Description of the operational environment
Global economic outlook
The year 2020 started in an atmosphere of emerging economic optimism. The International Monetary Fund (IMF) predicted that the global economy would grow by 3.3 per cent in 2020, in other words: slightly more than last year. Then, during the first weeks of the year, the world became aware of a new coronavirus spreading in China. When the virus began spreading elsewhere, it became evident that it was a global pandemic. Various countries introduced shutdowns and restrictions on movement aimed at preventing the spread of the virus. The restrictions and caution among people also had an unprecedented negative impact on the economy.
The most significant economic shock was seen in the second quarter, with many countries seeing historically sharp declines in GDP. The situation with infections improved in the summer, leading to a rapid economic recovery. COVID-19 case numbers began to increase again in the autumn, which was reflected in economic indicators. However, the economic impacts of the second wave of the pandemic were less severe, as societies had learned to live with the virus to some extent and the restrictions on economic activity were not as strict as in the first wave of the pandemic in the spring.
In response to the COVID-19 crisis, governments around the world have introduced various financial policy stimulus measures aimed at helping businesses and households overcome the economic crisis caused by the pandemic. In Europe, the focus of stimulus measures has been on preserving jobs, while in the USA the emphasis has been on direct payments to consumers. National debt has risen quickly in many countries due to the stimulus measures. Central banks have also been alerted and supported the financial markets through massive support measures.
The world economy as a whole is expected to contract by approximately 4% in 2020. Economic development during the year was characterised by fluctuations that reflected the spread of the virus. When COVID-19 case numbers grew, the economy suffered. Conversely, when the number of cases declined, the economy began to recover. The development of the economy was dictated by COVID-19, but there were also other significant events in 2020. The most significant of these were the US presidential election and the Brexit deal in December.
The industry that was the hardest hit by the COVID-19 crisis was naturally the service sector, where social contact is frequent. The industrial sector has also suffered from the pandemic, although the impact has not been as severe as feared. Indeed, the industrial sector turned out to be surprisingly resilient during the second wave of the pandemic late in the year.
Although COVID-19 has had an adverse impact on the economy across the world, there are significant differences between countries. In China, the disease has been kept under control after the first wave and the Chinese GDP has already exceeded the pre-crisis level. In addition to the successful management of the situation with infections, China has benefited from manufacturing products that have been in high demand due to the pandemic, such as health and hygiene products as well as IT products to support the increase in remote work. U.S. GDP is expected to have decreased by just under 4%, while a decline in excess of 7% is expected in the euro zone. There are also significant differences between countries within the euro zone. Among large European countries, Italy, Spain and France have suffered the most from COVID-19. Finland is among the countries that have coped with the pandemic the best.
Excellent news broke in late 2020 when multiple pharmaceutical companies announced they had developed effective COVID-19 vaccines and several companies were also in the final stages of development. Consequently, vaccinations began at the end of the year. The start of vaccinations also improves the outlook for 2021 and the way out of the COVID-19 crisis is already on the horizon.
The Finnish economy
The Finnish economy has coped with the COVID-19 crisis better than other European countries. Finnish GDP is expected to have declined by about 3% in 2020, which is substantially less than in the euro zone on average. Finland’s success in managing the situation is the sum of many factors. The virus reached Finland a little later than other countries, which gave the government time to react. The management of the situation regarding infections has also proved to be relatively successful. The less dramatic decline in GDP is also attributable to the structure of the Finnish economy, with the service sector and tourism, for example, playing a smaller role than in many other countries. The transition to remote work was also smooth in Finland thanks to the high level of digital preparedness.
As in other countries, the decline in economic activity has been the sharpest in the service sector in Finland. There are also substantial differences within the service sector. The hardest-hit segments have been the hotel and restaurant industry, transport, entertainment and recreational services. At the same time, the information and communication sector has even grown during the COVID-19 pandemic. Industry and construction have held up fairly well during COVID-19 and the retail trade has even benefited from the pandemic. The effects of the pandemic vary between companies in different industries. Nevertheless, the number of bankruptcies was actually lower than usual in 2020. This is largely due to amendments to bankruptcy legislation that temporarily made it more difficult for businesses to declare bankruptcy.
On the whole, households have coped with the COVID-19 crisis relatively well. Temporary lay-offs grew quickly in the spring, but most of the temporarily laid-off employees have already returned to work. Unemployment has increased by more than one percentage point, but the feared mass unemployment did not materialise. By the late autumn 2020, household wages had already returned close to the previous year’s levels. One manifestation of the COVID-19 crisis is an increase in the household savings rate. This will enable the quick recovery of consumption when the situation regarding infections improves.
The Finnish housing market has been surprisingly resilient during the pandemic. Housing transaction volumes declined by about one-third in the spring but activity in the market picked up thereafter. Housing prices have also increased slightly, although there are substantial regional differences.