THE FINNISH ECONOMY will slide into a recession this year despite the alleviation of concerns about the energy crisis, predicts OP Financial Group.
The Finnish financial group revealed yesterday that it expects the national economy to contract by half a per cent in 2023 and grow by half a per cent in 2024. Although the forecast has only undergone minor tweaks since last summer, it should not be read as an indication that the economic outlook is clear, told Reijo Heiskanen, the chief economist at OP.
“We are looking rather at a couple of years of indefinitely sluggish development than at a clearly defined recession and a brisk recovery,” he said in a press release on Tuesday.
The recession will hit the economy widely, denting exports, private consumption and investments, according to OP.
While the value of exports increased at an almost unprecedented rate last year, the volume of exports crept up only by a few per cent from the previous year. The volume is expected to continue declining this year as demand decreases, the recovery of service demand levels off and statistics are weighed down by lack of exports to Russia.
Also export prices will start declining this year.
Meanwhile, rapidly rising consumer prices and interest rates are having an increasing impact on private consumption and investments. Private consumption grew noticeably last year despite a decline in disposable income due to savings built up during the coronavirus pandemic, bringing down the household saving rate to its lowest level since late 1980s.
With households once again looking to build up financial buffers amid rising interests and economic uncertainty, private consumption is expected to decline.
“In 2022, households were particularly hit by the rapid price and interest rate increases. The situation of businesses will start eroding this year as costs increase and demand erodes. Both employment and investments will consequently start declining,” commented Heiskanen.
The decline in investments is expected to be noticeable especially in construction. Although employment continued to grow at the end of last year, the economic slowdown is to start gradually gnawing away at the labour markets – both dragging down the employment rate and driving up the unemployment rate.
Inflation appears to have peaked last winter, but the rise in consumer prices will level off slowly particularly for services as pressure builds for pay rises.
Economic indicators in the eurozone have declined to levels that herald a slowdown but remain higher than the market expectation, according to OP. While inflation has abated since peaking in most member states at the end of last year, core inflation is more unrelenting and labour markets remain widely tight.
Central banks are in a difficult spot as the rapid interest rate hikes remain only partly reflected in the economy. It remains uncertain how much further monetary tightening is required, as it is critical to avoid both excessive rate hikes and the re-acceleration of inflation.
Tomi Kortela, a senior economist at OP, pointed out that while further tightening has been priced into market expectations, the extent of future rate hikes remains somewhat uncertain. “It is clear, however, that the most significant hikes are behind us and the development of short-term interest rates will be more moderate this year,” he commented.
Aleksi Teivainen – HT
