Economic Survey Winter 2023 Economic Prospects PUBLICATIONS OF THE MINISTRY OF FINANCE – 2023:96 Economic Survey Winter 2023 Economics Department Ministry of Finance Helsinki 2023 Publications of the Ministry of Finance 2023:96 Ministry of Finance CC BY-NC-ND 4.0 ISBN pdf: 978-952-367-456-1 ISSN pdf: 1797-9714 Layout: Government Administration Department, Publications Helsinki 2023 Finland Publication distribution Institutional Repository for the Government of Finland Valto julkaisut.valtioneuvosto.fi https://julkaisut.valtioneuvosto.fi/ Description sheet 19 December 2023 Economic Survey, Winter 2023 Publications of the Ministry of Finance 2023:96 Subject Economic Prospects Publisher Ministry of Finance Group Author Economics Department Language English Pages 95 Abstract The increase in prices and interest rates has reduced household consumption and investment. The Finnish economy will contract by 0.5% in 2023. In 2024, slowing inflation and a downward turn in interest rates, combined with moderately strong household income growth, will increase household disposable income. GDP will grow by 0.7% in 2024. Growth in consumption and investments will pick up in 2025 and the economy will grow by 2.0%. In 2026, growth will be 1.6%. Employment will fall slightly in 2024, but will increase from 2025 onwards. In 2026, the employment rate for people aged 15-64 will be close to 75% and the unemployment rate 6.6%. The general government deficit will be 2.5% of GDP in 2023. The deficit will grow to 3.5% in 2024, driven by weak economic and employment growth and slow growth in tax revenue. The general government deficit will improve to around 3.0% of GDP in the following years as the Government’s adjustment measures start to have an effect and the economy and employment begin to grow towards the end of the outlook period. The central government deficit will remain substantial throughout the outlook period, and local government deficits are not expected to improve. Due to the central government and local government deficits as well as slow economic growth, the debt ratio will continue to increase, and it is not on track to decline given the foreseeable economic development. Keywords economic prospects, public finance, economic development. ISBN PDF 978-952-367-456-1 ISSN PDF 1797-9714 URN address https://urn.fi/URN:ISBN:978-952-367-456-1 https://urn.fi/URN:ISBN:978-952-367-214-7 Kuvailulehti 19.12.2023 Taloudellinen katsaus, talvi 2023 Valtiovarainministeriön julkaisuja 2023:96 Teema Talousnäkymät Julkaisija Valtiovarainministeriö Yhteisötekijä Kansantalousosasto Kieli englanti Sivumäärä 95 Tiivistelmä Hintojen ja korkojen nousu on vähentänyt investointeja ja kotitalouksien kulutusta. Suomen talous supistuu 0,5 prosenttia vuonna 2023. Vuonna 2024 inflaation hidastuminen ja korkojen kääntyminen laskuun yhdessä kotitalouksien kohtuullisen hyvän tulokehityksen kanssa lisäävät kotitalouksien käytettävissä olevia tuloja. BKT kasvaa 0,7 prosenttia vuonna 2024. Kulutuksen ja investointien kasvu voimistuu vuonna 2025 ja talous kasvaa 2,0 prosenttia. Vuonna 2026 kasvu on 1,6 prosenttia. Työllisyys laskee hieman vuonna 2024, mutta kasvaa vuodesta 2025 lähtien. Vuonna 2026 15–64-vuotiaiden työllisyysaste on lähes 75 prosenttia ja työttömyysaste 6,6 prosenttia. Julkisyhteisöjen alijäämä on 2,5 prosenttia suhteessa BKT:hen vuonna 2023. Alijäämä kasvaa vuonna 2024 3,5 prosenttiin heikon talous- ja työllisyyskasvun sekä hitaan verotulojen kasvun vetämänä. Julkisyhteisöjen alijäämä kohenee jatkovuosina noin 3,0 prosenttiin suhteessa BKT:sta, kun hallituksen sopeutustoimet alkavat purra sekä talous ja työllisyys alkavat kasvaa ennustejakson lopulla. Valtionhallinnon alijäämä pysyy mittavana läpi koko ennustejakson, eikä paikallishallinnossakaan ole odotettavissa alijäämien oikenemista. Valtion ja paikallishallinnon alijäämien sekä hitaan talouskasvun seurauksena velkasuhde jatkaa kasvuaan, eikä se ole kääntymässä laskuun näköpiirissä olevalla talouden kehityksellä. Asiasanat talousnäkymät, julkinen talous, taloudellinen kehitys. ISBN PDF 978-952-367-456-1 ISSN PDF 1797-9714 Julkaisun osoite https://urn.fi/URN:ISBN:978-952-367-456-1 https://urn.fi/URN:ISBN:978-952-367-214-7 Presentationsblad 19.12.2023 Ekonomisk översikt, vinter 2023 Finansministeriets publikationer 2023:96 Tema Ekonomiska utsikter Utgivare Finansministeriet Utarbetad av Ekonomiska avdelningen Språk engelska Sidantal 95 Referat De stigande priserna och räntorna har minskat investeringarna och hushållens konsumtion. Finlands ekonomi krymper med 0,5 procent 2023. År 2024 kommer den avtagande inflationen och det faktum att räntorna börjar sjunka i kombination med hushållens relativt goda inkomstutveckling att öka hushållens disponibla inkomster. Bruttonationalprodukten (BNP) ökar med 0,7 procent 2024. År 2025 stärks konsumtions- och investeringstillväxten och ekonomin växer med 2,0 procent. År 2026 uppgår tillväxten till 1,6 procent. Sysselsättningen minskar något 2024, men ökar igen från och med 2025. År 2026 var sysselsättningsgraden för 15–64-åringar inemot 75 procent och arbetslöshetsgraden 6,6 procent. År 2023 är underskottet i den offentliga sektorns finanser 2,5 procent i förhållande till BNP. Underskottet ökar 2024 till 3,5 procent till följd av den svaga ekonomiska tillväxten och sysselsättningstillväxten samt den långsamma ökningen av skatteinkomster. Underskott i den offentliga sektorns finanser stiger under de följande åren till cirka 3,0 procent i förhållande till BNP i och med att regeringens anpassningsåtgärder börjar ge effekt och ekonomin och sysselsättningen börjar öka i slutet av prognosperioden. Underskottet i statsförvaltningen blir fortsatt kraftigt under hela prognosperioden, och inte heller inom lokalförvaltningen förväntas underskotten börja minska. Till följd av statens och lokalförvaltningens underskott och den långsamma ekonomiska tillväxten fortsätter skuldkvoten att öka, och det finns inga utsikter att den skulle börja minska med den ekonomiska utveckling som är inom synhåll. Nyckelord ekonomiska utsikter, offentlig ekonomi, ekonomisk utveckling. ISBN PDF 978-952-367-456-1 ISSN PDF 1797-9714 URN-adress https://urn.fi/URN:ISBN:978-952-367-456-1 https://urn.fi/URN:ISBN:978-952-367-214-7 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 MEAE Ministry of Economic Affairs and Employment MoF Ministry of Finance MSAH Ministry of Social Affairs and Health Each of the figures presented in the tables has been rounded separately. 7 Publications of the Ministry of Finance 2023:96 E CO N O M I C S U R V E Y W I N T E R 2023 This Economic Survey offers projections of economic developments in 2023–2026. In addition to short-term prospects, it includes a medium-term economic outlook extending to 2028. The forecast and trend projections in the survey are prepared independently by the Ministry of Finance 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 budgetary frameworks (869/2012). The forecasts are based on quarterly national accounts data published by Statistics Finland in November 2023 and on other public statistical sources available by 13 December 2023. Helsinki December 2023 Ministry of Finance Economics Department Mikko Spolander Director General Janne Huovari Jenni Pääkkönen Senior Financial Advisor Senior Financial Advisor Head of Macro Forecasting Head of Public Finance Contents ECONOMIC SURVEY Winter 2023 7 Preface 10 Summary 13 1 Economic outlook.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 1.1 International economy.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 1.1.1 Global economy.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 1.1.2 World trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 1.1.3 Risks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 1.2 Foreign trade. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 1.2.1 Exports and imports.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 1.2.2 Prices and current account.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 1.3 Domestic demand.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 1.3.1 Private consumption.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 1.3.2 Public consumption.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 1.3.3 Investments.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 1.4 Domestic production. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 1.4.1 Total output.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 1.4.2 Secondary production.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 1.4.3 Services.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 1.5 Labour force. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 1.6 Income, costs and prices.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 1.6.1 Wages and salaries.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 1.6.2 Consumer prices.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 1.7 Medium-term outlook 2027 – 2028.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 2 General government finances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 2.1 General government.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 2.2 Central government.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 2.3 Municipal administration.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 2.4 Wellbeing services counties.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 2.5 Social security funds.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 2.5.1 Employment pension schemes.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 2.5.2 Other social security funds.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 Appendix 1.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 Boxes: Outlook and challenges for the Indian economy.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Emissions on a downward path due to technology.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Development of the tax ratio.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 10 Publications of the Ministry of Finance 2023:96 Preface The Finnish economy has been expected to drift into a recession towards the end of this year, and expectations have been fulfilled. Finland is in recession. The recession will be deeper and longer than expected. As a result, the picture for 2024 has also deteriorated. Early 2023 turned out to be weaker than forecast. Indeed, demand for services no longer supported private consumption in the second quarter of the year. Investments also decreased more than expected. A turn for the worse was expected to take place in the third quarter of the year. This indeed happened, but according to preliminary data, the third quarter was even worse than expected. Although wages are rising and inflation has slowed rapidly, interest rates are now biting into consumption and investment with full force, employment is weakening and households’ financial gloom has started to intensify once again. There will be a sticky start to 2024. However, growing purchasing power and falling interest rates will gradually turn the economy into a new upswing during 2024. When the brakes restraining growth are released, demand and output will recover and employment will start to grow. At the same time, work-incentivising reforms will increase labour supply. We estimate that in 2025 and 2026, demand and output will close quite quickly the gap that had opened. Even if the economic conditions turn more favourable next year, the Finnish economy will enter the coming years in less than good shape. The COVID-19 pandemic, Russia’s invasion of Ukraine, rising prices, costs and interest rates as well as the recession have blocked the circulation of the economy in a situation where the Finnish economy was already in need of an angioplasty. 