Whither Recovery - Economic Growth and Structural Change after Five Years of Recession

Six years into the euro-area crisis, some signs of a recovery are starting to appear. Exports are picking up in the core industrial economies. At the same time, the underlying structural problems – notably the ageing of the population with its implications on public spending as well as on labour markets remain. The question in many countries is, whether the pre-crisis growth rates are still attainable. Finland weathered the first years of the crisis remarkably well compared to most EU-countries but she has also experienced a deep structural change in her economy. Many of the key exporting industries are surfacing from the recession significantly leaner than before. This development climaxed in the fall of 2013 with the announcement of the sale of Nokia’s – the telecommunications giant’s – mobile phone branch, which was preceded by the closure of the firm’s last mobile phone plant in Finland only a few months earlier. At the same time, the problems and fiscal pressures brought about by a rapidly declining working-age population and the growing costs of an ageing population have become more and more apparent. To the mounting distress over the extent of a sustainability gap was thereby added a nagging concern over the growth potential of the economy. On the eve of a spring election, questions abound on the magnitude and timing of unavoidable fiscal measures. The aims of the present study are to grasp the effects of the structural change on the growth potential of the economy, and to analyse the connection between output growth and the sustainability gap. We do this by studying the contribution of the different sectors of the economy to economic growth in the recent past, taking into account the often dramatic cuts in capacity in many of the key exporting industries. Our analysis corroborates the findings of recent econometric studies that the loss of the ICT sector’s boost to productivity growth may well jeopardize future growth. We also turn the findings at ...