OP forecasts weak growth of Finnish economy

Finland’s economic growth this year and the next will be weaker that predicted, according to OP Financial Group’s economists.

According to OP economists, Finland’s economy will slip into a slight recession this year. Gross domestic product (GDP) is expected to decrease by 0.8% this year and grow by 0.3% in 2024, said OP in a press release on Wednesday.

The previous estimates predicted a decrease of 0.5% for this year and an increase of 0.5% for 2024.

"The big picture of Finland's economy has not changed. We are still facing only a slight economic downturn. However, the rapid increase in interest rates has really affected housing development, and development investments are plummeting more that we had predicted," said Reijo Heiskanen, Chief Economist at OP Financial Group.

Development investments are expected to grow by 8.5% this year and by 2% in 2024. The overall trend for investments will remain positive, as the outlook for machine and equipment investments is on the positive side for now. Investments will decrease by 3.4% this year and by 1% in 2024.

In early 2023, consumer spending in the form of services went up, particularly in comparison with last year, which was affected by restrictions due to COVID-19. Based on payment card data, there has been a slight slump in spending this spring. OP's economists predict that consumer spending will decrease this year by a further 1%, as consumers are not able to rely on savings the same as last year, and the real income available to consumers is no longer increasing.

Export revenues will dramatically decrease this year. Last year, export revenues went up as a result of the unprecedented increase in prices. However, export volumes only went up slightly. Peak export prices have now taken a downturn, and export volume trends in early 2023 have been weak. For the whole year, OP's economists predict that export volumes will decrease by 2.7% and the overall value of exports will decrease by 6.6%. The risk trend in export prices in particular is downward.

The situation in the labour market remained strong in the first quarter. However, there are signs of weak development, for example, furloughs have gone up. There is still a labour shortage and plenty of work available, and OP's economists predict that the increase in unemployment rates will be moderate at 7% in comparison with last year’s 6.8%.

Although inflation peaked over the past winter, it will take some time to get back to the inflation target of 2%. Consumer prices are expected to increase by 5.9% in 2023 and by 2.3% in 2024. The increase in prices is no longer based on increased energy costs, and the role of food and commodities in inflation is decreasing. However, the inflation of service prices has not yet peaked, and will continue to increase for some time.

"In terms of economic risk assessment, the risk of stagflation has abated. A prolonged period of high inflation and unemployment rates is unlikely. In terms of economic growth, the combined effect of multiple simultaneous crises, a so-called crisis hangover, poses a risk. We are already experiencing the symptoms through increased bankruptcies," said Heiskanen.

Earlier this month, Nordea Bank, the largest bank in the Nordic countries also published a weaker outlook of Finnish economy.