11 Publications of the Ministry of Finance 2023:96 The outlook for general government finances has been bleak for a long time, and even now there is no light to be seen. Population ageing is putting the brakes on the economy’s revenue generation and increasing the need for services. At the same time, the unit costs of services are rising. The restructuring of the economy is eroding taxation. More money will inevitably be sunk into interest on public debt as the central government, the wellbeing services counties and the municipalities will remain in deficit and debt will continue to grow. The imminent turn towards lower interest rates will likely be sufficient only to slow down growth in debt servicing expenditure. The general government deficit will narrow more slowly as the turnaround to a new upswing is delayed. In addition, even more problems threaten to accumulate in central government finances. As estimates of the 2023 deficit in the wellbeing services counties have deteriorated, and completed tax data have revised the transfer calculations for the health and social services reform, the wellbeing services counties and the municipalities are demanding more money from central government to cover their operating expenses. The savings and work-incentivising reforms outlined in the Government Programme will reduce the general government deficit, but even implementation of the programme in full and on time will not be enough to reduce the deficit to the target of 1% of GDP in 2027 or to reverse the increase in public debt relative to GDP by 2027. Strengthening the revenue generation capacity of the economy would be the best way to strengthen general government finances in the desired way. The ongoing technological revolution, the energy transition and the associated reindustrialisation of the economy are creating concrete opportunities that, through their utilisation, new production and new jobs can be created in Finland. The change in the production structure requires vast investment and will succeed when the ability of Finnish companies and Finnish society to compete for investments is in good shape. The public authorities build the investment environment through their own decisions. 12 Publications of the Ministry of Finance 2023:96 Without underestimating the opportunities related to technological change, energy transition and re-industrialisation, they are hardly sufficient to correct the structural imbalance in general government funding – at least not during one parliamentary term. Economic restructuring takes time. The employment and productivity leap needed to strengthen revenue-generation capacity must be so large and implemented so rapidly that further plans to strengthen general government finances as desired cannot be based on them alone. In addition to measures to support growth in employment and productivity, achieving the targets would require further savings as well as measures to maintain total tax revenue. These are currently being screened by a working group established by the Ministry of Finance to identify additional measures to strengthen general government finances. 13 Publications of the Ministry of Finance 2023:96 Summary Economic outlook for the period 2023 – 2026 At the beginning of the year, the Finnish economy was weaker than previous estimates, and in the third quarter output clearly decreased. The economic situation at end of the year remains weak, and Finland’s GDP will contract by 0.5% this year. Construction is in the weakest situation, but good growth in services has also stalled. The economy is expected to return to growth, however. Slowing inflation and a fall in interest rates, combined with moderately strong household income growth, will increase the purchasing power of households. Private consumption is set to return to subdued growth next year, and growth will strengthen in 2025. The fall in interest rates will also support investment, which will be underpinned by the energy transition and defence investment. In 2024, GDP will grow by 0.7%, and growth will strengthen in 2025 and 2026 to 2.0% and 1.6% respectively. -4 -3 -2 -1 0 1 2 3 4 5 2010 2015 2020 2025 Net exports Investment Private consumption Public consumption Change in inventories GDP Contribution to GDP growth in Finland percentage points Sources: Statistics Finland, MoF 14 Publications of the Ministry of Finance 2023:96 Boost from growth in world trade Global economic growth has been slowed by inflation and rising interest rates as well as geopolitical tensions. However, the rapid slowdown in inflation and the good employment situation support future growth prospects. Interest rates are also expected to fall faster than previously expected. The mood in the financial markets has been quite optimistic recently. The global economy is expected to grow by 2.7% in 2024 and 3.0% in 2025. Economic growth in the United States has been significantly faster than in the euro area in the recovery from the coronavirus crisis. In the euro area, economic growth has been held back by high energy prices, while in the United States the economy has been boosted by a stimulative fiscal policy. In the outlook period, however, the growth gap will be narrowed by the recovery of the euro area economy. World trade has contracted this year, despite the growth of the global economy. This contraction is due both to geopolitical tensions and high inventory levels. In the future, however, world trade is expected to recover and also to provide a boost to Finnish exports. In 2023, exports from Finland will decline, but significantly less than imports. Net exports will therefore make a noticeably positive contribution to the economy this year. In 2024, exports are already expected to grow. Finland's cost-competitiveness is in good shape, and exports will grow as world trade recovers. Slowing inflation and falling interest rates will boost consumption Inflation has slowed rapidly during 2023. Inflation will be 2% on average in 2024, and will fall below 2% in 2025 and 2026. The main reason for the slowdown in inflation has been the fall in energy prices but, from the latter part of 2023, the slowdown has been broad-based. Price pressures remain highest in services but, even there, price increases have clearly slowed. As inflation slows, interest rates will also start to fall. Expectations for a fall in key interest rates next year have been brought forward and market interest rates have already decreased. The biggest positive impact from lower interest rates will be seen in 2025. 15 Publications of the Ministry of Finance 2023:96 Real earnings will take an upturn in 2024, but the growth of household purchasing power will still remain subdued, as the deterioration of employment and social benefit cuts will curb growth of household disposable income. From 2025 onwards, household purchasing power and consumption growth will accelerate. Residential construction decreasing and energy transition boosting investment The construction of new housing is in sharp decline and this will continue in 2024. However, there is demand for housing due to immigration and domestic internal migration. A downturn in interest rates will stimulate the housing market and new production will increase from 2025 onwards. Non-residential construction is also in decline, but will recover faster than residential construction. Despite the challenging short-term outlook, expectations for production investments are positive, and companies have a strong need to invest in the next few years. In addition to climate change and the energy transition, ever-advancing digitalisation and the use of artificial intelligence will increase investment. Indeed, there are a record number of plans for productive investments. The volume of public investment will increase in the next few years, even though the tight situation in general government finances will reduce investment opportunities. Central government investment will be sustained by the strengthening of cyber security, border control and national defence as well as RRF investment funding. In local government, investment pressure will continue due to population migration and the repair backlog of the building stock. Employment will fall, but remain high With the decline in production, the demand for labour will decrease and the number of employed people start to fall. In 2024, employment will decline temporarily and the employment rate will fall. However, companies will respond to weak demand for labour mainly by adopting temporary layoffs and other labour flexibilities rather than redundancies. Indeed, the number of hours worked will decline more than employment. The contraction of construction activity, in particular, will increase unemployment in 2023 and 2024. The unemployment rate will rise to 7.5% in 2024. 16 Publications of the Ministry of Finance 2023:96 In 2025 and 2026, economic growth will be quite strong, with employment increasing by nearly 1% per year. Employment growth will be broad-based and underpinned by the Government’s measures to increase labour supply, the first of which will take effect in 2024. The employment rate for people aged 15–64 will reach nearly 75% in 2026. Medium-term outlook 2027–2028 Over the medium term, economic output is projected to grow moderately. In 2027, GDP is projected to grow by around 1.3%, and growth of around 1.1% is expected in 2028. The factors supporting GDP growth include the growth of private investment, which is expected to recover due to decreasing market interest rates as well as green transition investments. The Finnish economy is projected to be still below potential output in 2027. Potential output growth will be around 1% per year. Weak economic development will keep general government deficits deep The general government deficit will be 2.5% of GDP in 2023. The deficit will deepen to 3.5% in 2024, driven by weak economic and employment growth and slow growth in tax revenue. The general government deficit will improve to around 3.0% of GDP in the following years as the Government’s adjustment measures start to take effect and the economy and employment begin to grow towards the end of the outlook period. Despite all this, the general government deficit will be deep. The central government deficit will remain substantial throughout the outlook period. Tax revenue will grow moderately and, despite the adjustment measures, expenditure growth will remain brisk. The rapid rise in prices and wages, the large investments made in preparedness and security, and the increasing debt servicing costs will keep central government expenditure growing throughout the outlook period. The wellbeing services counties are planning adjustment measures, which are taken into account in the forecast to an amount of EUR 0.3 billion for 2024. Nevertheless, the deficit for 2024 is projected to remain at the 2023 level of around 0.5% of GDP. The deficit, moreover, is not on track to be corrected during the outlook period. In addition, local government is projected to be in deficit throughout the outlook 17 Publications of the Ministry of Finance 2023:96 period. On the other hand, employment pension schemes will remain significantly in surplus, and the other social security funds will remain close to balance during the outlook period. As a result of the central government and local government deficits as well as slow economic growth, the debt ratio will continue to increase, and it is not on track to decline given the foreseeable economic development. In 2023, the debt ratio will be just over 75% of GDP and in 2026 it will be over 83%. Risks The decline of residential construction may be larger and last longer than projected. If construction and real estate companies were to run into financial difficulties on a large scale, the functioning of whole economy would be adversely affected. A slower-than-projected fall in interest rates would deepen the recession in the construction industry and weaken investment prospects in general compared with the forecast. The outlook for the global economy is also rather bleak. Recent years have seen major crises, to which the response has been exceptional policy measures. The economy has not yet adjusted to all these changes and there is much uncertainty about the ultimate impacts. In addition, negative risks related to geopolitics and the environment may, if realised, increase uncertainty and disrupt the economy. Furthermore, the economy is undergoing an energy transition and rapid technological development, which are likely to have major impacts. Positive surprises would probably be reflected first in investments. Household consumption may also surprise positively if the economy otherwise develops in line with the forecast. In the forecast, the saving rate still remains reasonably high, so the development of household income would provide an opportunity for greater growth in private consumption. A faster-than-projected fall in interest rates would boost consumption more than forecast and accelerate the recovery in the housing market. 