Russia’s war in Ukraine is weakening the outlook for the Finnish economy. Finland’s economic growth was in full swing before the war started, and this serves as a good foundation for the full year’s growth. According to the Bank of Finland's June forecast, the Finnish economy will grow by 1.7% in 2022, but growth will slow to 0.5% in 2023. In 2024 growth will pick up to 1.5%.

Inflation has risen significantly. The war is spurring further growth in energy prices, and the availability of goods has worsened. Services will become more expensive as goods price inflation is passed on to service prices. Consumer prices are projected to rise by 5.6% in 2022. “Supply chain bottlenecks and high raw material prices are pushing up inflation. Inflation is projected to slow next year as the impact of energy prices subsides and supply chain disruptions are expected to ease,” says Bank of Finland Head of Forecasting Meri Obstbaum.

Foreign trade with Russia is collapsing as a result of the war, and higher uncertainty and inflation are weakening the prospects for consumption and investment. “Cost-competitiveness will play an important role in how companies are able to adjust as they try to find new markets to make up for lost business in Russia. If they do not succeed in this, the risk of a recession will grow,”’ says Obstbaum.

Uncertainty surrounding the world economy is present in the forecast for the Finnish economy. In addition to geopolitical risks, uncertainty is being stoked by the continuation of the pandemic and the risk that growth in China may slow more rapidly than expected. “The investment boom that appeared to be on the horizon has been dashed by uncertainty. Factors deterring investment also include the shortages of materials and components faced by companies as well as rising prices and interest rates,” says Obstbaum.

The uncertain economic outlook and rising prices are curtailing household consumption. “Finnish household sentiment about their personal finances and the national economy both slumped to record lows this spring. As a result of the high inflation, households will still see their purchasing power decline this year,” says Obstbaum. On the other hand, households have accumulated a considerable amount of savings during the pandemic which they might choose to spend to make up for the loss in purchasing power.

Finland’s public finances were weakened by the pandemic, and Russia’s invasion of Ukraine has created new public spending needs. The general government deficit relative to GDP will shrink somewhat in the coming years, but the public finances will remain in deficit and the debt ratio will begin to edge upwards again.

The risks surrounding the forecast are clearly on the downside. The forecast assumes that uncertainty generated by the war will fade over time. Production and supply chain bottlenecks are expected to gradually ease. The trajectory of Russia’s war in Ukraine is, of course, impossible to predict accurately. Growth in the Finnish economy may fall short of the forecast, especially if disruptions in the availability of commodities and goods persist and price pressures fail to subside. In the worst case scenario, the entire euro area may fall into recession.