Economic forecasts published earlier this year predicted that the Finnish economy would pick up in the latter months of 2023.
However, similar reports now seem certain that Finland will be in recession for the rest of the year, with the gross domestic product (GDP) for 2023 expected to remain at last year’s level.
The latest economic survey from the Ministry of Finance, published on Monday, noted the cause of the recession is the rise in prices, which has reduced household consumption.
The construction sector has been impacted in particular, with housing sales and, as a result, housing construction plummeting due to the rise in interest rates.
The situation in industry is also weak, as customers at home and abroad prefer to empty their existing stocks rather than order new ones.
Some cause for optimism
On the other hand, the ministry believes that next year will be better for the economy. That optimism is driven by at least the following factors:
1. Purchasing power and private consumption.
Cheaper energy and raw materials will slow down inflation at the same time as wages and benefits rise. Household purchasing power is expected to improve next year, which will increase consumption and boost economic growth in 2024 and 2025.
2. Falling interest rates.
The ministry expects the European Central Bank to lower its key interest rates in the autumn of 2024. Market interest rates that affect mortgages may fall even earlier than this. This will boost both private consumption and investments.
3. Inventories are almost used up.
With the slowdown in the economy, corporate customers of Finnish companies have reduced their purchases and turned to using their stocks. As inventories are depleted, demand will recover.
4. Employment growth as demand recovers.
This will also support an uptick in private consumption. Employment will decline at the end of the year, but according to the ministry’s assessment, this trend will be short-lived.
Revival of global economy
The ministry further noted that due to the strength of this positive cycle, world trade will “significantly pick up” in 2024.
The forecast also saud that GDP will grow 1.2 per cent next year, and 1.8 percent the following year.
According to Finance Ministry Director General Mikko Spolander, this situation does not give cause for new government economic stimulus packages.
“For now, the recession as seems to be a fairly typical period of negative growth that is part of the economic cycle. A slight and short-lived recession does not give cause to support total demand in the economy through public funds. The automatic mechanisms of general government finances and fiscal policy will support the economy in other ways in 2023–2024,” he stated in ministry press release on Monday.
The ministry notes that investment prospects are exceptionally bright, because a record number of different investment decisions related to the green transition are being made.
Private investments are expected to fall by 3.6 percent this year, but will turn to 1.1 percent growth in 2024. In 2025, investments are expected to grow by 2.3 percent.
Public finances continue to weaken
The slow growth of wages and stagnation in private consumption are affecting tax revenues.
“Tax revenue growth has been anemic this year,” says ministry Senior Financial Adviser Jenni Pääkkönen.
“The total effect of the savings decided on in government party budget talks is 2.7 billion euros at the 2027 level, but the weakening of revenues will eat up the effects of those savings,” she noted.
The budget deficit in healthcare and social services wellbeing counties is also proving to be larger than previously estimated. The combined deficit of central government administration, municipal administration and the wellbeing services counties is deep, projected to remain at over 14 billion euros in 2027.
Source: Yle
