By Hilary Schmidt, International Banker
In an economic forecast published on September 20, the Helsinki-based private economic research institute ETLA Economic Research laid out a rather gloomy outlook for the Finnish economy for 2024, with gross domestic product (GDP) slated to contract by 0.2 percent. ETLA’s head of forecasting, Päivi Puonti, predicted that the Finnish economy would be “the worst performer in the euro area this year”. But with more upbeat forecasts for 2025 now being published, Finland may well be over the worst of its multi-year economic quagmire.
The last couple of years have been unequivocally rough for Finland’s economy, with every quarter from the final quarter of 2022 until Q2 2024 having posted negative annual growth in gross domestic product. 2024 has seen the first two quarters register growth of -1.2 percent and -1.5 percent, respectively, underlining the persistence of the dire situation up until at least the second half of the year and adding to the 1.2-percent GDP contraction recorded for 2023. The Finnish economy did grow by 0.5 percent year-on-year in the third quarter of 2024. Nonetheless, many economists are predicting an overall contraction for the economy for the full year 2024.
For instance, S&P Global Ratings revised its 2024 growth projections for Finland down to 0.4 percent on October 25. And Fitch Ratings predicted the Finnish economy to contract by 0.3 percent this year, citing a sharp fall in inventories and weak European Union (EU) growth as key underlying factors. With variable-rate loans representing a whopping 97 percent of housing loans in Finland, moreover, Fitch highlighted in an August 9 report that the impacts of the European Central Bank’s (ECB’s) interest-rate hikes of recent years have been distinctly amplified on the Finnish economy in particular. Investment and consumption have also suffered gravely as a result of the steep monetary tightening, despite real wages growing once again for the first time in approximately a year. Fitch also disclosed its downgrading of Finland’s sovereign rating from stable to negative in the same report.
The Bank of Finland’s December report on 2024’s GDP growth outlook confirmed a contraction of 0.5 percent for the full year—the same as its earlier October estimate. The central bank also highlighted Finland’s labour-market woes as being particularly significant, with both a rise in the unemployment rate and a drop in total employment numbers being recorded during the first 10 months of the year. As such, the central bank forecasted the unemployment rate to rise to 8.3 percent for 2024 as a whole from 7.2 percent in 2023.
If there’s one silver lining to emerge from Finland’s ongoing economic slump, however, it’s that the weakness in domestic demand, along with the dearth of upward wage pressure, has kept inflation well below the euro area average over the last three years. And despite the hike in the standard VAT (value-added tax) introduced on September 1, S&P predicted the inflation rate to average just 1 percent for 2024. “Contributing to overall low inflation are decreasing energy prices, which had risen by 30 percent during 2022,” S&P noted in its October 25 assessment. “At the same time, weak domestic demand and moderate wage growth have also kept core inflation below the eurozone average. Some of these effects will fade toward the end of 2024, but we believe inflation in Finland will remain below the ECB’s target of slightly below 2 percent through 2027.”
Indeed, analysts expect the economy to show much more convincing signs of a rebound next year, with the green shoots of recovery already visible during the latter half of 2024 after eurozone interest rates began declining from their 4.5 percent peak in early-June. “Private consumption will benefit from several factors, such as inflation remaining low (currently 1 percent year on year); rising wage growth; declining interest rates; and an expected labour market recovery,” S&P also noted in late October. “Private-sector investment, specifically construction, will still take time to recover from high interest rates and a previous overhang of supply. At the same time, the rebound of external demand will critically depend on developments in Finland’s main trading partners, namely Germany and Sweden, for which we project a recovery commencing in the second half of 2024.”
ETLA forecasted Finland’s economy to record a 1.4-percent expansion for the full year of 2025, while Fitch predicted growth at 1.3 percent in 2025 and 1.6 percent in 2026, as lower interest rates boost investment and consumer spending and a recovery in the EU drives real export growth. However, the credit-rating firm also stated that it expected fiscal-consolidation measures to dampen domestic demand, suggesting that risks to the downside would persist.
