Govt forecasts pick up of stagnant economy later this year

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Finland’s economic growth is stagnant as rising prices and interest rates reduce demand but the economy is expected to pick up in the latter part of the year as household purchasing power increases, according to an economic survey published by the Ministry of Finance on Thursday.

Investments related to the green transition will further boost growth. The general government deficit will increase this year, and it is not projected to narrow during the outlook period, said the ministry in a press release, quoting the survey.

The Economic Survey does not include the upcoming government programme’s measures aimed at strengthening general government finances.

In 2023, Finland’s gross domestic product (GDP) will remain at the previous year’s level. Economic growth is hindered by the increase in prices and interest rates, which has slowed household consumption and private investment.

At the same time, however, foreign trade has a positive impact on growth, with exports increasing and imports decreasing to a significant degree.

“In the Finnish economy, the early part of this year has been in line with expectations, and the outlook has not changed substantially. While green investments may spring a positive surprise, stabilising general government finances requires purposeful and significant measures rather than surprises,” said Director General Mikko Spolander, Head of the Economics Department of the Ministry of Finance.

The Finnish economy is projected to grow by 1.4% in 2024 and 1.9% in 2025. Growth in 2024 will be favourably affected by the slowing of price inflation and rise of household income, which will improve the purchasing power of households. Growth will also be supported by investments related to the green transition, which will increase domestic demand. However, if the investments materialise, most of them will take place towards the end of the decade.

The stagnation of production growth will be reflected in a slight decrease in employment in the latter part of the year. Nevertheless, the decline in employment will be minor, and employment is projected to improve during the outlook period.

The unemployment rate will fall to 6.6% and the employment rate for the 15–64 age group will rise to 74.6% by 2025. The employment situation has not been as good as this since the beginning of the 1990s.

The economic situation in Finland and globally is characterised by both positive and negative factors. Services are seeing strong growth, employment continues to improve, and wages are increasing. At the same time, the situation in industry is substantially weaker than before, and higher interest rates have led to a sharp decline in construction.

Exports are increased by price competitiveness remaining fairly good. Import growth will accelerate next year, driven by the growth of consumption and investment. The closure of the Russian market and the decline of tourism to Finland have had a long-lasting impact on Finland’s foreign trade and the export of certain services.

The rapid rise of interest rates on housing loans has cooled down the housing market, and new residential construction starts declined year-on-year by approximately a quarter in the early part of the year.

At the same time, construction is maintained by repair construction and non-residential construction. The stagnation of the housing market is expected to be short-lived. However, residential construction may decline more than expected, particularly if prices and interest rates continue to rise for longer than anticipated.

Investments related to the green transition will accelerate economic growth, and they may provide a larger-than-expected positive growth impulse. There are plans for a very significant amount of wind power investment in Finland, as well as production plant investments to take advantage of cheap and clean wind power. While not all of the investment plans will materialise, the number of plans is many times higher than usual.

General government finances improved in the two previous years as the pandemic abated. However, this improvement was temporary: the economy will not grow in 2023, inflation will increase public expenditure, and debt servicing costs will increase further during the outlook period. In addition, many discretionary measures have a negative effect on general government finances, and central government finances in particular. Due to these factors, the general government deficit will be 2.4% of GDP this year, rising to 3% in 2025.

The general government debt ratio will increase throughout the outlook period. The debt ratio will be kept on an upward trajectory thereafter by the combined substantial deficits in central government and local government, the ageing of the population and rising debt servicing costs. The rise in interest rates levelling off does, however, reduce the uncertainty associated with debt servicing costs.

The forecast is based on the assumption that the economic impact of Russia’s war of aggression will remain at the current level. It is difficult to predict the potential impacts on the Finnish and European economy of new developments in the war.

Moreover, the forecast is based on the assumption of unchanged policy, which means that measures to be taken by the government that is currently being formed are not anticipated in the projections. The actions of the new government may have a significant effect on general government finances.

  •  Finnish
  •  Economy
  •  Stagnant
  •  Pick up


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