OECD Economic Outlook, Volume 2023 Issue 2

Finland

GDP is projected to stall in 2023 and grow by a moderate 0.9% in 2024, before picking up to 1.8% in 2025. As energy prices ease, private consumption is set to recover moderately in 2024 despite the drag from higher interest rates, which together with declining house prices will weigh on residential investment. Unemployment is expected to slowly increase until mid-2024 before starting to decline, as the economy grows and employment growth gains momentum. Lower energy prices and weak demand should help bring headline inflation down from 7.2% in 2022 to 4.5% in 2023 and 2.2% in 2024.

The planned increase in defence and security spending, as well as moderate tax cuts, will outweigh cuts to spending on other items in 2024 and 2025; as a result, fiscal policy is projected to remain expansionary. Given rising public debt, earlier fiscal consolidation would be more appropriate. Improving female and senior labour force participation is necessary to boost labour supply in an ageing society, in addition to the planned reforms of unemployment insurance. Further investing in decarbonisation is also paramount.

Consumer and business confidence remains depressed

The Finnish economy expanded sluggishly in the first half of 2023 as the drop in investment was milder than expected, but contracted by 0.9% in the third quarter according to flash estimates. High inflation and rising mortgage rates are still a drag, albeit a fading one, on households’ purchasing power. After falling by over 7% in the previous two years, real wages rose by 1.4% in the third quarter of 2023. However, consumer confidence declined in August and industrial confidence has kept declining since early 2022. Against the backdrop of weak demand, the unemployment rate edged up to 7.3% in September, while headline and core inflation continued to decline. The drop in measured headline inflation is magnified by the downward correction of the electricity price index by Statistics Finland in August 2023, which will affect year-on-year headline inflation until July 2024.

Finland: Inflation and housing indicators

Source: European Central Bank; Statistics Finland; and Bank of Finland.

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Finland: Demand, output and prices

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Cost pressures from abroad have been mixed. Lower world food prices are helping moderate inflation in Finland, but oil prices have increased again since July. Russia’s war of aggression against Ukraine has closed Russian supplies for some of Finland’s imports, pushing up costs, and weighed on tourism exports. The recent damage to the gas pipeline and telecom connector with Estonia is unlikely to have a meaningful impact given alternative infrastructure and low Finnish reliance on natural gas.

Fiscal policy will remain accommodative in the near term

The continued tightening of monetary policy by the European Central Bank is affecting lending conditions for households and businesses in Finland. House prices declined by 5.6% during the year to mid-2023. Given the high share of variable- or adjustable-rate mortgages, interest rate increases make it harder to service household debt and could put additional pressure on house prices and consumption. Except for emergency loans and credit guarantees for utilities until the end of 2024, all emergency support measures have been wound down in the first half of 2023. The government’s current budget proposals include cuts in environmental and social spending, but they will not be enough to offset the proposed increase in security and defence spending, as well as tax breaks. The fiscal stance is projected to ease by about 1% of GDP in 2023 and ½ per cent in 2024, and be broadly neutral in 2025. Consolidation is foreseen in the Government’s budget from 2026 onwards. Gross public debt is expected to increase to about 80% of GDP by end-2025. Despite the gradual increase in the retirement age, ageing-related costs are expected to increase by about 2½ per cent of GDP by 2040.

Growth is expected to pick up gradually in 2024

Underpinned by modest real income growth, private consumption is set to recover in early 2024. Higher interest rates, tighter credit conditions and declining house prices will continue to hold back residential investment. Weak internal demand will slow import growth, leading to a positive contribution of net exports. Unemployment will inch up further to 7.4% by end-2023 but start falling in 2024 as the economy and job creation regain momentum. Headline inflation is expected to decline gradually over 2024 and 2025. Core inflation is expected to decline more slowly than headline, as labour costs are passed through to prices. While Finnish reliance on natural gas is low, the economy is still exposed to the risk of a cold winter in Europe, with spillovers to electricity prices and weak external demand. Finland is also exposed to a risk of higher security tensions with Russia. Higher mortgage rates and energy prices would also further undermine confidence and purchasing power.

Improving the fiscal balance and boosting employment are key

Productivity growth has been weak. Investing in R&D, digitalisation and tertiary education can sustainably boost productivity growth and innovation. Along with earlier fiscal consolidation – by foregoing some of the planned tax cuts on fuels and for homebuyers – raising growth will help stabilise the debt‑to‑GDP ratio. Enhancing the labour force participation of women and seniors is also key to address the growing old-age dependency ratio. 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.