09.03.2021 -

Divided prospects in the service sectors – one third of the service companies will recover next year at the earliest

According to the Service Sector Employers’ Association Palta’s economic survey published in March 2021 and the company survey carried out in connection with the economic survey, one third of the service companies will recover from the COVID-19 pandemic next year at the earliest. The COVID-19 pandemic has had no impact on one fifth of the companies and the business operations of 8% of the companies were even accelerated. More than one tenth of the companies assessed that their business operations will never return to the pre-pandemic level. 

“Prospects in the service sectors are quite dualistic and the differences between the sectors are extensive. In some service sectors, the recovery is well under way. However, many companies will return to normal conditions next year, at the earliest, if at all,” says Martti Pykäri, Chief Economist at Palta. 

According to Palta’s forecast, turnovers in the private service sectors will grow by 4% this year, which is not sufficient to compensate the more than 7% decrease last year. This year’s economic forecasts for GDP growth concerning the whole of Finland vary between 2–3%. In practice, the variation results from the companies’ views on when private consumption is expected to be freed and how strong it will be. Nearly half of this year’s economic growth is created through service consumption. 

“Delays in the opening up of the economy are costly and increase risks.”

“Recovery from the COVID-19 pandemic relies basically fully on the recovery of services. In order to reach the 3% annual growth despite the pandemic this year, private consumption should start growing rapidly at the beginning of summer, at the latest,” says Pykäri. 

“Delays in the opening up of the economy are costly and increase risks. Economic resilience weakens, stock of enterprises erodes and the number of bankruptcies increases as the spring progresses. The labour market deteriorates. The working-age population must be vaccinated as soon as possible. Successful vaccination is a prerequisite for the recovery of households’ consumption and economic recovery. A clear plan and view on how to start rescinding the restrictions and normalising the situation once the risk groups are vaccinated are also required. 

In the second quarter of 2020, households’ consumption of services decreased by up to 16%.The annual consumption decreased by 8% when compared to last year. The drop was even sharper than, for example, the drop seen during the financial crisis or the recession in the 1990s. In practice, the collapse of consumption has been targeted at the entertainment, culture and mobility services as well as other services: a total of EUR 5 million less than normally was spent on these services last year. 

The number of workplaces in transport and logistics industries is still decreasing dramatically

Employment in the service sectors develops at different speeds. The pandemic and related restrictions will burden especially the passenger traffic, tourism, entertainment and recreation sectors as well as personal services sector throughout this year. The recovery of these sectors will start at the end of this year, at the earliest, regardless of the vaccination rate. 

According to Palta’s forecast, up to 9,000 workplaces will be lost in the transport and logistics sector, mainly in passenger traffic, in addition to the 9,000 workplaces that were lost last year. In light of the forecast, the entertainment, recreation and personal services sectors will not achieve growth this year. In the service sectors, approximately 32,000 employees were still laid off full-time at the turn of the year.   

In the service sectors, approximately 32,000 employees were still laid off full-time at the turn of the year.   

However, the strong growth of employment of recent years in the information and communications sector as well as business and expert services continues. For example, in the business and expert services sector, the number of people in employment is expected to grow by ten thousand this year and by nine thousand next year. Palta’s economic survey shows that many expert services have managed to function nearly as usual regardless of the pandemic, and the digital leap has increased the demand, for example, for different information and communications services. 

“According to our forecast, the total number of those in employment will grow moderately by five thousand in the service sectors presented by Palta this year. However, the employment in the sectors grew, on average, by nearly 20,000 per year during the four years preceding the COVID-19 pandemic, which constitutes a major proportion of the general employment growth. There is still some way to go to reach this pace, but the service sector is the sector where new workplaces will be created also in the future,” says Pykäri from Palta. 

According to Pykäri, there are a great number of unemployed jobseekers in sectors in which the number of employed persons is predicted to still decrease in the coming years, whereas the growing sectors are suffering from a shortage of skilled employees. 

“The skills mismatch is a real problem. In order to keep Finland attractive as a location for high-expertise services, skilled employees must be available. We have to increase labour-related migration, develop continuous learning paths and quickly adopt employment promotion reforms, such as advancing local bargaining on the legislation level and developing unemployment security to be more motivating. 

The collapse of the transportation and tourism sectors worsens the export prospects 

The prospects of the service exports are also dualistic. The COVID-19 pandemic sent also the service exports into a downward spiral last year when exports decreased by up to one sixth. Pykäri believes that exports created, for example, through the royalty and licence income will most likely recover to the pre-pandemic level already during this year when the production returns to normal. The export of digital services and ICT services is expected to grow this year. 

However, the trade in services as a whole will not recover before the transportation and tourism sectors recover, which is forecasted to take at least until 2023. Services cover one third of all Finland’s export, and more than two thirds of the fall of exports was due to the drop in the external trade of services. 

The State of the Service Economy report surveyed the changes in the economic situation of private services. The report analysed the development of the logistics, information and communications service, business and expert services, administration and support service sectors as well as other service sectors, excluding the trade, tourism, catering, educational and health and social services. In the report, the export figures of services cover the foreign trade of all economic sectors in terms of services. The report figures and calculations are based on the situation on 26 February 2021.