018. It is, however, possible that these major projects may be delayed due to permit procedures or funding decisions. That would postpone the investments forecast for 2018. There are al- so plans to launch of several major projects in 2019. Civil engineering will continue to grow as there are major construction projects underway. In addition, investment by the energy supply sector in civil engineering is anticipated to increase further due to investment in the electricity transmission network, liquefied natu- ral gas (LNG) network and wind power, for example. Industrial capacity utilisation rates have risen, especially in the forest industry but also in the metal industry, and these create the need to add new capacity. This can also be seen in the investment survey published in June by the Confederation of Finnish Industries (EK), reporting two-digit growth in fixed industry investment. When launched, the above-men- tioned major projects will also result in a considerable increase in investment in machinery and equipment in the next few years. -15 -10 -5 0 5 10 15 -15 -10 -5 0 5 10 15 95 97 99 01 03 05 07 09 11 13 15 17 19 Construction Machinery and equipment R & D Total Investments Sources: Statistics Finland, MoF change in volume and growth impact, % VM34170 37 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 ECONOMIC SURVEY  –  AUTUMN 2017 Research and development (R&D) investment is forecast to gradually show a clear upturn. According to the EK investment survey, the outlook for industry’s R&D investment still remained grim for the current year. On a positive note, however, the expectations of the technology industry, which is the most important sector for R&D investment, have already improved and increases in total investment are also already planned. The investment focus is shifting from residential housing construction in particular to in- dustrial machinery and equipment and R&D investment by enterprises. The negative real interest rate and easy access to financing will bolster investment throughout the forecast horizon. Uncertainty to the forecast is created by the fact that the implementation sched- ules of major projects may have a considerable impact on the differences between the investment volumes of two consecutive years. In addition to these, normal cyclical change risks will naturally be material. 60 70 80 90 100 -10 -5 0 5 10 05 06 07 08 09 10 11 12 13 14 15 16 17 Investment in machinery and equipment, change in moving annual total, % (left scale) Capacity utilization rate, industry, 6-month moving average, % (right scale) Source: Statistics Finland Investment and capacity utilization rate VM34170 38 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 1.3.4 Public investment The public investment to GDP ratio in 2016 was 4.0%, close to the long-term average. Pub- lic investment is anticipated to grow slightly every year during the outlook period. Civil en- gineering investment and other construction investment both account for 30% of public investment. The share of R&D investment is over one quarter, while machinery and equip- ment account for around 15%. The Government’s commitment to spend around EUR 600 million in improving existing transport infrastructure will increase the level of central government investment. Appro- priations for transport infrastructure maintenance will increase both this year and next. Very few new infrastructure projects will be launched. There is a slight reduction in appro- priations for research and development activity in the 2017 Budget. Additional appropria- tions are allocated for next year for Tekes – the Finnish Funding Agency for Innovation and the Academy of Finland. The temporary additional appropriations for transport infrastruc- ture maintenance will end in 2019. The spring spending limits decision includes an addi- tional appropriation for the Defence Forces’ investments for 2019 and the following dec- ade due to the fighter aircraft purchases. Investment will be required for the development of the counties’ ICT systems, and these have been taken into account in central govern- ment investment from 2018 onwards. Table 8. Fixed investment by type of capital asset 2016 share, % 2014 2015 2016 2017** 2018** 2019** Change in volume,% Buildings 47.7 -5.4 2.1 9.9 8.2 3.2 2.4 Residential buildings 28.6 -6.5 2.0 10.5 8.2 4.5 0.3 Non-residential buildings 19.1 -3.7 2.3 9.0 8.2 1.2 5.7 Civil engineering construction 10.1 4.1 -0.9 10.2 1.7 2.4 2.0 Machinery and equipment 23.2 -1.6 4.4 10.1 2.0 4.8 5.5 R&D-investments* 19.1 -0.5 -5.2 -3.3 0.7 4.3 4.9 Total 100.0 -2.6 0.7 7.2 4.7 3.7 3.5 Private 81.6 -3.4 2.2 7.9 5.5 4.0 4.1 Public 18.4 0.9 -5.2 3.9 1.0 2.1 0.9 % Investment to GDP ratio (at current prices) Fixed investment 20.6 20,4 21.5 22.2 22.7 23.3 Private 16.4 16,5 17.6 18.2 18.7 19.3 Public 4.2 3,9 4.0 3.9 4.0 4.0 * Includes cultivated assets and intellectual property products 39 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 ECONOMIC SURVEY  –  AUTUMN 2017 