Indeed, Finland’s budgetary finances remain a distinct challenge, with budget deficits recorded every year since 2009 and the most recent deficit for 2023 standing at 2.7 percent of GDP. The Ministry of Finance’s forecast delivered on September 23 acknowledged that while the economy had begun to recover from the recession and growth should pick up next year, the budget would remain in deficit and continue to add to the national debt, such that the ratio of general government debt to GDP would likely exceed 80 percent this year, from 75.8 percent in 2023.
To address the deficit, the government will implement around €9 billion of budget-consolidation measures—or 3.3 percent of 2024’s GDP levels—over the next few years to 2027. €6 billion of this amount will be in the form of spending cuts and higher consumption taxes, a further €2 billion will be generated through labour-market reforms, and another €1 billion will be obtained through spending cuts at the county level.
Most of these measures will take effect next year, moreover. When combined with the improving growth trajectory, they should reduce the budget deficit to 3.2 percent in 2025 and 2.0 percent by 2027, according to S&P’s estimates. “Given this fiscal path, Finland’s government will avoid being subject to the European Commission’s Excessive Deficit Procedure, even though deficits will exceed 3 percent of GDP next year as well, in our view,” S&P stated.
Next year may see the Finland’s public debt being better contained due to shrinking deficits and accelerating economic growth. “It seems that the patience of those waiting for an upward turn will be rewarded. However, the outlook for general government finances does not inspire similar confidence,” the Ministry of Finance’s director general, Mikko Spolander, said. “Even though the deficit is shrinking and indebtedness is slowing down, public finances will remain close to the risk limit.”
While the outlook for Finland’s government finances remains subdued, however, the same cannot be said for its trade balance, with the recovery of world trade strongly expected to drive Finnish export growth. “Export demand will be boosted especially by accelerating growth in the euro area,” the Ministry of Finance also noted in its September 23 forecast. “Finland’s price competitiveness is at the long-term average level and will not present an obstacle to growth.”
The Bank of Finland remains less sure that a likely rebound in manufacturing and exports next year will persist, however. “Exports will largely depend on how Finland’s export markets develop in the final part of 2024 and in early 2025,” an October 8 assessment by the bank also observed. “Geopolitical risks are still present, including fragmentation into competing blocs in the global economy, the reshaping of value chains, and armed conflicts. Domestically, it is uncertain how long consumers will continue to be cautious and at what point the construction sector will eventually start to recover.”
That said, the central bank has stated that it does expect the number of unemployed people to fall modestly in 2025 as the economy recovers. It also sees a good chance of strong improvements in business and household confidence off the back of falling interest rates, which should also bolster private consumption and housing investment next year.
Over the longer-term horizon, however, Finland needs to resolve key structural economic challenges, most notably its low productivity growth and its ageing population. “It is a pity that Germany, one of our main trading partners, is in a similar situation to ours,” according to ETLA’s Päivi Puonti. “Germany’s economic performance this year will be at the tail end of the G7. As monetary policy eases and the business cycle normalises, deeper structural problems will remain. In Germany, some of the same questions as in our own country are being asked: how to attract skilled workers to an ageing workforce and how to improve the long-term structure of the economy.”
ETLA also recommended that the government invest more strongly in the conditions for productivity growth. “A temporary investment incentive and recapitalisation of the Finnish Industry Investment Tesi (a state-owned, market-driven investment company) are not enough. Realising the competitive advantage of wind power and improving the productivity of social services require a broader productivity programme.”
Diversification of the export structure would further protect the economy from cyclical fluctuations, ETLA’s chief executive officer, Aki Kangasharju, added, noting that with exports and imports expected to grow at roughly the same rate in the coming years, net exports will not be a catalyst for Finland’s economic growth.
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Publish date : 2024-12-23 04:29:00
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