Overly optimistic productivity forecasts for Finland, reveals economic policy assessment council report
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The Economic Policy Assessment Council’s background report reveals that Finland’s economic growth forecasts have been excessively optimistic, particularly during crises. This trend contrasts with Finland’s main trading partners, Sweden and Germany, where forecast errors of a similar magnitude haven’t occurred.
The report, based on a doctoral research by Adam Rybarczyk, compares estimates (or ‘estimates’) of potential production and production gaps for Finland, Sweden, and Germany over the last 20 years.
These estimates, derived by the European Commission, the International Monetary Fund (IMF), and the Organisation for Economic Co-operation and Development (OECD), evolve as new statistical data becomes available.
Excessive Optimism in Real-Time Forecasts for Finland
Potential production, reflecting the sustainable level of output a country can achieve without accelerating inflation, forms a long-term budget constraint for public spending. According to the report, real-time estimates of Finland’s potential production have been consistently too high, especially during sharp economic fluctuations. The overestimation is largely attributed to optimistic predictions of economic productivity growth, a trend not as pronounced in Germany and Sweden.
The production gap, which determines fiscal policy direction, is the difference between actual and potential production. A positive gap indicates overuse of economic capacity, leading to wage and price increases and accelerated inflation. Conversely, a negative gap signifies underuse of re
Source: www.helsinkitimes.fi
