The Finnish economy performed well in 2017. GDP rose 2.7% y/y and growth was broad based. In H2 17, employment finally started to rise and public finances improved above expectations. In Q1 18, GDP growth accelerated to 1.2% q/q, boosted by strong domestic demand from manufacturing investment and private consumption. Leading indicators have remained strong in 2018 and growth is set to continue. Due to the better than expected start in Q1, we revise our forecast and now expect Finnish GDP to grow 2.7% in 2018. However, we believe this rapid growth is likely to slow down quickly and we see no reason to change our 2.0% growth forecast for 2019. Future growth depends on structural reforms and labour participation, which is still well below that in other Nordic countries.
After several years of slow earnings growth, problems with cost competitiveness have largely been resolved, which has helped to boost exports and bring the current account back on surplus. We forecast wages will rise by 2.0% in 2018 and 2.3% in 2019. Wage agreements are still slightly below the levels seen in Sweden or Germany. A better employment situation, rising wages, low interest rates and sky-high consumer confidence are likely to keep consumption on a growth track. Business surveys imply a bright outlook also for export industries.
The housing market is divided geographically and by type of housing. The demographic shift towards smaller families and migration to growth centres has increased demand for small apartments. Strong demand has raised prices and fuelled a construction boom in Helsinki and a few other towns, while dwelling prices fall in some parts of the country. We expect the average price level to rise 1.2% in 2018 and 1.5% in 2019.
General government debt to GDP ratio is likely to fall below 60% in 2018 with the help of rising tax revenue. Finland still needs structural reforms to manage the needs of an ageing population and to boost potential growth. Otherwise, the debt ratio is likely to return to a rising trend in the medium term. The rating outlook is getting brighter but the ratings agencies are likely to need further evidence of successful structural reforms. Social and health care reform (SOTE) may be the key to regaining AAA sovereign credit ratings but its fate is still quite unclear.
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