The Finnish economy is expected to remain in a state of hibernation, according to Suomen Pankki's latest forecast. The country slipped into a recession in the fall of 2022 due to the energy crisis caused by Russia's aggressive war. The effects of unusually rapid inflation and significantly rising interest rates will have a delayed impact on the economy. However, the recession is expected to be short and mild. The turbulence in international financial markets increases economic uncertainty and may lead to weaker-than-expected economic growth in Finland.
Despite the difficulties, the Finnish economy has held up so far, but not all the effects of rapid inflation and rising interest rates have been seen. Moreover, the risks to the international economy have recently increased," says Meri Obstbaum, head of forecasting at Suomen Pankki.
In 2022, the Finnish economy grew by 2.1% due to a strong start to the year, but the war and energy crisis reversed the trend. According to the forecast, the economy will shrink by 0.2% in 2023. Since interest rates are expected to remain higher than before, and there is no rapid recovery in Finnish export demand, economic growth will remain sluggish in the coming years. According to the forecast, the economy will grow by 0.9% in 2024 and 1.5% in 2025.
Inflation is expected to return to below 2% in 2024
Consumer prices rose unusually quickly in 2022. At the end of the year, energy prices fell rapidly, and the upward pressure on consumer prices is expected to ease this year. According to the forecast, inflation will be 4.6% in 2023. The rise in the prices of services and consumer goods will also gradually slow down, and inflation will return to below 2% in 2024.
Employment strengthened significantly in 2022. The downturn will halt the favourable development of the labour market. However, since the economic growth slowdown will be short-lived, employment will remain good in the coming years.
The greatest risks in the forecast are related to financial conditions, energy markets, and the prolongation of rapid inflation, which, if realised, may lead to weaker-than-expected economic development.
Overall, the forecast suggests that the Finnish economy faces some significant challenges in the coming years, but the outlook is not entirely bleak. While the economy is expected to remain sluggish in the near term, the recession is likely to be short-lived. However, there are risks to the outlook, and these should be monitored closely by policymakers and businesses alike. By remaining vigilant and responsive to changing circumstances, Finland can continue to navigate the economic challenges ahead.
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