Shallow recession in Finnish economy to be followed by moderate growth
Growth in Finland’s economy this year and in 2024 will be close to zero. The rise in interest rates and increased costs will reduce the level of business investment. At the same time, growth will be weak in Finland’s main export markets, and therefore in Finnish exports, too. “Employment will remain a bright spot in the economy, although the labour market will, for a period, just be stepping back from its peak vitality,” says Bank of Finland Head of Forecasting Meri Obstbaum.
The Bank of Finland has today published its economic forecast for the period 2023–2025. The Finnish economy will contract this year by 0.4%, as a return to growth is being deferred by the rise in prices, tighter monetary policy and weak export demand. Inflation is nevertheless slowing down this year, and this is already improving household purchasing power. As a consequence, growth will pick up in 2024 to 0.9%. Increased interest rates will dampen growth in investment and private consumption in the immediate years ahead. In 2025, growth in the economy will gather pace, reaching 1.5%.
“Falling inflation and the rise in wages in Finland will gradually improve the purchasing power of households and revive private consumption,” says Obstbaum.
The decline in energy prices will bring inflation down significantly this year already. Tighter monetary policy is gradually beginning to bite, and Finland’s inflation rate will subside next year to 1.3%. However, underlying inflation, which measures price movements in consumer goods and services, will fall only after some delay, as wage increases and rent rises will maintain inflation in service prices. Employees’ earnings will rise briskly in the immediate years ahead, and real earnings will grow. The fight against inflation is not over yet, and the lending rates for households and businesses will, for the time being, remain above the level that people have viewed as normal in recent years.
Household consumption is returning to growth during 2023, as purchasing power and real incomes start to pick up. For households with outstanding loans, interest payments are now taking a larger slice of their income. “For some households, it has been possible to cover the rising cost of living by using savings accumulated during the pandemic, for instance,” says Obstbaum.
With interest rates having risen and the economic outlook being uncertain, companies have been cautious this year with their investments. Significantly fewer new homes are being constructed, for example. A large number of green transition projects are nevertheless at the planning stage.