Govt forecasts economic recession in latter part of year

Rising prices and interest rates have reduced household consumption and investments, which will push Finland’s economy into recession in the latter part of the year, according to the Ministry of Finance’s Economic Survey published on Monday.

Household purchasing power is expected to improve next year, which will increase consumption and boost economic growth.

General government finances will deteriorate from this year on, and the general government deficit will be 3 per cent, or more, during 2024–2026. The debt ratio will grow over the forecast period

Although Finland’s economy will be in recession in the latter part of the year, due to good growth in the early part of the year, economic growth will remain at zero overall in 2023.

Next year, private consumption, investments and exports will start to grow, and GDP will grow 1.2 per cent. The growth of consumption and investments will increase in 2025, and GDP will grow 1.8 per cent.

Residential construction is suffering the worst from higher interest rates and is being hit particularly hard by recession. The situation in industry is also weak, as companies are releasing their previously accumulated inventories.

“For now, the recession as seems to be a fairly typical period of negative growth that is part of the economic cycle. A slight and short-lived recession does not give cause to support total demand in the economy through public funds. The automatic mechanisms of general government finances and fiscal policy will support the economy in other ways in 2023–2024,” said Director General Mikko Spolander.

The forecast includes many risks relating to, for example, construction, household consumption behaviour and the global economy.

The realisation of these risks would delay economic recovery and prolong the recession.

Demand is expected to pick up in Finland and in the euro area as a whole next year. Inflation will continue to slow, and wage increases will exceed the rise in prices. Interest rates have already stopped rising and are expected to start falling again next year. Household purchasing power will start to grow, which will also boost household consumption in 2024 and 2025.

Residential construction will decline sharply this year and next. In spite of this, the investment outlook is bright. There is a record-high number of investment plans related to the energy transition. Affordable energy and robust price competitiveness will increase investments in production.

Having increased in the early part of the year, employment levelled off in the summer and will decrease slightly during the latter part of the year.

The sector with the worst employment situation is construction. The decline in employment will be shortlived, with employment returning to growth next year. By 2025, the employment rate in the 15–64 age group will rise to 74.3 per cent, and unemployment will fall to 7 per cent.

The state of general government finances is weak. General government deficit will be 3 per cent or more during 2024–2026 and will fall to 2.8 per cent of GDP in 2027.

The debt ratio shows no signs of levelling off and will rise to nearly 82 per cent in 2027. The combined deficit of central government administration, municipal administration and the wellbeing services counties is deep, remaining at over EUR 14 billion in 2027. Halting the growth in the debt ratio will require a reduction in the deficits particularly of central government and the wellbeing services counties.