1.4 Domestic production 1.4.1 Total output Strongest economic growth in half a decade Following four years of contraction, the output of the economy returned to growth posted at 1.6% last year. This growth accelerated clearly in the first months of the year, as gross value added for the economy in the first half of 2017 was 4% higher year on year. Econom- ic growth was based on increased output in many industries since value added rose year on year across all main industries on the back of improved domestic and international demand. Even in the sub-industries, reduction was only recorded in public service pro- duction and energy supply (as a result of consolidation measures in general government finances and a mild winter). Unlike the previous year, output development was thus driv- en also by sectors other than construction. Output in many industries still remains below pre-financial crisis levels, but the most notable exceptions to this are the value-added in- creases seen in chemical industry, real estate and business services. Local government capital expenditure is historically at quite a high level. Maintenance and repairs of the existing local government building stock continue to require substan- tial investment. In growth centres, new building construction and transport infrastructure investments will continue at a high level in the years ahead. Already taking place at a brisk rate, hospital construction is set to increase further despite the fixed-term legislation that entered into force more than a year ago and made major health and social services invest- ments subject to special dispensation. 50 100 150 200 250 50 100 150 200 250 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 Industry Services Primary production Construction Production Sources: Statistics Finland, MoF 1990=100 VM34170 40 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 New signs of the continuation of the positive economic outlook were received in spring and summer. These include the increase in new orders in the manufacturing industry and growth in private service production turnover, as well as the sustained strength of construc- tion in growth centres. The lack of demand that restricted production opportunities for many years appears to hold enterprises back much less these days. Only a year ago one in three or four manufacturing, construction or service enterprises reported that shortage of demand was slowing output growth, but only one in five or six respondents to this sum- mer’s survey reported insufficient intermediate or final product demand. In construction in particular, a shortage of skilled labour is already hampering growth opportunities consid- erably more commonly than the demand level. In manufacturing, a shortage of capacity is also a larger obstacle to growth than a year earlier, particularly in the forest and metal indus- tries, and enterprises in these industries have announced expansions of existing capacity. Despite obstacles to output growth, gross value added for the economy is stepping up. Growth is being driven by an increase in orders illustrating strong international demand in manufacturing, progress made in numerous private and public construction projects started, and growth in service production for all main industries. Although the period of fastest growth seen in early 2017 appears to be over, the business tendency surveys of the Confederation of Finnish Industries (EK) indicate that the positive trend will still continue at least for the second half of the year. In addition, the forecast’s background assumptions concerning acceleration in world trade and global economy support export-oriented in- dustrial production and therefore, indirectly, business services. Strengthened imports of Finland’s most important trading area, Europe, are good news for Finnish industries man- ufacturing investment and intermediate products. Due to broad-based growth and very strong first months of the year, gross value added for the economy will grow by around 3% this year. The growth rate will level off in 2018 and 2019, but total output will still in- crease by around 2% per year during those years. -10 -8 -6 -4 -2 0 2 4 6 8 -10 -8 -6 -4 -2 0 2 4 6 8 00 02 04 06 08 10 12 14 16 18 Primary production Secondary production Services Total value added, change in volume Contribution to total production Sources: Statistics Finland, MoF percentage points VM34170 41 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 ECONOMIC SURVEY  –  AUTUMN 2017 1.4.2 Secondary production Strongest growth in manufacturing orders and output Five years of recession in manufacturing came to an end last year as the entire industry’s value added increased 1.1% year on year. In the first half of the current year, this growth accelerat- ed clearly, despite a slowdown seen in the growth rate in the second quarter. Growth in early 2017 was particularly strong in the chemical industry as well as in the manufacture of basic metals and in metal