Finland: Economy drops back to contraction in Q1
May 28, 2021
GDP swung back to contraction in the first quarter of 2021, dropping 0.1% in seasonally-adjusted quarter-on-quarter terms, notably below the previous estimate of a 0.4% expansion (Q4 2020: +0.4% s.a. qoq). The result was largely due to renewed restrictions in the period to contain the spread of another wave of Covid-19. On an annual basis, GDP contracted at a sharper rate in the first quarter (Q1 2021: -1.5% yoy; Q4 2020: -0.7% yoy).
Domestically, the quarterly result was driven by government spending, which swung to a 1.3% fall in Q1 from Q4’s 2.6% expansion. Despite the restrictions in place, private consumption dropped at a more moderate pace of 0.7% (Q4 2020: -1.3% yoy), likely aided by a slightly lower unemployment rate in the period (Q1 2021: 8.0%; Q4 2020: 8.1%). Meanwhile, fixed investment also supported the overall reading, with growth clocking in at 1.4%, contrasting Q4 2020’s 1.1% contraction.
Turning to the external sector, exports of goods and services fell 5.0% in the quarter, contrasting Q4’s 9.4% growth. Meanwhile, imports of goods and services expanded 1.4%, swinging from the prior quarter’s 0.8% drop. Consequently, the external sector subtracted 2.5 percentage points from the overall result, markedly contrasting Q4 2020’s 3.8 percentage-point contribution.
Looking ahead, the economy is projected to rebound and grow robustly this year as the vaccination campaign continues to advance, with restrictions set to be lifted by the summer. Moreover, activity will be further bolstered by the ECB’s ultra-accommodative monetary policy stance and ongoing fiscal stimulus.
Reflecting on the economic outlook for the coming months, James Watson, senior economist at Oxford Economics, noted:
“The outlook is set to improve heading into the summer. With one of the lowest Covid-19 incidence rates globally and one of the highest vaccination rates in Europe, Finland is well-placed to begin easing activity restrictions. This in turn will drive stronger economic momentum.”
However, Juho Kostiainen, economist at Nordea, sees the economy facing challenges in the longer term:
“It looks like rapid economic growth will not last beyond the next few years due to re-emerging structural challenges. A shrinking working population, high structural unemployment, growing costs of health care and subdued productivity growth are a ticking time bomb and the fuse is already lit.”
Author: Marta Casanovas , Junior Economist