OECD Economic Outlook, Volume 2023 Issue 1

Finland

Growth is projected to stall in 2023, before picking up to 1.2% in 2024. As energy prices ease, private consumption is set to recover moderately despite the drag from higher interest rates, which together with declining house prices will weigh on residential investment. Unemployment is expected to increase modestly. Lower energy prices and weak demand should help bring headline inflation down from 7.2% in 2022 to 5.7% in 2023 and 3.0% in 2024, though elevated wage growth and cost increases could keep inflation high.

The fiscal stance is currently projected to be expansionary but is likely to be revised once the new coalition agreement is reached. Implementing a moderate fiscal consolidation is warranted to help fight inflation, and to stabilise the public debt ratio and set it on a downward path. Addressing labour shortages through immigration and improved female labour force participation, investing in R&D and skills, and furthering the diversification of energy sources are key to shared prosperity.

The economy is recovering from the energy crisis

Consumer confidence – which plunged because of Russia’s war of aggression against Ukraine and the risk of energy shortages – is gradually improving as the risk of shortages has faded and energy prices have decreased. After two consecutive quarters of negative growth, GDP increased by +0.2% in the first quarter of 2023. Industrial output also increased in the first quarter of 2023 (+2.1% on a year earlier), but industrial confidence has trended down since the war broke out. Annual (harmonised) headline and core inflation have recently decreased, to 6.3% and 4.9% respectively in April 2023, but remain high. The labour market is robust and tight, with the harmonised unemployment rate remaining broadly constant at a low level over the past few months. However, nominal wages have not kept up with inflation and real wages fell by 3.6% in 2022.

Finland: Activity and economic growth indicators

1. Consumption refers to government and private consumption; growth contributions add up to quarterly real GDP growth up to a statistical discrepancy.

Source: Statistics Finland; European Commission; and Economic Outlook 113 database.

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Finland: Demand, output and prices

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A mild winter and demand reductions have helped Finland avoid energy shortages. Energy prices have come down but remain elevated. Finland has diversified its sourcing away from Russia, in particular through more wind power investments and the commissioning of an additional nuclear unit. While food commodity prices have declined, retail food prices are still rising sharply.

Monetary policy is tightening, while fiscal policy uncertainty is high

The continued tightening of monetary policy by the European Central Bank is affecting lending conditions for households and businesses in Finland. House prices declined 4.6% between 2022Q2 and 2022Q4. Given the high share of variable- or adjustable-rate mortgages, interest rate increases will make it harder to service household debt and could put additional pressure on house prices and consumption. The bulk of remaining energy support measures that were provided from January to April have been wound down. The support included a VAT reduction on electricity and passenger transport as well as targeted support for households facing high energy bills. However, utilities will benefit from emergency loans and credit guarantees until the end of 2023. No support measures are assumed in 2024, and it is probable that the next Budget will implement fiscal consolidation through reduced spending, which would help fight inflation and stabilise the public debt ratio. However, as there is no coalition agreement so far, this likely fiscal consolidation is not incorporated in these projections.

Following a mild recession, a moderate pick-up in growth is expected

Following the decline in GDP in the second half of 2022, activity is expected to remain weak in the first half of 2023, before consumption growth picks up as the energy shock fades, and foreign trade improves. Unemployment will increase modestly in 2023, and slowly decline to 7.1% in 2024. Higher interest rates, the contraction in GDP and increased unemployment are expected to help ease inflationary pressures over 2023-24. The recent fall in energy prices will also help reduce inflation pressures, but the expiration of value added tax cuts at the end of April will delay the decline in retail prices. The pass-through of energy prices into prices and wages is projected to keep core inflation higher for slightly longer than headline inflation. Given the high share of mortgages with variable or adjustable rates, and high household debt (156% of disposable income in 2022), house prices could decline markedly further amid interest rate increases. A renewed spike in energy prices would also undermine confidence and purchasing power, putting a drag on private consumption and growth.

Boosting productivity, employment and energy security is key

Investing in R&D, digitalisation and tertiary education are key to boosting productivity growth and innovation. Enhancing female labour force participation by improving work incentives and addressing shortages of childcare workers, as well as skill‑based immigration, can help increase employment and help ease labour shortages. Finally, accelerating the transition towards decarbonised energy sources (wind, solar, nuclear) is also crucial for increased energy security and meeting Finland’s greenhouse gas emissions reduction goals.