Growth will drop sharply in 2009 and recover only slowly in 2010 as world trade picks up. The unemployment rate has begun to climb sharply, and is expected to rise through the projection period. Inflation has remained above the euro area average on the back of the high wages negotiated through 2007.
The government has responded with assistance to banks to maintain liquidity and confidence, and a relatively modest fiscal stimulus package to support activity. The fiscal balance will fall significantly but will not deteriorate to the levels of many other OECD countries given the strong structural position coming into the downturn. Using the room for further fiscal stimulus would help support domestic demand. To sustain competitiveness, the upcoming wage negotiations should focus on aligning outcomes more closely to productivity at the firm level. Deeper reforms are needed to improve labour market flexibility.
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©OECD Observer No 274, July 2009