Economic growth picked up globally in the early part of 2022, when COVID-19 restrictions were removed and the pandemic began to fade from the spotlight. Finland’s economy, too, grew briskly throughout the first half of the year. Growth then stalled again due to Russia’s invasion of Ukraine. According to the Bank of Finland’s latest economic forecast, the Finnish economy will grow by 1.9% over the full year 2022.

In 2023, the economy will slide into a mild recession and real GDP will contract by 0.5%. Precipitating the recession will be the energy crisis exacerbated by Russia’s war in Ukraine and the surge in the cost of living. Growth will rebound to 1.1% in 2024 as the headwinds to the economy subside. In 2025, Finnish real GDP will grow by 1.5%.

Inflation has accelerated in 2022. The war in Ukraine has led to reduced availability of energy, and this has driven up electricity and fuel prices considerably. High electricity costs will keep prices high especially during the coming winter months. “High inflation and weakening purchasing power will cause private consumption to fall in the immediate years ahead. The decline in purchasing power and the rise in interest rates needed to control inflation will affect indebted households especially, and they may have to reduce their consumption significantly,” says Bank of Finland Head of Forecasting Meri Obstbaum.

The high level of inflation is weakening consumers’ purchasing power and eroding consumer and business confidence in the economy.Businesses will be cautious in their investment decisions due to the weak economic outlook, rising financing costs and the substantial uncertainty surrounding the economy.

Raw material and component shortages and disruptions in the international transport of goods will gradually ease. Inflation will slow to 5% in 2023 and settle at about 2% in 2024–2025. “As inflation slows, household purchasing power will improve and the uncertainty about the economy will subside. This will encourage consumer spending and strengthen the economy’s conditions for growth,” says Obstbaum.

The very favourable developments on the labour market are fading. The strong employment rate and the level of savings accumulated during the pandemic have for the time being provided support to households. A lot of new staff have been hired in the service sectors in particular. Businesses in many industries are experiencing a shortage of skilled staff, and many employers are therefore particularly keen to retain employees. As with real GDP, the employment rate will decline temporarily in 2023 but will then rebound.

Public spending will continue to exceed revenues in the immediate years ahead. Population ageing is adding to health and social services spending and at the same time public debt service payments are growing. The gap in the general government balance is being financed with debt. The public debt-to-GDP ratio will begin rising considerably from 2024 onwards and will reach almost 75% by the end of 2025. A fiscal correction will require significant spending cuts and tax increases in future parliamentary terms. The Bank of Finland estimates that the Finnish sustainability gap is about 4% relative to GDP.