In its latest economic forecast, Nordea predicts a challenging start to the year for Finland's economy but anticipates a significant upturn towards the end of the year. The expected turnaround is attributed to a deceleration in inflation, which should enhance household purchasing power and allow the central bank to initiate interest rate cuts. However, the global economic landscape remains fraught with uncertainty, influenced by geopolitical risks and the unpredictability brought about by a busy election year.
Navigating Through Current Economic Challenges
As Finland braces for a tough beginning in 2024, high interest rates are dampening economic growth, leading Nordea to adjust its growth forecast to -1% for the year. However, the bank remains optimistic about a positive shift in the latter half, projecting a 2% growth in GDP for 2025. "Households facing increased mortgage interest expenses and a deteriorating employment situation are expected to keep domestic consumption subdued in the early months. Yet, as inflation slows, tax reductions take effect, and interest rates begin to decline, purchasing power is likely to improve, brightening prospects for the year-end," assesses economist Juho Kostiainen.
Inflation and Interest Rate Expectations
A pivotal factor in this economic scenario is the slowing pace of inflation across many countries, more sharply than anticipated, paving the way for central banks, including the European Central Bank (ECB), to start lowering interest rates. "We expect the ECB to begin interest rate cuts by June. Prior to this, the central bank will closely examine labor market and wage trends. Although wages are likely to rise swiftly again this year, weak demand should prevent these cost increases from fully translating into higher end prices, potentially bringing inflation back to the ECB's target soon," explains Tuuli Koivu, Chief Economist at Nordea.
Global Economic Outlook Amidst Geopolitical Tensions
The global economy in 2024 continues to be shadowed by geopolitical risks and political uncertainty, with recent developments in the Red Sea highlighting vulnerabilities in the world's production chains. "The role of states in the economy has been magnified in recent years due to the pandemic, the green transition, and rising geopolitical uncertainty. Thus, economists and market analysts are paying close attention to numerous elections that could influence not only national economic policies but also the global economic outlook. The U.S. presidential elections, in particular, are under the spotlight for their potential direct impact on Finnish companies' investments," Koivu forecasts.
The Housing Market and Productivity Concerns
The Finnish housing market is currently characterized by subdued demand and an oversupply of properties. High construction costs and declining prices for used homes have rendered new building projects unprofitable, leading to a contraction in residential construction. This situation is expected to improve slightly as new housing completions decrease and population growth in urban centers, coupled with falling interest rates, boosts demand.
On the productivity front, Finland faces challenges that have hindered growth for the past 15 years, lagging behind peers such as Sweden and the USA. "Finland now needs the courage to invest in developing technologies and business ideas, as well as in education, while also attracting and retaining skilled immigrants," states Kostiainen, highlighting the path forward for Finland's economic recovery.
Despite a rocky start, Finland's economy is poised for a gradual recovery by the end of 2024, buoyed by easing inflation and favorable monetary policies. Addressing long-standing productivity and innovation challenges will be crucial for sustaining growth and enhancing competitiveness in the global market.