New Finnish coalition’s austerity to drag on growth

The new coalition government is likely to impose significant budget cuts that would drag on Finland's already ailing economy. This austerity is likely to act as a drag on growth. Although the parties disagreed in the run-up to the election on the scale of cuts that were needed, an agreement to save between €6 billion and €10 billion over the next four years seems likely. This is the equivalent of 0.7% to 1.2% of GDP per year. 

But there are reasons to think that fiscal consolidation might be less of a constraint on growth than it has been over the past four years.  A key difficulty that many governments have had in reducing their deficits has been that this requires the other sectors of the economy - the domestic private sector and the overseas sector - to increase their borrowing and spending. 

This time round, prospects for domestic demand growth are slightly more positive. And the euro is much weaker, providing a potential boost to the export sector. 

"We expect Finland to return to growth this year. But only just. We forecast a 0.5% expansion in GDP this year and a modest acceleration to 1.0% growth in 2016." said Capital Economics