industry manufacturing machinery and electrical equipment. The forest industry growth rate also accelerated due to increases in the mechanical forest industry as well as in pulp and paperboard production. -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 Households and non-profit institutions serving households General government Financial and insurance corporations Non-financial corporations and housing corporations¹ Total economy Net lending by sector relative to GDP, % Sources: Statistics Finland, MoF 1) Including financial sector in 2017-2019 VM34170 0 10 20 30 40 50 60 70 80 90 100 0 10 20 30 40 50 60 70 80 90 100 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 Electrical and electronics industry Chemical industry Rest of manufacturing Metal industry excluding electrical and electronics industry Forest industry Manufacturing Source: Statistics Finland % of gross value added VM34170 42 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 Most of Finland’s industrial production comprises raw materials and investment goods for export, the demand for which has improved as the global economy and trade have picked up and capacity utilisation has been increased by economic growth. Finnish unit labour cost competitiveness also improved in early 2017. This is reflected in the large number of orders re- ceived by manufacturing companies, up 20% year on year. The highest number of orders has been won by the shipbuilding industry, but increasing order books have also been reported by the chemical and forest industries. The outlook for output in the second half of the year is therefore positive. Business tendency surveys show the best prospects for growth are in the technology and chemical industries. Forest industry companies anticipate growth will slow towards the end of the year, but the capacity increase in Äänekoski will support forest industry output growth starting from next year at the latest. Overall, industrial output will increase by almost 7% this year due to the strong development early in the year and the new orders received. In the coming years, export demand will increase as world trade growth accelerates and im- port growth is expected to accelerate in 2018 and 2019 in the European market in particular, which is important for Finnish enterprises. Increased production capacity and efforts made by enterprises to improve the competitiveness of their products will boost industrial output in the years ahead. The growth of value added in manufacturing is set to stabilise at around 3% in 2018 and 2019. Despite this growth, the volume of industrial output in 2019 will remain al- most one-sixth lower than in the peak year of 2007. -40 -20 0 20 40 -40 -20 0 20 40 07 08 09 10 11 12 13 14 15 16 17 Forest industry Metal industry excl. electrical and electronics industry Electrical and electronics industry Chemical industry Source: Statistics Finland Volume index for industrial production 3-month moving average, change from previous year, % VM34170 43 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 ECONOMIC SURVEY  –  AUTUMN 2017 Good trend continues in construction For the second consecutive year, construction output increased last year at rather strong rate of 4.9%. In early 2017, the rate accelerated further as there were several major construction projects underway at the same time. Growth is also promoted by the diversity of construc- tion. Migration is increasing housing demand in growth centres, municipalities are investing in health care and educational facilities, and enterprises have launched capacity expansion and replacement projects, which can been seen in commercial, office as well as agricultural construction. However, levels of new construction are higher in growth centres than outside them, which means that growth is unevenly distributed across the regions. The need for repair construction is high, particularly as regards residential and office buildings. The outlook for construction output still remains quite bright. There is diverse demand for the various building categories, whereby enterprises perceive their order books as stronger than normal. Furthermore, government investment in transport infrastructure is boosting civil en- gineering works. Indeed, growth is increasingly held back by a shortage of skilled labour. In addition, the number of planning permissions no longer increased in early 2017. Supported by ongoing construction projects, the increase in construction output this year will exceed the increase seen last year and stand at almost 6%. Construction will remain buoyant in growth centres in both 2018 and 2019, but the number of new starts will no longer increase as much as seen in recent years, slowing down the rate of growth. In the 2018–2019 period, the focus will be on a few major construction projects and the annual increase in construction value added will be around 2%. Growth will drive output this year above the level achieved in 2007, while the overheated level in 1989 was 