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Finland.

The brisk recovery from the forestry-related downturn in early 1996 continued in 1997, with GDP expanding by a robust 6 per cent. Exports grew at a double-digit rate, while domestic demand gained further momentum as monetary conditions remained easy and household and business sentiment improved. The unemployment rate is steadily declining, and economic prospects remain bright, particularly as inflation risks have decreased with the conclusion of a new centralised pay agreement.

Although the authorities need to remain vigilant to possible signs of overheating, the main policy focus should now be on key measures proposed in the OECD Jobs Strategy to rein in structural unemployment. Work incentives for older unemployed workers need to be strengthened, while the growing importance of high-tech activities in the economy makes it imperative that skills be enhanced. Hence, a more active stance of labour market policies should be adopted, including a shift from unconditional income support towards a strict enforcement of eligibility rules, improved job brokerage by the public employment service, better targeted re-training and increased tax credits for low-paid work.

GDP expanded by a robust 6 per cent in 1997 with few, if any, signs of a slowdown. The appreciation of the dollar, the rapid development of eastern European economies, the boom in the international telecommunication equipment market, and the upswing in the forestry cycle all served to boost exports after the brief downturn in early 1996. Moreover, with the terms of trade rebounding towards the end of the year, the external current account surplus has reached a historic high. At the same time, domestic demand conditions have remained favourable, with residential investment and durables consumption particularly buoyant. As job creation accelerated, unemployment dropped below 13 per cent of the labour force in recent months. Wage increases eased markedly to average 2 1/2 per cent in 1997, in line with the two-year incomes policy deal concluded in late 1995. However, a significant increase in the cost of housing, related to the recovery of the housing market, served to lift consumer price inflation to around 2 per cent by the end of the year.

The striking recovery of the Finnish economy from the crisis of the early 1990s has been based on successful industrial restructuring, moderate wage developments, positive household and business sentiment, and sustained efforts by the authorities to [TABULAR DATA OMITTED] enhance policy credibility. The fiscal austerity programme started in 1993 is now nearing its completion, and has secured the achievement of the fiscal requirements of the Maastricht Treaty in 1997. Whereas the 1998 budget points to some further fiscal consolidation this year, tax cuts may lead to a less restrictive stance of fiscal policy in 1999 (although their implementation is uncertain and has not been incorporated in the projections: see box). Monetary conditions are already easy, although concerns over demand-pull and asset price inflation prompted the Bank of Finland to raise official interest rates in September last year, by 25 basis points to 3 1/4 per cent, and by a further 15 basis points in March 1998. Nevertheless, after a new incomes policy agreement for the years 1998 and 1999 was signed in December 1997, the Bank has expressed confidence that the official target of 2 per cent "underlying inflation" (consumer prices excluding indirect taxes, subsidies and housing capital cost) will be achieved in the years ahead. Moreover, with long-term interest rates close to corresponding German rates and the markka exchange rate broadly stable since it was linked to the European Exchange Rate Mechanism in October 1996, Finland is well placed for its entry into the European Economic and Monetary Union from the outset.

Although both private consumption and residential investment should remain buoyant, economic growth is projected to ease to around 4 1/4 per cent in 1998 and 3 per cent in 1999 due to slower export growth in the wake of the Asian crisis (in particular in the forestry equipment industry), the unwinding of public works programmes and the completion of major investment projects in the forestry industry. Further robust employment growth should push the unemployment rate to 11 per cent by the end of the projection period, but wage and price increases are expected to remain moderate, at close to 3 and 2 per cent on average, respectively. While inflation risks have considerably eased with the recent incomes policy agreement, wages might increase somewhat faster than projected as emerging shortages in several trades (notably construction workers and professional engineers) could lead to wage over-bidding by employers.

FISCAL POLICY ASSUMPTIONS UNDERLYING THE PROJECTIONS

Projections for 1998 are based on the budget presented to parliament last autumn, which includes a 2 per cent of GDP reduction in public expenditure, with the bulk of the savings in the area of social security and the remainder reflecting the completion of public works programmes initiated in 1996. Tax proceeds also fall relative to GDP, as a cut in income tax rates was not fully offset by a rise in petrol excises. As regards 1999, tax and social security contribution rates are assumed to remain unchanged and expenditure restraint to continue in line with the medium-term expenditure framework agreed in 1997. As the budget negotiations for 1999 have yet to begin, a 2 per cent of GDP tax cut envisaged in the incomes policy agreement has not been incorporated in the projections.
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Title Annotation:Developments in Individual OECD Countries; economic development
Publication:OECD Economic Outlook
Date:Jun 1, 1998
Words:889
Previous Article:Denmark.
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