Finland – Climate Strategy a Key Fault Line

The ideological diversity of Prime Minister Sanna Marin’s coalition government poses the main risk to policymaking and political stability in the parliamentary term that runs to 2023, and the recent rise in the popularity of the main opposition liberal-conservative KOK will hardly bolster the cohesion of the five-party governing alliance. The coalition has so far survived the strains created by successive new waves of COVID-19 infections, the most recent of which peaked in September. The progress of the national vaccination program has raised hopes that the health crisis might fully abate in 2022, but the appearance of a new variant of the coronavirus (Mu) clouds the outlook on that score.
The challenge of addressing the threat posed by climate change is arguably the issue that carries the greatest risk of creating a lasting rift in the coalition. The setting of climate targets proved to be a major sticking point in the coalition’s budget negotiations, with the business-friendly KESK and the green VIHR butting heads over the timeline for achieving carbon-reduction targets. The room for compromise will be limited, with environmental activists increasing the volume of their demands for action and escalating energy and transport costs squeezing the budgets of businesses and households.
The government has targeted a narrowing of the general government budget deficit to 2.4% of GDP next year, at which point nominal GDP growth will be sufficient to reverse the rising trend of the gross public-sector debt burden, which is projected to peak at around 71% of GDP. The growth of household, corporate, and government debt is not an immediate cause for concern, but it could become a problem in a scenario where macroeconomic conditions encourage aggressive tightening of monetary policy.
The loosening of health restrictions and strengthening global demand created the basis for an economic revival in the second quarter of 2021, with the added impetus from a base effect underpinning real GDP growth of 7.5%. Sustained demand for metals and forestry products, the revival of construction activity, and strengthening business and consumer confidence likely contributed to above-trend growth again in the third quarter, but a weaker base effect probably held the pace of year-on-year real expansion to about 4% in the July-September period.
Disruptions to the global supply chain and rising energy prices against the backdrop of looming shortages will weigh on growth in the fourth quarter and into 2022. The annual growth rate will top 3% this year, but will slow to 1.4% by 2023, which is in line with the pre-pandemic trend.
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