18 Publications of the Ministry of Finance 2023:96 The real economy risks described above will inevitably be reflected in general government finances. Weaker (stronger) than forecast employment and economic growth will weaken (strengthen) general government finances. If, on the other hand, interest rates fall faster than projected, the central government deficit and the general government debt ratio will develop more moderately. The impact on the general government deficit will be limited, however, because the general government entities also has significant property income. A labour shortage, on the other hand, may have unpredictable effects on both the municipal sector and the wellbeing services counties. In addition, there is uncertainty associated with wellbeing services counties’ savings measures, as it is possible that the wellbeing services counties will take more measures than has been assumed in this forecast. The uncertainty of the economic growth forecast can be illustrated by confidence intervals around the forecast based on past forecast errors. Confidence intervals describe the range within which actual figures have fallen in previous forecasts with an 80% probability. However, these confidence intervals only reflect the normal uncertainty involved in forecasts, and they do not take into account the special risk factors present in each instance of forecasting. -5 -4 -3 -2 -1 0 1 2 3 4 5 -5 -4 -3 -2 -1 0 1 2 3 4 5 2010 2012 2014 2016 2018 2020 2022 2024 Gross domestic product, growth % Source: Statistics Finland, MoF 19 Publications of the Ministry of Finance 2023:96 Table 1.  Key forecast figures 2022 2021 2022 2023** 2024** 2025** 2026** EUR bn change in volume, % GDP at market prices 269 3.2 1.6 -0.5 0.7 2.0 1.6 Imports 128 6.0 8.5 -6.1 2.4 4.0 3.0 Total supply 397 3.9 3.5 -2.3 1.2 2.6 2.0 Exports 122 5.8 3.7 -1.3 2.0 3.8 3.0 Consumption 203 3.6 1.4 0.4 0.5 1.4 1.2 private 138 3.5 1.7 -0.8 0.7 2.0 1.7 public 65 3.9 0.8 3.0 0.0 0.1 0.3 Investment 65 1.0 3.2 -5.6 2.2 4.6 3.1 private 54 4.3 4.0 -5.4 0.9 2.9 4.2 public 11 -11.8 -0.2 -6.6 9.0 12.5 -1.3 Total demand 395 3.7 3.3 -2.3 1.2 2.6 2.1 domestic demand 274 3.0 3.2 -2.7 0.9 2.1 1.7 20 Publications of the Ministry of Finance 2023:96 Table 2.  Other key forecast figures 2021 2022 2023** 2024** 2025** 2026** GDP, EUR bn 251 269 282 289 301 313 Services, change in volume, % 4.3 3.2 0.9 0.7 1.5 0.9 Industry, change in volume, % 2.0 -1.3 0.2 1.8 2.8 1.9 Labour productivity, change, % 1.4 0.0 0.0 1.7 1.3 0.7 Employed labour force, change, % 2.4 2.5 0.1 -0.2 0.8 0.9 Employment rate (15–64 yrs), % 72.3 73.8 73.6 73.5 74.1 74.8 Employment rate (20–64 yrs), % 76.6 78.1 77.9 77.9 78.7 79.5 Unemployment rate, % 7.7 6.8 7.2 7.5 7.1 6.6 Consumer price index, change, % 2.2 7.1 6.3 2.0 1.4 1.7 Index of wage and salary earnings, change, % 2.4 2.4 4.2 3.5 3.3 3.1 Current account, EUR bn 1.0 -6.8 -2.2 -2.3 -2.7 -2.8 Current account, relative to GDP, % 0.4 -2.5 -0.8 -0.8 -0.9 -0.9 Short-term interest rates (3-month Euribor), % -0.5 0.3 3.4 3.4 2.4 2.1 Long-term interest rates (10-year govt. bonds), % -0.1 1.7 3.1 3.2 3.1 3.1 General government expenditure, relative to GDP, % 55.7 53.3 54.5 54.9 54.7 53.9 Tax ratio, relative to GDP, % 43.1 42.9 41.5 40.5 40.5 40.3 General government net lending, relative to GDP, % -2.8 -0.8 -2.5 -3.5 -3.4 -3.0 Central government net lending, relative to GDP, % -3.3 -1.6 -3.2 -3.7 -4.2 -3.8 General government gross debt, relative to GDP, % 72.5 73.3 75.5 79.1 81.4 83.3 21 Publications of the Ministry of Finance 2023:96 1 Economic outlook 1.1 International economy 1.1.1 Global economy The outlook for the global economy is uncertain at the end of 2023. The outlook is weakened by the transmission of high interest rates to private consumption and the associated weak consumer confidence as well as the modest development of world trade. In addition, geopolitical tensions remain high due to the continuation of Russia’s war of aggression and the conflict in the Middle East. On the other hand, the rapid slowdown in inflation and the continued high level of employment in many economies support growth prospects. The global economy will grow by 2.7% in 2024, accelerating to 3% in 2025. Economic growth in the euro area has stalled at the end of 2023. Total output contracted in the third quarter of the year. The outlook for German industry, in particular, is difficult. Leading indicators for both industry and services in the euro area remain on a low level. Inflation has slowed rapidly, resulting in expectations of an earlier easing of monetary policy. Construction is in deep crisis in a number of countries. Fiscal policy is expected to be mildly tightening in the next few years. Economic growth will recover from 0.5% in 2023 to 0.9% in 2024 as real incomes rise. Growth will accelerate further to 1.8% in 2025 as the global economy recovers. The Swedish economy is in recession at the end of 2023, and the situation is difficult due to the crisis in the construction industry, among other things. Total output will contract by 0.5% in 2023, but growth will recover to 0.8% in 2024 and to 1.8% in 2025. Despite the uncertainties in the global economy, the economic outlook for the United States is quite favourable. Growth was strong in the third quarter of 2023, largely driven by private consumption. It is generally expected that the economy will experience a soft landing, with economic growth slowing in 2024, but will not go into recession despite tight monetary policy. In addition, inflation has slowed rapidly, which will support real incomes. Leading indicators have remained 22 Publications of the Ministry of Finance 2023:96 relatively strong. Fiscal policy is expected to be mildly tightening in the next few years. Economic growth will slow from 2.3% in 2023 to 1.6% in 2024, before recovering to 2.2% in 2025. The economic outlook for China is challenging. The economic model based on public investments appears to have reached the end of the road, and the real estate sector is in deep crisis. Exports have been struggling in 2023, although they have picked up slightly towards the end of the year. At the same time, retail trade has recovered to some extent, but the outlook for private consumption remains uncertain. Inflation has slowed rapidly during 2023, and turned negative for a couple of months during the second half of the year due to exceptional factors. Economic growth will slow to 4.3% in 2024 and further to 4.2% in 2025. The relatively favourable development of the Japanese economy in 2023 was halted by a contraction in total output in the third quarter. The near-term outlook is fairly positive, however, supported by exports. The UK economy has improved slightly as inflation slows, but the outlook for industry remains difficult. In the short term, economic growth in Russia appears to be supported by war-related industry. Isolation from the Western global economy is darkening the longer-term outlook. India’s economic outlook is favourable as consumer confidence and the outlook for industry remain strong. -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 2005 2010 2015 2020 2025 China Euro area United States Gross domestic product Sources: Statistical authorities, MoF change in volume, % 23 Publications of the Ministry of Finance 2023:96 The mood in international financial markets has been quite optimistic recently. Market interest rates have taken a downward turn, as expectations grow of an earlier easing of monetary policy. Long-term interest rates have declined sharply, although they are also influenced by other factors. European stock indices have been rising modestly in the latter part of the year. The outlook for banks, in particular, is positive, whereas in spring 2023 there were still fears of an exacerbation of banks’ problems in the United States and to some extent in Europe. Government bond spreads remained quite stable, indicating the situation to be calm. Potential risks include inflation accelerating once again above the central banks’ target levels as well as unexpected market disturbances that could lead to chain reactions and broader impacts. Geopolitical turns of events, in particular, could trigger such reactions. The price of crude oil has been on a downward path despite the production cuts announced by the OPEC+ countries. Oil production in the United States is at peak levels. The price of crude oil will fall during the outlook period. After a slight increase in the second half of 2023, the price of natural gas has started to fall again. Futures point to a downward trend in prices during 2024. Electricity prices are expected to rise slightly during the winter and heating season, but to fall again in spring 2024. Prices of industrial raw materials will continue to fall, although demand for some metals will remain strong as the battery industry grows. 