Finnish economy falls into recession: OP

The Finnish economy has slipped into recession as predicted, and Finland's Gross Domestic Product (GDP) will decline by 0.3% this year, according to OP Financial Group's economists.

In line with the previous forecast, 2024 is feared to remain weak with a GDP growth rate of about zero, said OP in a press release on Tuesday.

"On the whole, the Finnish economy has quite successfully endured the various blows dealt to it, including the collapse in Russian trade, accelerated inflation and the rapid rise of interest rates. While the recession remains moderate for now, no turn for the better is yet to be seen," said Reijo Heiskanen, Chief Economist of OP Financial Group.

Finland's economy has weakened extensively this year. Exports, investment and private consumption in particular have declined. The sectors hit hardest are those most affected by the rising interest rates, including residential construction and home sales, as well as export sectors particularly susceptible to economic fluctuations.

The decreasing demand on the private side has been offset by strong growth in public consumption.

Exports are suffering from the weak industrial cycle. In the sectors most susceptible to economic fluctuations, exports have plunged sharply, and export orders have decreased extensively.

In 2024, the global economy is predicted to shrink and the prices of export products to decline across a wide range. Finnish export volumes will decrease for the second consecutive year in 2024.

Private consumption will decrease slightly this year. Despite the growth in real income, private consumption will not return to a growth track next year, as the weaker job market encourages saving, and the rising interest rates reach their full impact. Public consumption is not expected to continue to grow in 2024.

Investments will decline by 5% in 2023, and the downward trend will continue in 2024. The greatest weakening impact will come from residential construction investments, which are expected to drop by 16% from 2022.

Unemployment has increased this year. The number of vacancies has returned to pre-pandemic levels, and temporary lay-offs have increased.

According to forecasts for 2024, unemployment will continue to increase, and the employment rate will take a downward turn.

Inflation has slowed significantly and is expected to drop to roughly two per cent in the next few years.

"The risks to Finland's economic development point in a weaker direction. Development may be slightly better than predicted, but heightened uncertainty will persist, and in the current economic situation, the materialisation of risks could quickly derail the economy. However, it is unlikely that development will be considerably better than predicted," Heiskanen said.

The global economy has grown better than expected this year. Development has been mixed: the industrial sector has been in a recession, while services have driven growth. Next year, the industrial cycle is expected to remain weak, and the service sector to lose some momentum.

The US economy plays a key role in the global economy. In 2023, US development provided a positive surprise, but the country's economic growth is still expected to slow down next year.

Growth has been heavily based on household consumption, supported by robust employment and savings accumulated during the pandemic.

Household sentiment has remained quite good. Employment and the use of savings, some of the key growth engines, are now declining, and household sentiment may fall rapidly. In turn, investment relies strongly on support from economic policy.

"It's difficult to predict how quickly the US economic cycle will cool down. Development in the US may continue to be slightly better than expected, but in this case, the risks of a steeper economic cooldown will increase gradually because inflation and interest rates will remain higher," Heiskanen added.

The economic development of the euro zone will remain weak in 2024. However, inflation is slowing down, and the ECB may begin to relax its monetary policy during the year.

"It is very likely that the ECB's interest rate hikes have seen their peak. The markets expect the ECB to initiate interest rate cuts in the first half of next year, which has led to a slight decrease in market rates. The inflation trend may cause surprises in either direction, but a year from now, interest rates will probably be lower than currently," said Senior Economist Tomi Kortela.