THE FINNISH ECONOMY will tip into a recession this year, forecasts Pellervo Economic Research (PTT).
PTT on Wednesday revealed that it expects the economy to contract by 0.5 per cent this year and expand by 0.5 per cent next year as a consequence of factors such as rising interest rates, slowing construction activity and growing unemployment.
Investments are forecast to decrease across industries, by 6.2 per cent this year, with the construction industry especially in the doldrums.
“Residential construction in particular is drifting into hardship. There is the threat of a wave of bankruptcies and the permanent loss of the skilled foreign workers who will become unemployed,” the forecast reads.
PTT estimated that although there is no need for broad-based fiscal stimulus, the government should introduce carefully targeted support measures to tackle the situation. The government should also re-consider its plan to slash social security benefits due to the impending recession due to its potential impact on employment.
“It would be a serious policy mistake to cut social security in the circumstance of a prolonged recession; it would increase alienation from working life and inhibit employment growth in the long term.”
The economic research institute stated that it expects the ranks of the jobless to grow by roughly 50,000 people in 2024. Especially at risk of unemployment are employees on part-time contracts and employees on fixed-term contracts that are set to expire during the downturn.
“Labour markets have recently shown signs of a turn for the worse, and employment will deteriorate going forward.”
PTT forecasts that the employment rate will drop from 73.8 per cent to 72.4 per cent, while the unemployment rate will jump from 7.3 to 8.5 per cent in 2023–2024. Companies, it highlighted, are reluctant to let go of employees because the global talent shortage could make replacing them difficult once the economic difficulties ease.
“Temporary lay-offs will be used on a broad basis next year because they provide flexibility to companies in difficult economic conditions,” it said.
Consumer prices will rise by an average of 5.7 per cent in 2023 and by 2.8 per cent in 2024, according to the institute. In Finland, housing costs have emerged as the chief driver of inflation as the debt servicing costs of borrowers have risen due to benchmark rate hikes by the European Central Bank.
Also food, however, will continue to drive up consumer prices.
“Recent wage agreements have sought to compensate wage earners for the rise in prices. The wage increases, though, are partly sustaining the rise in prices through higher labour costs and consumer demand,” gauged PTT.
It forecasts that private consumption will decrease toward the end of the year due to persistent inflation, high interest rates and economic uncertainty. Although the combination of inflation slowing down and wage increases should consolidate the real income of households next year, it will not result in an immediate bump in private consumption.
“The individual household still has a lot of catching up to do before its purchasing power has been restored.”
Aleksi Teivainen – HT