25 45 65 85 105 125 145 165 185 0 20 40 60 80 100 120 140 160 180 200 220 240 2015 2016 2017 2018 2019 2020 2021 2022 2023 USD/barrel€/MWh Natural gas, near futures, euro area (left scale) Crude oil (Brent, global spot price, right scale) Sources: Intercontinental Exchange (ICE), Macrobond Raw material prices 24 Publications of the Ministry of Finance 2023:96 1.1.2 World trade World trade in goods has been very modest during 2023. In addition to the subdued general economic outlook, this seems to have been influenced, at least to some extent, by the restructuring of world trade. Many countries have deepened their trade relations with countries located nearby or perceived as friendly. The positive development of China’s exports in October, however, points to a recovery in goods trade in the latter part of 2023. This outlook is also supported by strong growth in container traffic and rising freight rates towards the end of the year. After contracting by 1.9% in 2023, world trade will recover to 4.4% growth, largely due to developing countries and the United States. Growth will level off at 4.1% in 2025, also as the European economic outlook improves and foreign trade recovers. -24 -20 -16 -12 -8 -4 0 4 8 12 16 2005 2010 2015 2020 2025 World trade Finnish exports World trade Sources: CPB Netherlands Bureau for Economic Policy Analysis, Statistics Finland, MoF change in volume, % 25 Publications of the Ministry of Finance 2023:96 1.1.3 Risks Risks associated with the outlook for the global economy are rather strongly skewed to the downside. The conflict in the Middle East that broke out in October 2023 may affect sensitive energy markets, although fears of an escalation of the crisis have gradually subsided. The prolongation of Russia’s war of aggression is maintaining geopolitical tensions. A renewed acceleration of inflation would lead to a continuation of tight monetary policy, weakening growth prospects globally. Further geo-economic fragmentation would deepen dividing lines in the global economy and world trade. An escalation of China’s economic problems could weaken the outlook for the entire global economy. The impact of climate change may cause even greater adverse economic effects than expected. A faster-than-expected slowdown in inflation would increase real incomes and broadly strengthen consumption demand. This outlook would be supported by an employment situation advancing more strongly than expected in many economies. An easing of geopolitical tensions would boost confidence worldwide. 26 Publications of the Ministry of Finance 2023:96 Table 3.  Gross domestic product ¹ The United Kingdom withdrew from the European Union on January 1st 2021 ² Fiscal year (April 1st to March 31st) Sources: Statistical authorities, MoF 2021 2022 2023** 2024** 2025** 2026** change in volume, % World (PPP) 6.7 3.3 2.9 2.7 3.0 2.8 Euro area 5.9 3.4 0.5 0.9 1.8 1.4 EU 5.7 3.2 0.5 0.9 1.8 1.4 Germany 3.1 1.9 -0.3 0.9 1.5 1.0 France 6.4 2.5 0.7 1.7 1.8 1.6 Sweden 5.9 2.9 -0.5 0.8 1.8 1.7 United Kingdom¹ 8.7 4.3 0.3 0.8 1.3 1.2 United States 5.8 1.9 2.3 1.6 2.2 2.0 Japan 2.3 0.9 1.7 1.4 0.7 0.4 China 8.4 3.0 4.5 4.3 4.2 4.0 India² 9.1 7.2 6.3 6.5 6.3 6.0 Russia 5.6 -2.1 1.5 0.5 1.0 0.8 Table 4.  Background assumptions ¹ Ratio of export growth to world trade growth Sources: CPB, Macrobond, HWWI, Statistics Finland, MoF 2021 2022 2023** 2024** 2025** 2026** World trade growth, % 10.9 3.7 -1.9 4.4 4.1 3.3 USD/EUR 1.18 1.05 1.08 1.07 1.07 1.07 Industrial raw material price index, EA, € (2015=100) 169.0 185.1 154.8 150.0 147.0 144.0 Crude oil (Brent), $/barrel 70.7 98.7 82.3 79.6 76.3 73.5 3-month Euribor, % -0.5 0.3 3.4 3.4 2.4 2.1 Government bonds (10-year), % -0.1 1.7 3.1 3.2 3.1 3.1 Export market share (2010=100)¹ 92.5 92.5 93.0 90.9 90.7 90.4 Import prices, % 9.7 19.4 -3.7 -1.6 1.7 1.7 27 Publications of the Ministry of Finance 2023:96 Outlook and challenges for the Indian economy India’s significance in the global economy is growing. According to UN estimates, the country’s population overtook China’s in April 2023 and accounts for one sixth of the world’s population. Economic growth has been the fastest among the G20 countries in recent years, at around 6-7% per year, and it is expected to maintain this pace. According to a recent estimate, India’s contribution to world economic growth is already approaching that of China, as measured by purchasing power parity. India is particularly known for exports of IT services. Indeed, services exports have grown rapidly in recent years (see figure). There are many IT experts in the country who speak fluent English. In addition, labour is inexpensive. IT services are mainly exports of insurance sector, software and business services as well as financial services. Software activities account for around half of this. The main software and IT export destinations are the United States (62%), the UK (17%) and the EU countries (11%). India’s significance in the global economy may be considered, indeed, to be related to this growth in IT services exports. In contrast to growth in world trade in goods, growth in trade in services remains strong. Exports are expected to grow, in particular, to other than those industrialised countries mentioned above. As digitalisation progresses in emerging and developing economies, IT services may be expected to grow, and in this India has an advantageous position. India has a young population and the country may benefit from the demographic dividend, i.e. the transition into the labour market of age cohorts 0 50 100 150 200 250 300 350 400 450 500 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Bi lli on India, merchandise and services exports 2012 - 2022 value of merchandise exports value of services exports Sources: MoC&I, RBI, Macrobond, VM 28 Publications of the Ministry of Finance 2023:96 that are coming of age and the resultant rapid economic growth. This is a phenomenon that will happen in the next few years, because in India, as in many other economies, the youngest age cohorts are already shrinking. The challenges facing India are enormous. A key structural challenge is the caste system, which limits, in particular, the professional and social mobility of non-caste people, and thereby opportunities to make life choices. In economic terms, the caste system may be seen as a massive underutilisation of human capital. Caste-based discrimination was officially prohibited in the Indian Constitution in 1950, but the caste system still exists, particularly in rural areas. e challenges facing India are enormous. A key structural challenge is the caste system, which limits, in particular, the professional and social mobility of non- caste people, and thereby opportunities to make life choices. In economic terms, the caste system may be seen as a massive underutilisation of human capital. Caste-based discrimination was officially prohibited in the Indian Constitution in 1950, but the caste system still exists, particularly in rural areas. Widespread poverty is a key societal challenge. According to a UN estimate (2016), India has 80 million people living in absolute poverty (6.7% of the population, definition: income level below USD 1.25 per day). In addition, the World Bank estimated in 2019 that 84% of the population live on less than USD 15000 10000 5000 0 5000 10000 15000 1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96 100+ India's population by age and sex, 2021 thousand persons women menSource: UN DESA, World Population Prospects 2022. 29 Publications of the Ministry of Finance 2023:96 6.85 per day. On the other hand, according to a UN estimate, the number of people in extreme poverty decreased by 271 million between 2005–2006 and 2015–2016. Poverty is linked to large-scale informal work. According to estimates, 85–90% of India’s labour force works in the informal labour market. The overwhelming majority of these people are self-employed or work occasionally. Others work for an official employer, i.e. belong to so-called organised informal labour. Informal work is a key factor in maintaining poverty. Workers are out of the reach of services and social networks. India’s middle class is large and it is projected to continue to grow over the next decade. This group constitutes a considerable societal force that may be expected to have consumption potential even on a global economic scale. Sources: https://news.un.org/en/story/2023/04/1135967 https://www.ft.com/content/85c4bd8d-84a2-4008-b86a-946c14706b2e https://www.indiantradeportal.in/vs.jsp?lang=0&id=0,31,24100,29404 https://en.wikipedia.org/wiki/Poverty_in_India Ramana Murthy, S V, Measuring Informal Economy in India _ Indian Experience, Session II: Traditional Estimation Practices: Determining the Level and Growth of the Informal Economy, www.imf.org 1.2 Foreign trade 1.2.1 Exports and imports 2023 has been marked by an economic slowdown both in Finland and internationally. In Finland, both export and import volumes have fallen, as have foreign trade prices, resulting in a rather sharp decline in the value of exports and imports. From the standpoint of growth of the Finnish economy, however, foreign trade has supported GDP growth, as net exports have been positive. This is due to the fact that imports have declined more sharply than exports in 2023. In the previous year, net exports had the opposite effect; despite economic growth, net exports weakened GDP. https://news.un.org/en/story/2023/04/1135967 https://www.ft.com/content/85c4bd8d-84a2-4008-b86a-946c14706b2e https://www.indiantradeportal.in/vs.jsp?lang=0&id=0,31,24100,29404 https://en.wikipedia.org/wiki/Poverty_in_India 30 Publications of the Ministry of Finance 2023:96 In 2023, imports of goods have fallen sharply both in Finland and across Europe. The previous year’s growth was quite strong, partly because companies prepared for the uncertainty caused by Russia’s war of aggression by increasing their inventories. The strong recovery in tourism was also reflected in Finland’s services imports during 2022. In 2023, companies are making use of inventories accumulated in the previous year, and the slowdown in the economy will further reduce the need for goods imports. Imports are forecast to decrease by 6.1% in 2023. In 2024, the outlook for imports will improve, but the recovery will be delayed until the second half of the year. Growing exports will also require an increase in production inputs imported from abroad, and a rise in real incomes will also increase demand for both imported goods and services. Imports are projected grow by 2.4% in 2024. In 2025, imports will grow quickly, as the amount of domestic investments increases. For the end of the outlook period, up to 2026, defence procurements have been made, which will maintain the level of imports. Imports are projected to grow by 4% in 2025 and 3% in 2026. Finland’s goods exports declined sharply in the third quarter of 2023. Weakness in Finland’s key European export markets has been more clearly evident towards the end of the year, as the order book, which still supported exports at the beginning of the year, has diminished. In the last quarter, however, a large ship delivery will boost exports. Growth in services exports was also slow in the early part of the year. Exports are expected to contract by 1.3% in 2023. Domestically, economic activity has declined and order books have fallen in several sectors, leading to expectations of slow development in early 2024. Sector-specific differences are large, however, and in some sectors the outlook for foreign trade has remained good or is improving. Exports will turn to growth in 2024, but faster growth will be delayed until the end of the year. Towards the end of 2024, the trend in exports will be reversed by recovering world trade, and exports are projected to increase by 2% percent in 2024. In addition, Finland’s cost competitiveness will remain favourable over the outlook period. From 2025 onwards, the outlook for exports is good, as the effects of the recovery of the global economy are reflected in strong growth of Finnish exports. Exports are projected grow by 3.8% in 2025 and 3% in 2026. 31 Publications of the Ministry of Finance 2023:96 96 100 104 108 112 116 120 124 128 132 136 140 144 148 2010 2015 2020 2025 Finland Sweden¹ Germany¹ Euro area¹ Unit labour costs Sources: European Commission, Statistics Finland, MoF 2010 = 100, nominal ¹ European Commission forecast Table 5.  