Global uncertainty slows down Finnish economic recovery: OP

The slower than estimated growth in Europe’s export markets and the increased international uncertainty will slow down the pace of Finnish economic recovery in 2025, according to the economic forecast published by financial group OP on Thursday.

The forecast, however, said that during 2024, the Finnish economy began to recover from a moderate economic downturn and in 2025, economic growth will become stronger and expand.

The growth of the Finnish economy will amount to 1.7% in 2025, instead of the earlier 2%, according to OP’s economists.

In 2026, the growth of Finland’s gross domestic product (GDP) is expected to be 1.5%, while in October the forecast GDP growth rate was 1.3%.

“The increased uncertainty is reflected in the economic development. For example, in calculations concerning customs duties, the impact of uncertainty may be greater than the actual duty increases. The global political uncertainty has already increased, and the forecast has aimed to take its impact into consideration,” said OP Financial Group’s Chief Economist Reijo Heiskanen.

However, the big picture in the economy has not changed much. The demand outlook will largely recover although growth forecasts for export and private investments are slightly weaker than before. The outlook for private consumption, however, is even better than before.

Export took an upward turn last year, driven by service exports in particular. The momentum will remain fairly good both this year and the next, but recovery will be slowed down by the subdued development in the European markets.

Investments have been a weak link in the Finnish economy. Investments have already seen their lowest point, and the climb upward from the bottom will begin.

Construction investments, above all, have been weak but are now starting to recover. Machine and equipment investments and investments in intangibles have been hit less than construction investments and will return to their growth trend.

The growth of private consumption stumbled in 2024, despite the favourable increase in real disposable income.

This year, real income continues to grow and the accumulated savings will allow for increased consumption that may even surpass income, particularly as a result of lower interest rates.

Last year, the inflation rate slowed down to less than 2%, where it will remain in the coming years. There are risks associated with the earnings trend, among other things. The faster than expected increase in salaries and wages would inevitably also be echoed in steeper consumer price increases.

The number of employed, despite having decreased, continues to be high and according to the forecast, will hit a new high in 2026. As the working-age population has begun to increase, the employment rate will develop more modestly, and the unemployment rate will decline slowly.

In 2023–24, the global economy grew fairly steadily at a rate of slightly over 3%. In the bigger picture, the global economy continues to grow fairly steadily. However, growth will fall slightly behind previous years and estimates. This is in part due to increased geopolitical uncertainty.

“The global economy at a crossroads. Economic growth may experience a stronger recovery as a result of lower interest rates, conflicts ending and technological development opening up new opportunities. Correspondingly, the increased obstacles to trade and the continued stagnation and structural problems in the industrial sector may keep growth at a low level,” said Heiskanen.

In the United States, the mood in the economy continued to be positive. Inflation has remained higher than expected and thus the expectations concerning reduced interest rates have been lowered. The upcoming economic policy measures are likely to slow down economic growth and will increase inflation in the US in 2025–26. Growth is expected to continue at a good level but be more moderate than in the previous years.

Economic growth in the euro area fell short of expectations in 2024, and economic indicators are not in favour of a rapid recovery of the economy. Uncertainty about trade policy solutions and domestic policy will lend themselves to delaying the economic recovery. Nevertheless, the decline in interest rates will gradually boost the economy. Economic growth will remain sluggish in the coming years.

Inflation in the euro area has become more moderate and is near the pursued two per cent, and expectations concerning inflation are aligned with this goal. The European Central Bank may continue to relax its monetary policy gradually.

“The Central Bank strives to lower the key interest rate to a level where the monetary policy is not tightening or accommodative, which means that interest rates will continue to decline. ECB’s deposit facility rate is expected to settle to the level of approximately 2% in the current year,” said Lead Economist Tomi Kortela.