According to the latest statistics on national economy, Finland’s gross domestic product grew by 0.2% in the first quarter of the year. This marks an end to the economic contraction of the previous six months, but growth prospects are looking weak, notes Timo Vesala, MuniFin’s Chief Economist.
The historically rapid tightening of monetary policy will truly begin to reduce demand this year. The rise in financing costs is already shaking the economy’s most interest-sensitive sectors, such as the real estate market and construction. The sharp contraction in construction investments will significantly cut GDP growth this year and the next.
Wage earners’ purchasing power has fallen back to 2009 levels – MuniFin scaled back its GDP forecast for the coming year
Economic outlook is affected by private consumption, which is currently in a downright anaemic state. According to Vesala, rising living costs have put many households in a tight spot, eroding consumer purchasing power.
“Real earnings have fallen back to levels last witnessed 14 years ago. The increases in purchasing power gained after 2009 have been wiped out in a short time, and no quick recovery is to be expected. Households likely still have some leftover extra savings from the period of the COVID-19 pandemic, but at some point, consumers will reach a limit.”
MuniFin lowered its growth forecast for 2024 by one percentage point to 0.5% and predicts a slight rise in unemployment. The GDP growth forecast for 2023 remains unchanged at -0.5%.This cold shower on the economy will also cool down price pressures.
According to Vesala, food prices will probably take a downward turn after a period of rapid increases. The falling demand will also ease inflationary pressure.
Inflationary pressures are gradually easing
Inflation has been running at a faster pace than expected in the early months of the year. Fortunately, food prices may be turning downwards after a rapid period of increase. Additionally, cooling demand will dampen inflationary pressures.
However, the realized price increases in the current year have been significant enough for the average inflation rate for 2023 to reach 6.0 percent. In the following year, consumer price inflation will slow down closer to normal levels, reaching around two percent.
High employment continues to support the economy
The labour market situation has remained surprisingly strong despite the headwinds in the economy, and there are still few signs of weakening, unless one counts the slight increase in the number of furloughed workers or the slight decrease in job openings.
The number of employed individuals, the employment rate, and the total hours worked are all either at or near record levels. The robustness of the labour market is partly indicative of a chronic labour shortage, which is indeed the primary factor restricting the long-term growth potential of the economy.
Despite structural labour availability issues, the economic downturn will inevitably weaken overall employment to some extent and lead to a slight increase in the unemployment rate. Unemployment is expected to rise particularly in sectors connected to the housing market and construction.
The summary of MuniFin’s Economic Forecast (only available in Finnish) is written by Timo Vesala, Chief Economist, Doctor of Philosophy (PhD), Economics.
Timo Vesala, Chief Economist
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