Foreign trade 2021 2022 2023** 2024** 2025** 2026** change in volume, % Exports of goods and services 5.8 3.7 -1.3 2.0 3.8 3.0 Imports of goods and services 6.0 8.5 -6.1 2.4 4.0 3.0 change in price, % Exports of goods and services 9.8 18.6 -4.3 -1.3 1.6 1.7 Imports of goods and services 9.7 19.4 -3.7 -1.6 1.7 1.7 32 Publications of the Ministry of Finance 2023:96 1.2.2 Prices and current account Prices in foreign trade of goods rose by an exceptional amount in 2022 after export and import prices of energy and raw materials became significantly more expensive. In 2023, prices in foreign trade of goods fell sharply in the early part of the year, but in the third quarter import prices rose slightly, impacted by the rise seen in energy prices. Prices in foreign trade of services have been more stable and prices have continued to rise in 2023. Import prices will fall by 3.7% and export prices by 4.3% in 2023. In 2024, the decline in prices will slow and prices will slowly start to rise but, on an annual basis, import prices will fall by 1.6% and the export prices by 1.3%. Prices in foreign trade of services will continue to rise in 2024. In 2025, prices in foreign trade of both goods and services will rise as the global economy and the Finnish economy grow. In 2023, the trade balance will be in surplus due to a stronger contraction in goods imports than in goods exports. This will also significantly reduce the current account deficit accrued during the previous year. The services account has typically been in deficit, but in 2022 the deficit was higher than in previous years due, among other things, to strong development of tourism imports. From 2023 onwards, this deficit will narrow but will still remain high. In 2024 and towards the end of the outlook period, the balance of goods and services will remain in deficit. Growth in defence spending and an increase in investments towards the end of the outlook period as well as the persistent deficit in the services account will particularly contribute to this. Primary income, such as investment income, will flow to Finland in net terms in excess of the amount paid abroad, resulting in a primary income account surplus. As in previous years, however, more income transfers will be paid abroad in net terms, as a result of which the factor incomes and income transfers account will remain in deficit. The development of these sub-items impacts the current account in such a way that in 2023 the current account deficit will narrow significantly, to EUR 2.2 billion, having been EUR 6.8 billion in deficit in 2022. In the following years, the deficit will widen again slightly to EUR 2.3 billion in 2024, EUR 2.7 billion in 2025 and EUR 2.8 billion in 2026. The current account to GDP ratio is projected to be -0.8% in 2023 and 2024 and -0.9% in 2025 and 2026. 33 Publications of the Ministry of Finance 2023:96 -6 -4 -2 0 2 4 6 2005 2010 2015 2020 2025 Current account Balance of goods and services Sources: Statistics Finland, MoF Current account relative to GDP, % Table 6.  Current account 2021 2022 2023** 2024** 2025** 2026** EUR bn Balance of goods and services 0.1 -6.4 -1.0 -1.2 -1.5 -1.7 Factor incomes and income transfers, net 1.0 -0.3 -1.2 -1.1 -1.1 -1.1 Current account 1.0 -6.8 -2.2 -2.3 -2.7 -2.8 Current account, relative to GDP, % 0.4 -2.5 -0.8 -0.8 -0.9 -0.9 34 Publications of the Ministry of Finance 2023:96 1.3 Domestic demand 1.3.1 Private consumption In the third quarter of 2023, private consumption fell significantly compared with the previous quarter, and was 1.6% lower than in the corresponding period last year. In addition to the very weak development of the third quarter, Statistics Finland revised consumption for the first and secondquarters of the current year sharply downwards. As a result, the moderate growth in private consumption seen in the national accounts data published at the end of August has turned into a steep decline. The fall in real household wages has come to a halt in the autumn as inflation has slowed and the lowest income households have benefited from large increases in index-linked income transfers. Despite the rise in the level of interest rates, household incomes exceeded consumption in the early part of the year, which has returned the net savings ratio to positive. Indeed, the sharp drop in household consumption currently seems to be based above all on an exceptionally high level of caution and a lack of confidence, which in turn may be due to anticipation of a deteriorating employment situation. Part of the growth in household incomes has also apparently been directed to, instead of consumption, extra repayments of housing loans, through which households have tried to reduce their interest expenditure. Total private consumption will decrease by 0.8% in 2023. Low consumption at the end of the year has also negatively impacted the forecast for 2024. Due to a deterioration in the employment situation, growth in real wages will remain at around 1% in 2024. Reductions in the wage tax rate will increase the income of employed persons, but these are partly offset by cuts in social benefits, which will decrease disposable income in low-income households. Private consumption will grow by 0.7% in 2024, but in 2025 private consumption growth will accelerate significantly as interest rates fall and purchasing power increases. 35 Publications of the Ministry of Finance 2023:96 Consumer confidence took a downturn again in October–November. Consumers view Finland’s economic situation as particularly gloomy, but the majority of respondents, however, still expect their own financial situation to improve in the next 12 months. The decline in durables consumption has come to a halt, but consumption will remain at a very low level in 2023, even significantly below the level of 2019. First registrations of cars have remained at a low level. Durables purchasing intentions in the consumer confidence survey were still highly negative in November, which is why growth in durables consumption is not expected to accelerate until later, during 2024. -20 -15 -10 -5 0 5 10 2005 2010 2015 2020 Consumer confidence indicator Own economy now Own economy in 12 months’ time Sources: Statistics Finland Consumer confidence Deviation from average 36 Publications of the Ministry of Finance 2023:96 Due to the high price level and negative carry-over effect, non-durables consumption will decline by around 2% in 2023, despite the market price of electricity and fuel prices having now returned to normal levels. As the prices of food and current electricity contracts level off, non-durables consumption will return to growth in 2024. Services consumption will decline slightly in 2023. Sharp price increases, for example in restaurant services, may have contributed to the slowdown in consumption. In 2024, services consumption will return to growth as purchasing power improves. -6 -4 -2 0 2 4 6 2005 2010 2015 2020 2025 Durable goods Semi-durable goods Non-durable goods Services Tourism expenditure, net Total Household consumption Sources: Statistics Finland, MoF change in volume and contributions to growth, % 37 Publications of the Ministry of Finance 2023:96 The household savings ratio has turned positive in 2023 as disposable income grows faster than consumption. The savings ratio is projected to remain positive also in 2024 as consumer caution curbs consumption growth. The household debt ratio will fall in 2023 and is not expected to rise in 2024. As employment and confidence improve in 2025, the debt ratio will start to rise again slowly. 0 20 40 60 80 100 120 140 -2 0 2 4 6 8 2005 2010 2015 2020 2025 Saving ratio (left scale) Debt ratio (right scale) Household savings and debt Sources: Statistics Finland, MoF % of disposable income 38 Publications of the Ministry of Finance 2023:96 ¹ The contribution of taxes and social security contributions paid as well as the price of private consumption are shown with negative sign, as any increase in these items reduces the real disposable income of households Real disposable income, which measures the combined purchasing power of households, will turn to growth in 2023 as the rise in private consumption prices slows, average earnings increase and social benefits received grow substantially due to indexation. Interest paid by households is growing strongly but, at the same time, interest income from mutual funds and savings accounts is also rising, resulting in only a slight decline in net property income. The growth in household purchasing power is projected to accelerate in 2024 and 2025 as inflation slows further. Taxation of wages will decrease in 2024 due to reduction in unemployment insurance contribution. The increase in private consumption prices is projected to slow to around 2% in 2024 and 1.7% in 2025. -10% -8% -6% -4% -2% 0% 2% 4% 6% 8% 10% 2019 2020 2021 2022 2023 2024 2025 Households' real disposable income change and contributions to growth, % Compensation of employees per work hour Hours worked Social benefits received Current taxes and net social contributions paid Mixed and property income, net Price index of private consumption Households' real disposable income Sources: Statistics Finland, MoF 39 Publications of the Ministry of Finance 2023:96 Table 7.  Consumption ¹ Household debt at end-year in relation to disposable income 2022 2021 2022 2023** 2024** 2025** 2026** share, % change in volume, % Private consumption 100.0 3.5 1.7 -0.8 0.7 2.0 1.7 Households 95.2 3.7 1.8 -0.9 0.7 2.0 1.7 Durables 7.2 3.1 -7.9 -2.7 3.2 4.6 3.8 Semi-durables 7.2 12.0 0.4 -1.4 0.3 2.4 2.0 Non-durable goods 29.0 3.3 -4.2 -2.1 0.6 1.4 1.0 Services 51.7 2.9 5.6 -0.4 0.4 1.9 1.7 Consumption by non-profit institutions 4.1 -2.7 -1.2 1.0 1.0 1.7 1.7 Public consumption 3.9 0.8 3.0 0.0 0.1 0.3 Total 3.6 1.4 0.4 0.5 1.4 1.2 Private consumption deflator 1.8 6.1 5.4 1.9 1.7 1.9 Public consumption deflator 2.8 4.0 5.6 2.8 3.7 3.4 Households´ disposable income 3.5 4.0 5.8 3.8 3.2 3.2 Households´ real disposable income 1.7 -2.0 0.4 1.8 1.4 1.3 % Consumption in relation to GDP (at current prices) 75.7 75.5 76.1 76.3 75.9 75.7 Household savings ratio 3.0 -0.6 0.6 1.7 1.2 0.8 Household debt ratio¹ 132.7 131.5 129.0 129.0 129.6 131.5 40 Publications of the Ministry of Finance 2023:96 1.3.2 Public consumption The growth rate of public consumption has been relatively brisk in the first three quarters of the year, and is expected to accelerate to 3% in 2023. Consumption expenditure will be increased by, among other things, an increase in age-related expenditure, increased costs of the wellbeing services counties and the rise in defence materiel purchases and immigration-related expenses caused by Russian’s war of aggression. Public consumption growth is projected to remain close to zero in 2024–2026. Growth in consumption expenditure will be curbed by, among other things, the Government’s operating expenditure savings, which will continue throughout the parliamentary term. In addition, growth in consumption expenditure will be slowed by permanent adjustment measures of the municipalities and joint municipal authorities as well as the wellbeing services counties, which have been included in the forecast for a total of EUR 400 million from 2024 onwards. The value of public consumption will be increased during the outlook period particularly by rapidly rising prices. Although inflation is already slowing, the impact of already increased inflation will pass into the price of public consumption in the outlook period, partly due to long-term outsourcing agreements. The development of earnings in the public sector will also be accelerated by the remuneration system development programmes agreed upon for the municipal and wellbeing sectors and the wage harmonisation agreement of the wellbeing services counties. 