Finland’s economy has outperformed expectations in the early part of the year 2024. However, the recovery remains fragile as consumers continue to face financial pressures and investment remains weak. Thanks to falling interest rates, the outlook for next year is significantly brighter, with the economy accelerating to 2% growth.
While the economic recovery has begun, it is still in early stages and growth drivers remain scarce. Exports are already supporting the positive economic turnaround, but more is needed.
“Finnish households are still struggling due to rising costs and interest rate burdens. Economic confidence is low, and fears of unemployment are increasing consumer caution. In addition, the increase in the general value-added tax rate and cuts in social benefits are burdening the household sector,” says Timo Vesala, Chief Economist at MuniFin.
In the corporate sector, machinery and equipment investments held up relatively well for a long time, but they have also turned downwards in the last six months. Similarly, the weak economic situation continues in construction. However, the stabilisation of construction permits indicates that the construction sector downturn is slowly easing, and the bottom is being passed by the end of the year.
The strength of the economic recovery is highly dependent on the European Central Bank’s monetary policy.
“The interest rate level, which has risen in recent years, has had an exceptionally severe impact on Finns, who are accustomed to variable-rate loans. However, the economy’s interest rate sensitivity works in both directions, and Finland is expected to benefit more from falling interest rates than most other euro area countries. If the ECB lowers the deposit rate in line with market expectations and short-term interest rates fall to around 2.0–2.5% by the end of next year, the turnaround in the housing market will strengthen and the recovery of consumption and investment will accelerate,” Vesala says.
MuniFin is raising its 2024 GDP forecast from -0.5% to -0.3% in its economic outlook. Next year, the recovery will strengthen and be supported by both foreign trade and growth in domestic demand. Finland’s GDP is expected to grow by 2% in both 2025 and 2026.
Unemployment in 2024 has risen somewhat faster than in MuniFin’s previous forecasts. Employment will react to the economic recovery with a lag, and unemployment will start to decline more clearly only in 2025.
The recovery pace forecast by MuniFin is moderate considering that the economy is emerging from a rather deep recession. The last time a somewhat similar upturn was experienced was in early 2015 – after which GDP grew at a rate of almost 3% for the following three years.
“At the moment we are not seeing quite as rapid a recovery, as the global economy’s pull is now exceptionally strong in the service sector. This growth is not expanding to Finland’s export-heavy industry as fast as we are used to,” Vesala explains.