Finnish economy to fall into mild recession: OP

The economists of the OP Financial Group forecast a slight downturn and recession in the next 12 months, said OP in a press release on Tuesday.

According to a recent estimate by OP's economists, Finland's Gross Domestic Products (GDP) will shrink by 0.3% in 2023 and remain stagnant at 0.0% growth in 2024.

Previously, GDP was forecasted to grow by 0.3% in 2024.

Industry and construction are in a sharp downturn, and the rising income of households is not enough to offset dwindling savings and rising interest rates.

"The Finnish economy has been headed towards a slight recession, but at a speed that can be described as a soft landing. Unfortunately, after the downturn, the economy faces a shaky foundation and a great deal of uncertainty," said Reijo Heiskanen, Chief Economist at OP.

Exports are falling both this year and the next as growth in the export markets slows down. Sharp declines in prices are also worsening the outlook for the exports sector. With the sharp downturn in construction and companies' profitability, investment outlooks remain bleak this year as well as next year.

Earlier this year, the growth in consumer spending slowed down clearly from last year. Consumer spending will shrink in 2023 even as spending is supported by savings accumulated by households during the pandemic.

Real disposable income is expected to grow in 2024. However, households are no longer able to depend on savings to the extent previously possible, and spending is not expected to increase next year.

Inflation has fallen quickly from peak figures. On the other hand, core inflation, that is, inflation without energy and food prices, has decreased only slightly. Going forward, the cooling of inflation the rate is expected to slow down, and reaching the 2% target will take time.

The situation in the labour market took a turn for the worse in early 2023 and is expected to continue to weaken slightly in the next few years. Public fiscal balance will weaken this year due to past decisions and weakening economic development. Despite fiscal efforts, the deficit will remain sizeable also in 2024 due to lack of growth in the economy.

"The Finnish economy continues to face exceptional risks and will take years to adjust to the blows it sustained in recent years. A slight recession is the most optimistic of the scenarios," said Heiskanen.