Finland’s economy continued expanding in the first half of 2022 on the back of buoyant demand for services, investment and an inventory build-up. Record high energy prices and inflation, together with tighter financing conditions and a weakening external environment are set to weigh on economic growth in the near term. The general government deficit is forecast to widen in 2023, and remain broadly at the same level in 2024, raising also the debt-to-GDP ratio over the forecast horizon.
Last update (forecast)
Last update (11/11/2022)
|GDP growth (%, yoy)||3,0||2,3||0,2||1,4|
|Inflation (%, yoy)||2,1||7,2||4,3||1,9|
|General government balance (% of GDP)||-2,7||-1,4||-2,3||-2,3|
|Gross public debt (% of GDP)||72,4||70,7||72,0||73,3|
|Current account balance (% of GDP)||0,6||-0,2||-0,3||0,1|
Strong results in the first half of 2022
GDP continued to expand in the first half of the year by some 3.5% compared with the same period in 2021. Growth was driven by strong private and public consumption, as well as by a build-up of inventories. Buoyant demand for services and a strong labour market supported private consumption. At the same time, investment growth weakened but is still projected to register positive growth on an annual basis, with construction being the main driver. In contrast, net exports contributed negatively to growth as exports dropped in spring, while imports of services increased in the second quarter. In spite of the current deterioration in economic activity, the strong economic performance in the first half of 2022 is set to put annual real GDP growth at 2.3%.
Multiple pressures on the economy
The economy is facing headwinds from high energy prices and inflation, rising financing costs and weaker external demand. Higher energy bills weigh on households’ balance sheets which, in spite of a strong labour market, are set to squeeze private consumption. Tighter financing conditions are expected to keep pressure on corporate investment.
Consequently, it is projected that growth will enter into negative territory in the near term. Overall, real GDP growth is forecast to slow down to 0.2% in 2023. However, the assumed gradual easing of energy prices and the recovery of external demand already in the second half of 2023 are expected to put the economy on a recovery path. Furthermore, private consumption and investment are set to increase by above 1% in 2024. Net exports are projected to also contribute to growth, which is projected to recover to 1.4% in 2024.
Robust labour market performance
In the first half of 2022, employment continued to expand, including for part-time contracts, and compensation of employees grew by some 6% compared with the same period in 2021. In August, the seasonally adjusted unemployment rate stood at 7.0%, 0.6 pps. lower than a year ago, and the annual unemployment rate is projected to stand at 7.0% compared to 7.7% in 2021. This points to the overall strong labour market performance, which has been supporting economic growth so far. At the same time, some sectors are experiencing shortages of labour which are set to impact economic growth in the medium term. The weakening economic conditions, which are already translating into a lower number of vacancies, imply a temporary increase in unemployment rate in 2023. In 2024, against the backdrop of the projected economic recovery, the annual unemployment rate is forecast to be somewhat below the level of 2022.
The persistence of energy price inflation since the beginning of 2022 is feeding into prices of other goods and services and exerting pressure on core inflation. In the third quarter of 2022, HICP inflation stood at a record of 8.1%. This is, however, below the average of the EU as a whole, also due to Finland’s lower dependency on gas.
Having peaked in 2022-Q3, HICP inflation is forecast to average 7.2% in 2022. Weaker economic activity and lower energy prices are projected to bring the inflation rate down to 4.3% in 2023 and close to 2% in 2024.
Deficit and debt ratio to continue growing
In 2022, the general government deficit is projected to decline compared to 2021 to 1.4% of GDP, due to strong revenue performance, nominal GDP growth and lower expenditure following the gradual withdrawal of COVID-19 measures amounting to 0.2% of GDP
Against the backdrop of Russia’s war of aggression against Ukraine, the Finnish government announced additional spending on defence of 0.3% of GDP in 2022 and 0.4% in 2023. The general government deficit is also set to be affected by the costs of providing
temporary protection to people fleeing Ukraine. In addition, the fiscal forecast takes into account measures to mitigate the economic and social impact of high energy prices, which are projected to generate additional spending amounting to 0.4% of GDP in 2023.
The general government deficit is forecast to increase to 2.3% of GDP in 2023 and remain at that level in 2024. Public investment is projected to remain high over the forecast horizon.
Due to a methodological change applied to time series data on debt dating back to 2000, the general government public debt-to-GDP ratio for 2021 was revised up by about 6 pps., from 65.8% to 72.4%. Correspondingly, the forecast for the general government public debt-to-GDP ratio has been revised upwards in 2022, and is expected to stand at 70.7%. It is projected to continue a growing trend over the forecast horizon, amounting to 72.0% in 2023 and 73.3% in 2024.