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Finland Faces Challenging Economic Outlook: Urgent Action Needed to Boost Productivity, Says PTT

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The Finnish economy is facing a bleak outlook in the coming years, and swift action is needed to improve productivity, according to a press release from PTT (The Finnish Business and Policy Forum). Finland’s productivity growth has lagged behind other Nordic countries, but the trend can be reversed by increasing labor market flexibility and encouraging companies to innovate and invest in higher value-added production.

According to PTT’s long-term growth forecast, Finland’s gross domestic product per capita is expected to grow by an average of 1.0 percent per year from 2023 to 2033, and by 2.7 percent per year from 2034 to 2043. The forecast assumes a higher level of immigration than the population projection by Statistics Finland.

“Global tensions and setbacks in globalization will slow down growth and productivity development worldwide over the next decade. However, our view is more positive for the second decade of the forecast: lessons will be learned. Confrontation will decrease, globalization will make a comeback, and artificial intelligence will increase productivity. Finland will have an opportunity for faster growth then – if we start making growth-supporting decisions right away,” said Markus Lahtinen, CEO of PTT.

PTT’s long-term growth forecast assesses GDP growth based on labor productivity and labor input development over the next 20 years. According to the forecast, Finland’s productivity is projected to grow by an average of 1.1 percent per year from 2023 to 2033, and by 2.4 percent per year from 2034 to 2043.

“Finland is unlikely to ever reach the level of the world’s leading countries in terms of productivity, but we can close the gap. The examples of Denmark and Sweden demonstrate that the strengths of the Nordic welfare society can lead to success in the global productivity competition,” said Lahtinen.

Finland’s productivity growth is built on a narrow foundation, and agility is lacking

Finland’s productivity caught up with the world leaders until 2008. Since then, the gap has not narrowed, although most other Nordic countries have managed to reach the top. There are several reasons for this.

“Finland’s productivity growth has always been built on a narrow foundation, with low value-added intermediate goods dominating the export industry. The impact of Nokia’s mobile phone business on labor productivity growth was significant. In Sweden, the range of successful sectors is broader, and the development of the service sector is ahead of us,” explained economist Emilia Gråsten.

Labor market dynamics also play a role. In the 2000s, technological development and labor productivity began to diverge, and the role of job intermediation in productivity growth has become even more important. The winners are those who can efficiently reallocate labor and capital from one sector to another. Therefore, countries with dynamic labor markets, such as Denmark and the United States, are successful in harnessing the productivity potential of technological innovations such as artificial intelligence.

Traditionally, Finland has not been very agile in this regard and will continue to lag without reforms. Finland is still a pioneer in technological expertise and societal digitalization, but it does not fully benefit from new technologies due to inefficient allocation of production factors.

“Finland is indeed determined to increase its R&D investments, but we need to develop high value-added end products with international demand from these new innovations. Otherwise, there is a risk of falling behind. On the other hand, the ambitious goal of carbon neutrality provides Finnish companies with an opportunity to become technological frontrunners,” said Gråsten.

The forecast estimates that R&D expenditure will account for 3.4 percent of GDP from 2023 to 2033 and 3.8 percent from 2034 to 2043. This requires significant increases in R&D investments from key industries.

Immigration increases the workforce, but better integration is needed

In previous PTT forecasts, labor force development was based on the population projection by Statistics Finland, but now it has been revised significantly higher. The forecast assumes a net immigration of 25,000 people per year, compared to Statistics Finland’s estimate of around 15,000. This significantly changes the forecast for the working-age population. Due to higher net immigration, the number of working-age people is expected to increase by an average of 0.1 percent per year throughout the forecast period. This means there will be 210,000 more working-age people in 2043 than projected by Statistics Finland.

“Immigration is growing, and Finland needs better integration, a smoother residence permit system, and a change in attitudes in the labor market,” said economist Veera Holappa.

The forecast predicts that the employment rate for the age group of 15 to 64 will increase to 79.1 percent by 2043. The number of employed people will grow by an average of 0.5-0.6% per year during the forecast period, driven by the growth in both the employment rate and net immigration. Achieving the forecast requires a clear improvement in incentives for employment.

“Alongside facilitating labor migration, unemployment benefits need to be reformed, and there is a need to involve partially disabled individuals more and increase lifelong learning. A high level of education, in general, helps labor markets adapt to global megatrends and changes in the workplace,” said Holappa.

Source: Helsinki Times

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