10% higher. -30 -20 -10 0 10 20 -60 -40 -20 0 20 40 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Confidence indicator for construction, seasonally adjusted (left scale) Value added in construction, volume, seasonally adjusted (right scale) Confidence and production in construction Sources: Statistics Finland, European Commission balance and change yoy, % VM34170 44 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 1.4.3 Services Broad-based growth in private services Private service production and, consequently, value added throughout the service sectors has been increasing for the past two years. By contrast, public service provision has contracted for three consecutive years now. Earlier this year, service-sector output growth accelerated year on year and growth was particularly strong in services supporting business operations, such as financing and insurance, planning and design, and information services. Consumer service sales have also increased despite the modest development in purchasing power. The cyclical position of private services is strong. Sales are on the increase and are generally expected to continue to grow in the second half of the year as only one in five respondents to the business tendency surveys report demand curbing growth. There are hardly any oth- er general obstacles to growth, unlike in the construction sector, which is facing a shortage of skilled labour, or in manufacturing, where capacity is already partly in full use. The best conditions for growth can be found in information and communication services and in ac- commodation and food service activities. Sales in trade industries are also anticipated to re- main strong. The increase in value added in services this year will be 2% year on year. Looking ahead, service production will be supported by demand in manufacturing and other industries, providing solid conditions for service-sector growth. Consumer-driven services will suffer slightly from the modest development of purchasing power, but inter- national demand will increase service production serving foreign demand and, through intermediate products, also domestic service production. Next year and the year after will only see a slight slowdown in service production growth from this year, with the coming annual growth rate averaging around 1½%. -8 -6 -4 -2 0 2 4 6 8 -40 -30 -20 -10 0 10 20 30 40 05 06 07 08 09 10 11 12 13 14 15 16 17 Services confidence (left scale) Trend indicator of output, services (right scale) Sources: Statistics Finland, European Commission Service production change yoy, per cent and balance, 3-month VM34170 45 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 ECONOMIC SURVEY  –  AUTUMN 2017 Table 9. Production by industry 2016 share, %1) 2014 2015 2016 2017** 2018** 2019** Average 2016/ 2006 change in volume, % Industry 20.3 -0.2 -1.6 1.1 6.8 2.8 3.0 -1.9 Construction 6.8 -3.6 3.7 4.9 5.8 1.9 2.2 0.1 Agriculture and forestry 2.7 -1.7 -1.4 4.2 5.5 3.2 3.3 2.4 Industry and construction 27.1 -1.0 -0.3 2.0 6.5 2.6 2.8 -1.5 Services 70.2 -0.4 0.2 1.3 2.0 1.5 1.4 0.7 Total production at basic prices 100.0 -0.6 0.0 1.6 3.1 1.9 1.8 0.0 GDP at market prices -0.6 0.0 1.9 2.9 2.1 1.8 0.2 Labour productivity in the whole economy 0.1 0.1 1.2 2.1 1.3 1.5 0.1 1) Share of total value added at current prices. 46 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 P R O D U C T I V I T Y D E V E LO P M E N T BY I N D U S T RY Over the long term, economic growth is based on increases in labour input and labour productivity. In Finland, the size of the working-age population (15–64-year-olds) has been decreasing since 2010, which means the impact of labour input on economic growth will take a downturn, unless labour input is increased by other factors (changes in labour force participation rate, structural unemployment and average working hours). In the future, economic growth in Finland will be based increasingly on higher rates of labour productivity. This not an entirely new phenomenon as, over the past 40 years, almost two thirds of the average annual increase of around 2½% in private-sector value added has come from increased labour productivity and the rest (just over a third) from increased labour input. In the past 40 years, labour productivity growth in the private sector has been based mainly on the productivity development of manufacturing and service sectors (see graph below). A third of the average annual increase in productivity of almost 3% has been generated in manufacturing industries and around a half in service sectors. The contributions of construction and primary production have been smaller, with more random variation seen in growth impacts. The growth impact of primary production was clearly positive in the 1970s and 1980s, with on average an equal contribution provided by agriculture and forestry. The average impact of construction on productivity growth has been clearly lower than that of primary production. Within manufacturing, the impact