Juuso Vanhala, the acting head of forecasting at the Bank of Finland, was photographed at a news conference in Helsinki on Tuesday, 11 June 2024. The central bank is forecasting more headwinds for Finnish exports, given what is expected to be muted growth in the eurozone and the incompatibility of the main export products with recent growth trends. (Markku Ulander – Lehtikuva)

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THE FINNISH ECONOMY will grow next year at a slower clip than expected, according to the Bank of Finland.

The Bank of Finland on Tuesday revealed that it expects the national economy to expand by 1.2 per cent in 2025, representing a downgrade of 0.5 percentage points from the forecast it published in March.

Juuso Vanhala, the acting head of forecasting at the Bank of Finland, said the key reasons for the downgrade are muted global trade and the tax increases and social security cuts implemented by the government of Prime Minister Petteri Orpo (NCP).

The economy is forecast to contract by 0.5 per cent in 2024 and to grow by 1.7 per cent in 2026. The Bank of Finland viewed that the recovery is likely to start in the second half of this year, driven by slowing inflation and its positive impact on the purchasing power of households and private consumption.

The recovery will also be supported by brighter economic outlook and the gradual dissipation of economic uncertainty.

Overall, however, the central bank is worried that growth will remain sluggish in the coming years. Private consumption is forecast to fall sharply this year and residential construction to continue on steep decline. The European Central Bank’s (ECB) restrictive monetary policy, along with the uncertain economic outlook, will also rein in productive investments.

The investment environment is expected to improve in the coming years, though, as demand picks up, inflation remains low and the financing environment becomes less stringent.

With the ECB forecasting that the eurozone economy will expand by 0.9 per cent in 2024, 1.4 per cent in 2025 and 1.6 per cent in 2026, Finnish exports will continue to face headwinds, having grown already for some time at a lower rate than demand in the most important export markets. The Bank of Finland highlighted that the exports have long focused on investment goods and raw materials, whereas eurozone growth has recently been driven primarily by services.

A number of economists have expressed their concern about the Finnish economy’s reliance on manufacturing.

Despite the broad-based fiscal adjustments implemented by the government, the national debt burden will continue to creep up, hitting 83.5 per cent of gross domestic product in 2026, according to the Bank of Finland. The government effort to balance the public economy will be complicated by the recession and rising debt servicing costs.

“It is important to continue balancing the public economy, and it would be significantly harder if the government hadn’t already taken action,” said Vanhala.

The ECB’s decision last week to cut interest rates will support the recovery also in Finland, estimated Olli Rehn, the governor of the Bank of Finland. In the longer term, he added, the key question will be how domestic companies fare in global competition.

“Most of the innovations utilised in Finland have been produced elsewhere. By investing in basic research and education that relies on it, we can strengthen our capacity to leverage innovations created elsewhere. Our innovation potential can also be boosted by promoting work-based immigration by highly educated people and the internationalisation of companies,” he said at a news conference on Tuesday.

Rehn said Finland needs not only to raise funding for innovation and development, but also an efficient tax system and regulatory environment that fosters innovation.

Aleksi Teivainen – HT

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