1.3.3 Investments Investments will decline by 5.6% in 2023, but will turn to 2.2% growth in 2024. In 2025, investments are projected to return to a stronger growth rate of 4.6%. The overall ratio of investments to GDP will be 23.1% in 2023. The ratio of private investment to GDP will be 19.2% and public investment 3.9%. In 2023, private investment will decline by 5.4% and public investment by 6.6%. Around half of the investments will be in construction, of which more than half will be residential construction. The decline in investments is mainly due to a decrease in residential construction. For this year, the decrease in residential construction investment will be 9.1% and0.2% next year. The turning point to recovery in construction will be delayed until 2025, even though construction is expected to revive more broadly already in 2024, at least in office construction. 41 Publications of the Ministry of Finance 2023:96 In other investment items, too, volumes will be lower in 2023 than in the previous year. Construction Residential construction investments will decline in 2023 and 2024. Construction is expected to recover in 2025. A decline of 12% is projected for 2023 and 4% for 2024. The picture of a downturn in residential construction has become clearer during the year, but the previous year’s starts have kept construction going. Construction is not expected to remain at a low level once demand returns. Interest rates are expected to start falling, which would boost housing sales, raise house prices and gradually kick-start residential construction. So far, there has not yet been a fall in construction costs that might be assumed from the current market situation. Urbanisation and immigration both sustain the need for housing production. At the end of the outlook period, the number of housing starts will return to a level closer to the long-term average. In 2025 and 2026, residential construction is expected to recover at annual growth rates of 5% and 3% respectively. -15 -10 -5 0 5 10 15 2005 2010 2015 2020 2025 Construction Machinery and equipment R & D Total Investments Sources: Statistics Finland, MoF change in volume and growth impact, % 42 Publications of the Ministry of Finance 2023:96 In 2022, a start was made on the construction of around 37,000 homes. By September this year, construction of around 20,000 homes had started. Although the statistics on housing starts are likely to be revised downwards, the figure can be used to estimate the number of housing starts for the year as a whole, if starts in the latter part of the year are taken into account. Housing completions are still quite high, with a further 31,000 homes being completed this year. The collapse in demand for new housing sales has increased the number of construction companies’ empty new homes. Measured by cubic volume, the number of permits in July–September 2023 has decreased by 39% in comparison with 2022. In residential construction, the decline has been 50% and in non-residential construction 35%. According to Statistics Finland, the number of building permits has varied from region to region. Most building permits are granted in Uusimaa, Central Finland and North Ostrobothnia, and with regard to the regions, more building permits have been granted to six regions than a year earlier. The slow but steady growth in repair construction will dampen the decline in construction investments and, in the long run, replace new construction. Last year’s rise in costs has also adversely affected housing companies’ repair construction projects and, exceptionally, the volume of renovation construction is also projected to decrease. -40 -20 0 20 40 60 80 2005 2010 2015 2020 Residential buildings Other than residential buildings Source: Statistics Finland Construction volume index change yoy, % 43 Publications of the Ministry of Finance 2023:96 Non-residential building investments will also decline in 2023, but not as much as residential buildings. Non-residential building investments include industrial properties, warehouses and commercial properties. Expectations concerning facilities construction remain more positive than for residential construction, and facilities construction is expected to grow significantly already in 2024. Non- residential building investments are expected to decline by 5% this year and to turn to growth of around 5% in 2024. The growth rates in 2025 and 2026 are projected to be 3% and 2% respectively. The decline in civil engineering follows other construction, such as foundations for residential areas. In 2022, a significant increase in civil engineering still came from the construction of wind power plants. The construction of wind power plants is continuing, but those areas of civil engineering that are based on residential construction are being postponed. Civil engineering is projected to decline by 4% in 2023 and subsequently recover to annual growth of 6–7% starting from 2024. In the longer term, growth is expected to be around 4%. Public investments Although the deficit limits the investment opportunities of general government, the investment ratio is projected to grow. Central government investment will be sustained by the strengthening of cyber security, border control and national defence as well as RRF investment funding. In addition, the Act on Research and Development Funding will substantially increase central government investment from 2024 to 2030. The first deliveries of the Finnish Air Force’s multirole fighter aircraft are expected in 2025. This will substantially increase public investment over the previous level. In local government, investment pressure will continue due to population migration and the repair backlog of the building stock. Investment pressures for healthcare and social welfare investment projects are considerable, but increased costs and financing costs will slow down investment. The finances of the municipalities and wellbeing services counties are tighter than expected. Decisions of the new Government may have a significant impact on the development of public investment in the coming years. 44 Publications of the Ministry of Finance 2023:96 Machinery and equipment investments have held up well, even though production has fallen, the utilisation rate is quite low and the rise in interest rates has increased investment costs. Despite the challenging short-term outlook, expectations for production investments are positive. Finland’s cost competitiveness is good, and investment is supported, in particular, by lower energy costs than the rest of Europe. Companies also have large investment needs in the next few years. In addition to climate change and the energy transition, ever-advancing digitalisation and the use of artificial intelligence will increase machinery and equipment investments. According to the Confederation of Finnish Industries’ monitoring of green transition investment plans, there are plans amounting to more than EUR 200 billion in inland. While it is likely that most of these plans will not be realised, the volume of investment plans is at a substantially higher level than usual. If implemented, most of the investments would take place towards the end of the decade, but wind power, battery, hydrogen and biorefinery investments, in particular, are coming and are planned for the next few years. 0 5 10 15 20 25 30 1990 1995 2000 2005 2010 2015 2020 2025 Construction Machinery and equipment R & D Investments relative to GDP, % Sources: Statistics Finland, MoF 45 Publications of the Ministry of Finance 2023:96 R&D investments as well as software and database investments will decline for the second year in a row in 2023 after very rapid growth in 2021. Nevertheless, the growth of R&D investments in the coming years is supported by the parliamentary target of raising Finnish R&D funding to 4% of GDP by 2030. Investments will be increased by the measures related to this target, including the tax deduction for R&D expenditure that entered into effect at the beginning of 2023 as well as financial support and loans under the EU’s Recovery and Resilience Facility. R&D activity is also increased by the development of technology, which is changing production methods in many fields and requires investment in R&D. Table 8.  Fixed investment by type of capital asset ¹ Includes cultivated assets and intellectual property products 2022 2021 2022 2023** 2024** 2025** 2026** share, % change in volume, % Buildings 50.5 -0.5 2.0 -9.1 -0.2 4.1 2.6 Residential buildings 29.6 2.8 1.7 -12.0 -4.0 5.0 3.0 Non-residential buildings 20.9 -4.8 2.5 -5.0 5.0 3.0 2.0 Civil engineering construction 11.2 -2.4 20.1 -4.0 6.0 7.0 4.0 Machinery and equipment 21.2 2.4 3.0 -1.0 5.0 5.0 4.0 R&D-investments¹ 17.1 5.7 -1.8 -2.0 3.0 4.0 3.0 Total 100.0 1.0 3.2 -5.6 2.2 4.6 3.1 Private 83.0 4.3 4.0 -5.4 0.9 2.9 4.2 Public 17.0 -11.8 -0.2 -6.6 9.0 12.5 -1.3 Investment deflator 6.5 2.3 6.5 5.9 0.2 2.0 2.0 % Investment to GDP ratio (at current prices) Fixed investment 23.6 24.2 23.1 23.1 23.6 23.9 Private 19.4 20.1 19.2 19.0 19.1 19.5 Public 4.2 4.1 3.9 4.1 4.5 4.4 46 Publications of the Ministry of Finance 2023:96 1.4 Domestic production 1.4.1 Total output The value added generated by the industries will not increase this year, and growth in 2024 will continue to be subdued. For 2023, however, the development of value added has been more positive than when measured in terms of GDP, as product taxes relative to the size of the economy have decreased, which is reflected in the fact that in 2023 the development of value added will be close to zero, while GDP will fall by 0.5%. In the first two quarters of 2023, the value added grew by 0.3% and 0.6% compared with the previous quarters, according to revised figures from Statistics Finland. The 0.9% decline in the third quarter brought value added volume back to the level of the end of last year, and a further drop is expected in the fourth quarter, which means a recession for the latter part of the year. In 2024, growth is expected to revive slowly and export demand to recover. For 2024, value added is projected to grow by 0.6%, slightly behind growth of total output. Product taxes are expected to increase again in real terms. The recovery in demand from 2025 will boost output not only in exports but also in construction and supporting services and in domestic production. For 2025, value added is expected to grow at a rate of around 2%, and in 2026 it will approach its longer- term potential of around 1.5%. 