of the electronics industry was enormous starting from the mid-1990s as, until the financial crisis, it alone contributed an average of one third of the total productivity growth in the private sector. The paper industry has also had a clearly positive productivity impact, especially before the 1990s. On average from 1976 to 2015, these two industries increased private-sector productivity growth by 0.3 and 0.2 percentage points per year, respectively. Both industries have also occasionally weakened productivity development, -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 15 Industry Services Primary production Construction Change in labour productivity, % Contribution of industries to labour productivity growth Source: Statistics Finland private sector 47 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 ECONOMIC SURVEY  –  AUTUMN 2017 and so has the oil refining industry. Unlike certain service industries, no manufacturing industry has, however, in the long term permanently slowed productivity development. Among services, the highest productivity impact has been provided by trade and telecommunications. On average, these two industries together have increased private-sector productivity by around 0.1 percentage points a year. The productivity impact of trade has been very consistent, but the most productive years of telecommunications were seen between 1995 and 2005. The productivity impact – both positive and negative – of real estate activities has also been substantial in certain individual years. Measuring the increase in value added for the industry is, however, more challenging than for many other industries, because a significant proportion of the industry’s value added comprises imputed housing services provided by owner-occupiers for themselves. In services, a few industries have also without interruption weakened the productivity development of the private sector. These include certain industries serving business (legal, consultancy and technical services) as well as activities serving financing and insurance activities. This may in part be due to measurement bias, and major productivity differences have been observed between enterprises. Private sector productivity improved by an average of 2.7% per year in the 1976–2015 period. In the public administration industry, annual productivity growth only averaged 1%, and in human health and social work activities productivity contracted by an average of 0.4% per year. Comparisons between market production and non-market production are not, however, unproblematic. According to a recent projection, the productivity growth in the Finnish economy as a whole will accelerate clearly in the next few years and average just over 1½% per year in the 2017– 2019 period. Growth will be boosted by the strong cyclical upswing. In the 2000–2016 period, average growth only just exceeded 1%. Economic restructuring has slowed down productivity development as production of manufacturing industries generating stronger and broader productivity growth has been discontinued or transferred outside Finland. At the same time, there has been a rise in the contribution of services increasing productivity more modestly and inconsistently to the Finnish economy’s value added. This will reduce the improvement of productivity in the future, too. The developments described above are based on analyses of macroeconomic data. Microdata results concerning enterprise-level productivity in Finland indicate major differences between enterprises as regards productivity, including changes in it. According to recent findings based on Finnish data, export growth, a higher employment rate and higher wages and salaries are generated in productive and profitable enterprises. Instead of measures targeted industry- specifically, general policy measures that support enterprises’ own productivity development and endeavour for growth would appear to be more effective economic policy measures improving productivity. Securing a level playing field also treats all kinds of enterprises equally. Incentives for investment in human capital will improve productivity in the long term. 48 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 1.5 Labour force Labour market mismatch problems alleviated by economic growth The broad-based and rapid strengthening of economic activity increased employment in early 2017. From January to June, the number of employed persons increased by 0.6% year on year. The number of working hours, however, did not increase any more in early 2017, despite the introduction of longer working hours under the Competitiveness Pact. The number of job vacancies has remained very high: the seasonally adjusted figure is more than 40,000 vacant positions. Continued strong economic growth and stronger de- mand for labour will take the number of employed persons in 2017 up 0.7% year on year, raising the employment rate to 69.4%. According to the Labour Force Survey of Statistics Finland, there was virtually