The Bank of Finland in Helsinki in May 2016. The central bank has revised down its forecast for the Finnish economy, saying the recession is still expected to remain shallow but the recovery from it uninspired. (Irene Stachon – Lehtikuva)


THE ECONOMIC OUTLOOK for Finland has soured notably, with the national economy now expected to be mired in recession in 2023 and barely grow in 2024.

The Bank of Finland on Friday unveiled its latest interim forecast, revealing that it expects the gross domestic product to contract by 0.2 per cent this year and grow by only 0.2 per cent next year. Three months earlier the central bank was expecting the economy to contract by 0.4 per cent this year but expand by 0.9 per cent next year.

“The recession is still expected to be shallow, but the economy will also recover more slowly than estimated in the summer. Statistical data that became available in the summer indicate weak developments for the rest of the year. In addition, risks in the domestic and global economy have grown,” summarised Meri Obstbaum, the head of forecasting at the Bank of Finland.

The Finnish economy is held back by rising inflation and interest rates on the one hand, and by the erosion of export demand that stems from the weakening economic situation and outlook in the euro area on the other. With also the sustained employment growth will come to a halt, the only positive is that inflation is slowing down rapidly.

The Bank of Finland attributed the downturn chiefly to the struggles of manufacturing industries and residential construction.

“Because manufacturing and residential construction account for a larger share of the gross domestic product than the eurozone average, [the struggles] are undermining the Finnish economy more than in many other countries,” the forecast reads.

In manufacturing, order books are becoming slimmer, companies are unloading their large stocks and reducing production. Residential construction, in turn, is set to decrease sharply as the increase in bankruptcies and low number of building permit applications cast dark clouds over the near-future outlook.

Although the outlook for industrial investment remains somewhat positive, private investments have already been on the decline for three quarters.

Finnish households have had to cut back on consumption in order to afford their housing costs amid rising interest rates, contributing to the slowdown in inflation. The Bank of Finland believes households are close to exhausting the savings they accumulated due to the restrictions imposed to rein in the coronavirus pandemic.

“It is very difficult to say precisely to what extent the savings that were accumulated during the pandemic have already been exhausted. We estimate that they will be exhausted next year or the year after that,” the central bank said. “The effects of this are, for example, that service sectors will no longer prop up the economy as strongly as in past years.”

The Bank of Finland forecasts that inflation will slow to 4.3 per cent in 2023 and to 1.0 per cent in 2024. Employees in many sectors, it also highlighted, are in line for wage increases in 2024.

“In Finland, there are reasonably reliable indicators that the price pressures will ease substantially.”

The employment rate for 20–64-year-olds will drop from 78.1 per cent in 2022 to 77.9 per cent in 2023 and 77.7 per cent in 2024. The rate will rebound close to last year’s level in 2025, as economic growth accelerates to 1.4 per cent.

The European Central Bank on Thursday stated in its forecast that the eurozone economy will expand by 0.7 per cent in 2023, 1.0 per cent in 2024 and 1.5 per cent in 2025 – clearly outpacing the growth rate forecast for Finland by the Bank of Finland.

The bleaker economic outlook warrants a re-consideration of the fiscal policy plans of the Finnish government, views Mika Maliranta, the director of the Labour Institute for Economic Research (Labore).

“The [Bank of Finland’s] forecast is credible, albeit shocking. The period of slowing economic growth is becoming longer than expected earlier, which would have to be somehow taken into consideration in near-future economic policy. The balancing of public revenue and expenditure must continue, but perhaps the emphasis of adjustments should be delayed slightly,” he analysed for Helsingin Sanomat.

Aleksi Teivainen – HT