The Finnish economy slipped into recession last autumn as a result of the energy crisis brought on by Russia’s war in Ukraine. The economy’s performance will continue to be very weak in 2023, according to the Bank of Finland’s interim forecast published today. It takes time for the full effects of uncommonly high inflation and the substantial rise in interest rates to be felt in the economy. The recession is expected to be short-lived and shallow, however. Turbulence in international financial markets is adding to economic uncertainty and could lead to weaker than expected growth in the Finnish economy.
“Finland’s economy has held up so far, despite the difficulties, but the full effects of high inflation and elevated interest rates have not been seen yet. Risks in the global economy have also grown again in just the past few days,” says Bank of Finland Head of Forecasting Meri Obstbaum.
The Finnish economy grew by 2.1% in 2022, thanks to a strong start to the year, but the war and the energy crisis then reversed the trend. The economy will contract by 0.2% in 2023, according to the interim forecast. Growth will then be at a fairly weak level in the immediate years ahead, as the forecast assumes interest rates will remain elevated and no quick recovery is expected in the demand for Finnish exports. According to the forecast, the Finnish economy will grow by 0.9% in 2024 and by 1.5% in 2025.
Inflation expected to return to below 2% in 2024
Consumer prices rose at an exceptionally high rate in 2022. Energy prices fell sharply towards the end of the year, and in 2023 the upward pressure on consumer prices will ease. Inflation is projected to be 4.6% this year. The rise in the prices of services and consumer goods will also gradually slow and inflation will return to below 2% in 2024.
The employment rate improved significantly in 2022, but the faltering economy will bring an end to the favourable trend in the labour market. The standstill in economic growth will nevertheless be of such short duration that employment will remain strong in the immediate years ahead.
The biggest risks surrounding the forecast are concerned with financing conditions, the energy markets and the persistence of high inflation. If these risks materialise, the economy could perform below the levels projected in the forecast.
Bank of Finland’s interim forecast, march 2023 (in Finnish)
Meri Obstbaum, Head of Forecasting
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