Coffee packages in Citymarket Ruoholahti in Helsinki on 13 April 2022. Coffee prices have risen by 44 per cent in the past year, Iltalehti wrote on Monday, 30 May. (Heikki Saukkomaa – Lehtikuva)

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A DECLINE in Finns’ standard of living is an unavoidable consequence of soaring consumer prices, reports STT.

Mika Maliranta, the director of the Labour Institute for Economic Research (Labore), told the news agency yesterday that the situation is not terribly dramatic because of the favourable development of real wages in recent years.

“Overall it’s a question of us taking three steps forward and now it’s looking like we’ll have to take one step back,” he summed up the situation.

Statistics Finland in May reported that inflation picked up to 5.7 per cent in April, driven particularly by the increases in energy prices and agricultural production inputs caused by Russia’s invasion of Ukraine. Collective bargaining negotiations, meanwhile, have yielded agreements on wage increases of around two per cent.

Statistics Finland on Friday stated that the real earnings of wage earners decreased by 2.7 per cent year-on-year in the first quarter of the year.

“It looks like the contraction of purchasing power is pretty inevitable in light of the current wage and inflation development,” Meri Obstbaum, the head of forecasting at the Bank of Finland, commented to STT.

Maliranta viewed that the most pertinent question for households is how long the decline in real earnings will continue. “It may take some time depending on how the situation develops in Russia,” he said.

Statistics Finland on Tuesday released preliminary data showing that the gross domestic product grew by 0.2 per cent from the previous quarter between January and March. Pasi Kuoppamäki, the chief economist at Danske Bank, warned that the Finnish economy is at risk of sliding into a short-term recession until the global economic situation and inflationary environment improve.

The Bank of Finland remains confident in the growth forecast of 0.5–2.0 per cent it presented for the national economy in March, according to Obstbaum. A recession, she added, is nevertheless a real possibility due to the unusual uncertainty and the decline in confidence among both businesses and households.

“The collapse in consumer confidence and contracting purchasing power slow down consumption, and consumption is the most important component of gross domestic product,” she told.

Households in Finland are being squeezed not only by inflation, but also by rising interest rates. Obstbaum reminded that an increase in interest rates is reflected fairly quickly in housing loans due to the popularity of variable-interest-rate loans in Finland.

“In a way, there’s pressure on consumption from a number directions,” she said to the news agency.

Although rising prices and interest rates impose significant constraints on individual households, the situation is different from the viewpoint of the entire economy. The employment situation is developing favourably, propping up total consumption and, as a result, shielding against the risk of recession.

“The employment situation is improving very strongly and, in that regard, the purchasing power of the whole household sector won’t drop in real terms,” said Jukka Railavo, a financial advisor at the Ministry of Finance.

The Finnish economy was recovering well from the coronavirus-induced crisis before the Russian invasion of Ukraine. The recovery is still evident in a sharp increase in employment – especially in the service sector.

“If you look at what sectors have created jobs in recent months, they’ve been created pretty much exclusively in the service sector,” highlighted Obstbaum.

Aleksi Teivainen – HT

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