MIL-OSI Economics: Finland’s economy gradually moving out of recession

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Source: Bank of Finland

The Finnish economy is recovering from the recession. Inflation is low and an improvement in the purchasing power of households is supporting a recovery in private consumption. Growth in the economy will gather pace in the immediate years ahead as the economic environment improves both in Finland and its export markets.

The Bank of Finland has today published its economic forecast for the period 2024–2026. The country’s gross domestic product (GDP) for 2024 will still show a year-on-year contraction, at -0.5%. In 2025, the recession will be over and GDP will be up by 1.2%. The economy will grow further in 2026, by 1.7%. “Finland’s economy is slowly moving out of recession. GDP growth in the coming years will nevertheless be subdued,” says the Bank of Finland’s Acting Head of Forecasting, Juuso Vanhala.

Inflation has fallen on a broad basis across the Finnish economy in the first part of the year. “The upward pressures on prices are moderate, though the increase in value added tax will raise consumer prices from the autumn onwards,” says Vanhala. Inflation is projected to rise to 2% in 2025. It will then fall to 1.6% in 2026, when the inflationary impact of the VAT increases diminishes.

Consumer spending will gradually recover as the purchasing power of households rises. “The outlook for the economy is improving and the level of economic uncertainty is slowly dissipating. At the same time the financial markets are expecting interest rates to fall. These factors will all support the recovery in private consumption,” says Vanhala. The past few years have seen a sharp increase in economic uncertainty. Many households are cautious and consumer confidence in the economy is noticeably weak. The Government’s fiscal adjustment measures, including tax increases and social benefit reductions, will dampen the growth in purchasing power.

The amount of private investment across the year will again be down substantially in 2024. Housing construction will continue to decline strongly and corporate fixed investment will also fall due to the tight monetary policy and uncertain economic outlook. The conditions for investment growth will improve in the years ahead, because demand is strengthening, inflation is low and the markets are anticipating looser financing conditions. Both housing construction and corporate fixed investment will pick up.

Low growth in Finland’s main export markets will continue to weigh on the country’s export outlook for the time being. There are nevertheless signs of a cautious recovery in world trade, which will gradually boost the growth in demand for Finnish exports as well.

The weak cyclical conditions, which have continued for some time, are reflected in the labour market. Employment is weakening this year, and unemployment is increasing cyclically. When the recession recedes in 2025, employment will start to pick up again and unemployment will fall.

General government finances will remain significantly in deficit in the years of the forecast. The public debt-to-GDP ratio will grow further, despite the Government’s decisions on substantial fiscal adjustment measures. The continuing weakness in the economy in 2024 and the still rising interest payments on government debt are making it difficult to rebalance the public finances. The situation would be even more challenging without the fiscal adjustment measures.

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