no decrease in unemployment in early 2017 and the unemployment rate trend remained at 8.7%. The Employment Service Statistics of the Ministry of Economic Affairs and Employment, how- ever, show that unemployment fell clearly in early 2017 across all regions and all age and occupational groups. The standstill in the decline of the unemployment rate is at least in part due to the activation of the disguised unemployed and other persons outside the labour force to become jobseekers, which is normal in the context of economic rebound. The pickup in economic growth will push unemployment back onto a downward trajecto- ry towards the end of the year, and the projected unemployment rate for 2017 is 8.6%. The continuing reasonably rapid rate of GDP growth in 2018 and 2019 will have a positive ef- fect on employment and at the same time the number of unemployed persons will decrease. The number of employed persons is projected to increase by 0.8% in 2018 and by 0.5% in 2019, 55 60 65 70 75 0 5 10 15 20 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 Unemployment rate (left scale) Employment rate (right scale) Employment Sources: Statistics Finland, MoF % Unemployment rate = Unemployed / Labour force (15-74 yrs) Employment rate = Employed / Population of working age (15-64 yrs) VM34170 49 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 ECONOMIC SURVEY  –  AUTUMN 2017 thereby taking the employment rate to 70.5% in 2019. The forecast assumes that wage and sala- ry increases will remain moderate and supportive to employment during the forecast period. The activation of persons outside the labour force to become jobseekers is likely to slow the decline in the unemployment rate also in 2018. Correspondingly, the large number of underemployed persons may slow the rise in the employment rate as well as the decline in the unemployment rate if some of the demand for labour is channelled to the current underemployed without increasing the number of new employed persons. This indicates a rather high rate of unemployment throughout the forecast period, despite stronger eco- nomic growth. The unemployment rate is expected to fall to 8.1% in 2018 and further to 7.8% in 2019. The number of the long-term unemployed decreased rapidly in early 2017 across all age groups. Due to strengthening economic growth, the number of the long-term and the structurally unemployed can be expected to decrease further in the next few years, albe- it more slowly than in recent months. The number of the structurally unemployed is still high, almost 200,000 persons according to the Employment Service Statistics of the Min- istry of Economic Affairs and Employment, which will contribute to slow the reduction in the unemployment rate in the next few years. In recent years, obstacles to an improvement in the employment situation have included various regional and occupational mismatch problems between unemployed job seek- ers and job vacancies. A decrease in these mismatch problems can finally be seen due to stronger economic growth as, according to the Employment Service Statistics of the Minis- try of Economic Affairs and Employment, unemployment fell in early 2017 across all Centre for Economic Development, Transport and the Environment (ELY) regions and in all occupa- tional groups. The large number of vacancies has therefore begun to erode unemployment on a broad basis, which means improved matching of labour market needs. It can be as- sumed that the economic rebound will improve the quality of job vacancies as regards pay and terms of employment, attracting unemployed persons to pursue vacancies based fur- ther away from their home. Another indicator of a reduction in mismatch problems is the clear downturn in the duration of job vacancies remaining unfilled in recent months seen in the Employment Service Statistics of the Ministry of Economic Affairs and Employment. The supply of labour will not have a major restricting effect on the increase in employ- ment during the forecast period as the combined total number of the unemployed and the disguised unemployed still remains very large: almost 400,000 persons. Nevertheless, a shortage of labour can already be discerned in certain occupational groups. According to the July 2017 Business Tendency Survey conducted by the Confederation of Finnish Industries (EK), a shortage of skilled labour has become the most common obstacle to in- creased activity in construction. 50 MINISTRY OF FINANCE PUBLICATIONS 32C/2017 1.6 Incomes, costs and prices 1.6.1 Wages and salaries In 2017, earnings development will mainly be determined by the Competitiveness Pact con- cluded by the social partners, as a result of which there were no increases to negotiated wag- es and salaries and public sector holiday bonuses were cut by 30%. The net effect of these factors is expected to lower the negotiated pay by an average of 0.3 %. The forecast for earn- ings development assumes that factors other than increases to negotiated wages