47 Publications of the Ministry of Finance 2023:96 Most industries have seen a turnaround in both expectations and production volumes in 2023. The exception to this has been construction, where production levels have been falling since last year. In the first two quarters of the year, growth was seen in a number of industrial sectors, and in the second quarter production increased in nearly all service sectors. The start of the year was also promising for primary production in agriculture. In the latter half of 2023, the decline in service production has been largely due to the decline in construction. In a number of service sectors, such as information and communication services as well as financial services, output has fallen. The same trend is expected to continue for the rest of the year. 90 100 110 120 130 140 150 160 170 2015 2016 2017 2018 2019 2020 2021 2022 2023 Manufacturing Construction Trade Services Turnover trends in main industries Lähde: Tilastokeskus 2015 = 100, seasonally adjusted 48 Publications of the Ministry of Finance 2023:96 In primary production, forestry production will decline as the use of wood in construction and the forest industry decreases. Climate policy targets are also expected to affect the amount of felling in the forestry sector, although there is still uncertainty about the timing of the turnaround. The reduction in wood imports from Russia has maintained the need for felling. In agriculture, data on production values vary significantly and is subject to considerable uncertainty. Industry is project to grow by 2.8% and 1.9% in 2025 and 2026. Construction is expected to recover to 4.5% in 2025 and 3.8% in 2026. Service production will grow by 1.5% in 2025 and 0.9% in 2026. Although there are signs of a contraction in primary production, the figures for the early part of the year have been so promising that they point to growth for the year as a whole. Primary production is projected to grow by 1.6% in 2024, 0.1% in 2025 and decline by 2% in 2026. Service production continues to support the creation of value added in the economy. It has grown in significance in exports, and around 70% of the value added of the entire economy is generated in services. The decline in construction is also reflected in service production, particularly in information and communication services, the financial sector and other business services. Continued uncertainty in Finland’s main export markets, especially Germany and Sweden, has an impact, 50 100 150 200 250 1990 1995 2000 2005 2010 2015 2020 2025 Manufacturing Services Primary production Construction Output Sources: Statistics Finland, MoF 1990 = 100 49 Publications of the Ministry of Finance 2023:96 particularly on energy-intensive sectors such as the chemical industry and the energy supply industry. In the export industry, the outlook is stabilising with regard to price levels, and raw material prices are expected to take a downturn. -10 -8 -6 -4 -2 0 2 4 6 8 2005 2010 2015 2020 2025 Services Secondary production Primary production Total value added, change in volume Contribution to total output Sources: Statistics Finland, MoF percentage points 50 Publications of the Ministry of Finance 2023:96 1.4.2 Secondary production Secondary production includes mining and construction in addition to industry. In addition to manufacturing, industry also includes heat and electricity supply and other energy production as well as waste management. In manufacturing, the largest export industries are the forest industry, the chemical industry, the metal industry, and the electrical and electronics industry, which according to the Standard Industrial Classification TOL include several sub-industries, but together they account for more than 60% of Finnish exports. The declining economic conditions have been reflected in the order books of manufacturing, i.e. export industries. Order volumes have declined since late 2022 if changes are measured by moving averages, which would be predictive of a decline in output. Production volume indices also show a decline, but rapid changes in orders and volume are typical of monthly observations. The economic situation for industry is also negative in terms of expectations, although a small recovery of output is also perceptible. The decline from last year’s peak expectations has been rapid and steep. The forest industry is suffering from a weak export outlook and high costs. On the other hand, capacity has been increased at Kemi and Äänekoski, and production is expected to grow next year. The operations of sawmills are also affected by the decline in construction. The main export market for the forest industry is Europe, and Germany in particular. China is also an important export market for pulp. The price level of pulp has fallen sharply, but has already taken an upward turn again. Moreover, the export price for pulp remains at a high level. Order books in the chemical industry have returned closer to normal levels after several peak years, which explains the falls in production levels in recent quarters. The outlook for the chemical industry follows, on the one hand, the outlook for exports and, on the other, the outlook for the domestic forest industry. Export prices rose until late last year but turned to a decline this year. Higher energy prices affect the chemical industry due to its energy-intensive nature, and expectations in other industries have a direct impact on the industry. The economic expectations in the industry are negative for this year. 51 Publications of the Ministry of Finance 2023:96 In the metal industry, including metal refining and the machinery and metal products industry, production growth has levelled off and order volumes have begun to decline. The electrical and electronics industry is also an important export sector. Last year, the industry was still growing well, but this year the industry has seen a decline in the value added of production throughout the early part of the year. Construction has been declining since the end of last year. In 2023, production will still reflect starts made in 2022, and the decline in production is expected to continue into 2024. Business Tendency Survey indicators in the construction industry have fallen sharply and confidence indicators are at financial crisis levels. 70 80 90 100 110 120 130 140 150 160 2015 2016 2017 2018 2019 2020 2021 2022 2023 Electrical and electronics industry Metal industry excl. electrical and electronics industry Chemical industry Forest industry Source: Statistics Finland Volume index for industrial production 2015 = 100, trend 52 Publications of the Ministry of Finance 2023:96 -30 -20 -10 0 10 20 -60 -40 -20 0 20 40 2005 2010 2015 2020 Confidence indicator for construction (left scale) Value added in construction, volume (right scale) Construction confidence and output Sources: Statistics Finland, European Commission seasonally adjusted balance and change yoy, % 1.4.3 Services In 2023, production in most service industries has contracted after the second quarter. According to the quarterly national accounts, service production grew by 0.8% and 0.4% in the first two quarters and declined by 1.1% in the third quarter. This is strongly driving the development of value-added as a whole. For a long time, the level of service production has kept production at a reasonable level. It is only at the end of this year that expectations in service production have also deteriorated. The trade sector has been growing in the second quarter and transport has also seen growth for two consecutive quarters. Growth is evident in the retail sector, and services are expected to grow at wide range, albeit low rate in the next few years. In the transport sector, the level of production has clearly fallen since the pandemic. Production in the tourism and restaurant sector is still recovering from the decline caused by COVID-19. According to the Business Tendency Survey, the service sectors expect sales to remain at the current level for the next six months. Demand has also declined in the service sectors, which adds to the previous factors constraining growth i.e production bottlenecks through the lack of skilled labour. 53 Publications of the Ministry of Finance 2023:96 In 2023, service production is expected to grow by 0.9%, which is clearly less than previous estimates, but still cautiously positive. In 2024, services are expected to grow by 0.7%, which is less than normal. In 2024 and 2025, growth is projected to be 1.5% and 0.9% respectively. -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 -50 -40 -30 -20 -10 0 10 20 30 40 50 2005 2010 2015 2020 Services confidence (left scale) Trend indicator of output, services (right scale) Sources: Statistics Finland, European Commission Service confidence and output change yoy, per cent and balance, 3-month 54 Publications of the Ministry of Finance 2023:96 Table 9.  Production by industry ¹ Share of total value added at current prices 2022 2021 2022 2023** 2024** 2025** 2026** share, %¹ change in volume, % Industry 22.4 2.0 -1.3 0.2 1.8 2.8 1.9 Construction 7.0 0.1 4.6 -9.6 -4.7 4.6 3.8 Agriculture and forestry 2.6 1.2 -3.1 2.1 1.6 0.1 -2.0 Industry and construction 29.4 1.5 0.2 -2.1 0.4 3.2 2.3 Services 68.0 4.3 3.2 0.9 0.7 1.5 0.9 Total production at basic prices 100.0 3.4 2.2 0.0 0.6 2.1 1.5 GDP at market prices 3.2 1.6 -0.5 0.7 2.0 1.6 Labour productivity in the whole economy 1.4 0.0 0.0 1.7 1.3 0.7 55 Publications of the Ministry of Finance 2023:96 Emissions on a downward path due to technology Finland’s Climate Act targets net zero by 2035. This means that anthropogenic greenhouse gas emissions decrease and removals by sinks increase so that, at the latest by 2035, Finland has reached a situation where its greenhouse gas emissions are at most equal to the removals. Greenhouse gases include for instance carbon dioxide, methane and hydrofluorocarbons. Greenhouse gases are generated in many economic activities. For example, carbon dioxide is produced from the use of fossil fuels in industry, and methane from animals in agricultural production. To reach the climate targets, the economy needs to undergo structural change. This will require industries of the economy to change their activities towards lower emissions, or industries to disappear and new ones to emerge. In economic production, emissions decrease for two reasons: 1) as greenhouse gas emission intensity decreases, for example through lower-emission technology, and 2) as economic activity decreases in emission-intensive sectors. Emission intensity is the amount of emissions generated per unit of value added produced. This box examines how Finland’s production-based emissions will change in 2022-2026. The analysis therefore includes emissions other than direct emissions from households, which are generated particularly in transport and in building-specific heating. Methodology The Ministry of Finance’s domestic production forecast as well as Statistics Finland’s air emission accounts[1] and the national accounts are used in the analysis. For each industry in the forecast, the emission intensity for 2010–2021 is calculated by dividing the sector’s emissions by the sector’s gross value added at constant prices. Emission intensity is projected for 2022–2026 using an approximation based on linear regression. Once the emission intensity has been estimated, it can be multiplied by economic activity, i.e. the volume of value added in the forecast period. This gives an estimate of how emissions will develop in the future. The calculation does not address the reasons for the decrease in emission intensity in each industry. Technological development, however, may shed some light on this. Many industrial sectors have invested in lower-emission technology and improved their energy efficiency. This means they can continue to produce the same amount of products with lower emissions. This analysis therefore assumes that technological development will be similar to that 56 Publications of the Ministry of Finance 2023:96 between 2010 and 2021. If the forecast were to be extended to Finland’s net zero target for 2035, the development of various technologies would have to be evaluated more precisely. On the other hand, if emission intensity does not decrease fast enough, emissions may rise due to increased activity in an industry. During the transition, economic activity in some industries may also decline as consumers shift their consumption habits towards lower-emission products and demand moves from one industry to another. For more details on the industry forecast, see section 1.4. The review also does not take a position on future policy changes that could accelerate or slow down the decrease in emission intensity or the green transition more generally. Results Emission intensities for the main industries are on a downward path in the period 2010–2021 and therefore the forecast for emission intensity also shows a downward trend. The change in the value added of production is projected to be zero or positive in 2023–2026. Production emissions are projected to decrease over the review period (Chart 1). Total production emissions in 2026 are expected to be around 33 million tonnes carbon dioxide equivalent.[2] Examining the change by industry, the largest decrease in emissions is from secondary production (industries B-F). Industrial emissions reductions have been driven, in particular, by EU emissions trading system, which has set a price for emissions and thus encouraged sectors to develop lower-emission solutions. In industry, emission reductions come particularly from the reduction in energy supply emissions. In addition to industry, secondary production also includes construction, whose emission intensity has remained nearly constant. Emissions from services (industries G-T) are on a slightly downward path. Historically, changes in emissions from services have been driven, in particular, by the transport industry. For example, in the coronavirus years 2020 and 2021, emissions from services decreased as emissions from transport services declined. The emission intensity of services is low (Chart 2). Emissions from primary production (industry A) are on a slightly downward path. Emissions from primary production did not decrease significantly in 2010– 2021, and therefore a similarly cautious trend over the review period is assumed in this analysis. Of the main industries, primary production has the highest emission intensity (Chart 2). 57 Publications of the Ministry of Finance 2023:96 0 10 20 30 40 50 60 70 80 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Chart 1. Production emissions forecast Total A Primary production B-F Secondary production (05-43) G-T Services (45-98) Greenhouse gases, CO2 eq., million tonnes Sources: Statistics Finland, MoF 0 500 1000 1500 2000 2500 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Chart 2. Emission intensities Total A Primary production B-F Secondary production (05-43) G-T Services (45-98) Amount of emissions generated per unit of value added produced, CO2 eq., tonnes/million euros Sources: Statistics Finland, MoF 58 Publications of the Ministry of Finance 2023:96 The value added of production was on an upward path in the period 2010–2021. At the same time, however, greenhouse gas emissions from production have fallen.[3] Chart 3 breaks down the emission changes into two components: 1) value added and 2) emission intensity of production. The chart shows that the emissions forecast is driven mainly by a decline in emission intensity. This is particularly pronounced in industry. In primary production, the amount of value added is, in contrast, more significant than the change in emission intensity, as the emission intensity of primary production did not decline significantly in 2010–2021. The decline in emission intensity may be assumed to be longer-term, as investments in new technology will be made for years to come. There is uncertainty about this, however: whether the current technological development will continue, slow down or accelerate. On the other hand, in the short term, the amount of value added of production has an impact. If production experiences a boom, this may increase Finland’s emissions, at least in the short term. Only emissions from production are taken into account in this analysis. Direct emissions from households, such as transport and building-specific heating, are not included in the results. The total emissions of households were 5.3 million -10 % -9 % 1 % -7 % -6 % 6 % -5 % 2 % -5 % -14 % 0 % -4 % -8 % -5 % -5 % -6 % -20 % -15 % -10 % -5 % 0 % 5 % 10 % 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Chart 3. Greenhouse gas emissions: intensity and value- added contributions Emission intensity Emissions Value added Sources: Statistics Finland, MoF Percentage change from last year 59 Publications of the Ministry of Finance 2023:96 tonnes carbon dioxide equivalent and of production 44 million tonnes carbon dioxide equivalent in 2021. The larger part of household emissions, 4.2 million tonnes, came from transport. Between 2010 and 2021, household emissions fell by 2.5 million tonnes, while the population grew by over 3%. Closing words Finland’s greenhouse gas emissions are on a downward path. Finland's emission reductions are driven mainly by a decrease in emission intensity. Economic activity is significant, however, particularly in the short term. Shifting production to low-emission-intensity industries, such as services and high- technology products, would help achieve emissions targets. Shifting towards high value-added sectors also supports the Finnish economy. [1] The total emissions correspond to the emissions included in Finland’s greenhouse gas inventory to which the emissions of Finnish economic units abroad have been added and from which the emissions of foreign economic units in the Finnish territory have been subtracted (https://stat.fi/tilasto/ dokumentaatio/tilma) [2] Carbon dioxide equivalent describes the combined global warming effect of various greenhouse gas emissions. [3] There has been a “decoupling”, in which emissions decrease even as production increases. 1.5 Labour force Employment will fall temporarily from its peak level. The number of employed people will level off in 2023 and the employment rate will fall slightly. The turnaround in the labour market took place in the summer and autumn. There have been fewer employed people than last year, particularly in the private sector, as the number of vacancies has decreased. In addition, many people, particularly men, have exited the workforce. Due to the positive trend in the early part of the year, the number of employed people in 2023 will still be 0.1% higher on average than in the previous year, but the number of hours worked will no longer increase. In addition, the employment rate will fall from 2022, as the increase in the number of people of working age in 2023 will be the most for 13 years due to substantial immigration. https://stat.fi/tilasto/dokumentaatio/tilma https://stat.fi/tilasto/dokumentaatio/tilma 60 Publications of the Ministry of Finance 2023:96 In 2024, the number of employed people will temporarily decline as demand for labour will be weak due to the economic downturn. Businesses plan to employ significantly fewer people around the turn of the year, particularly in construction and industry. The general shortage of skilled labour motivates companies to hold on to their employees, as the recession is expected to be short-lived, and it is likely that employers will elect to use temporary lay-offs and other labour flexibility solutions instead of redundancies. The economy is expected to recover towards the end of the year, while employment, particularly in services, will also recover. In 2024, the number of employed people will therefore be only 0.2% fewer than in 2023 and the employment rate will remain at the same level. In construction, the number of employed people will still be lower than in 2023. The fall in employment and the high number of temporary lay-offs will result in a clear reduction in the number of hours worked across the economy as a whole. In 2025 and 2026, economic growth will be quite strong, with employment increasing by nearly 1% per year. Employment growth will be broad-based and underpinned by the Government’s measures to increase labour supply, the first of which will take effect in 2024. The forecast includes measures that will be decided in the parliament during 2023. The employment rate for people aged 15–64 will reach nearly 75%, the highest in decades. 0 10 000 20 000 30 000 40 000 50 000 60 000 70 000 80 000 90 000 100 000 110 000 120 000 1990 1995 2000 2005 2010 2015 2020 Vacancies Source: MEAE seasonally adjusted 61 Publications of the Ministry of Finance 2023:96 The number of unemployed people already started to increase in spring 2023, with unemployment among men, in particular, increasing more than among women. The rise in unemployment will continue in the latter part of 2023 and to some extent in 2024. The contraction of construction activity, in particular, will increase unemployment in 2023 and 2024. The unemployment rate will rise to 7.5% in 2024. The turnaround in the economy and employment in 2025 and 2026 will reduce unemployment, but the competence requirements of a skilled labour force will slow the fall in unemployment. In 2026, the unemployment rate will remain at around 6.5%, which is still around one half of one percentage point above the level of structural unemployment in Finland estimated using the common methodology of the European Commission. 55 60 65 70 75 80 0 4 8 12 16 20 1990 1995 2000 2005 2010 2015 2020 2025 Unemployment rate (left scale) Employment rate 15-64 yrs (right scale) Employment rate, 20-64 yrs (right scale) Employment and unemployment Sources: Statistics Finland, MoF % Unemployment rate = Unemployed / Labour force (15–74 yrs) Employment rate = Employed / Population of working age 62 Publications of the Ministry of Finance 2023:96 Table 10.  Labour market 2021 2022 2023** 2024** 2025** 2026** annual average, 1,000 persons Population of working age (15–74 yrs) 4123 4120 4129 4119 4112 4107 Population of working age (15–64 yrs) 3417 3421 3439 3438 3437 3435 Labour force (15–74 yrs) 2765 2808 2827 2831 2843 2855 Employed (15–74 yrs) 2555 2619 2623 2619 2641 2665 of which 15–64 yrs 2470 2526 2530 2526 2547 2571 Unemployed (15–74 yrs) 212 190 205 212 202 190 change in volume, 1,000 persons Population of working age (15–64 yrs) -3 4 18 -1 -1 -2 Employed (15–64 yrs) 50 56 4 -4 21 23 % Employment rate (15–64 yrs) 72.3 73.8 73.6 73.5 74.1 74.8 Employment rate (20–64 yrs) 76.6 78.1 77.9 77.9 78.7 79.5 Unemployment rate (15–74 yrs) 7.7 6.8 7.2 7.5 7.1 6.6 1,000 persons per annum Immigration, net 23 34 55 50 25 25 63 Publications of the Ministry of Finance 2023:96 1.6 Income, costs and prices 1.6.1 Wages and salaries The decline in real incomes is starting to be over. The rate of increase in nominal wages will accelerate to just over 4% in 2023. The acceleration was due to higher negotiated wages, as wage drifts decreased. The rise in negotiated wages accelerated substantially in the municipal sector in particular, but negotiated wages were also higher than in the previous year in other public and private sector industries. The rate of increase in earnings accelerated to a significant degree particularly in real estate services, insurance services and healthcare services, while the rate of increase in earnings in secondary production accelerated only slightly. Real wages decline in 2023 by around 2% year-on-year as inflation still substantially exceeded the rate of increase of nominal wages. The level of real earnings, however, no longer declined in the third quarter compared to the early part of the year. Many two-year collective agreements have been signed in the private sector and the public sector in 2023. The negotiated increases this year have been generally around 4.5% at the annual level, making them substantially higher than in the previous year and the highest in 14 years. The negotiated increases in the municipal and wellbeing sector exceed that level because, in addition to wage increases in line with the general wage increases across the economy, theosts associated with the wage structure programme and wage harmonisation. This makes the local government sector the pay leader of this round of negotiations. Wage drifts are projected to be approximately half a percentage point across the entire economy. In 2024, the annual effect of the negotiated increases will