HIGHLIGHTS • War is slowing down economic growth only slightly • Weaker purchasing power erodes consumption • Record-breaking employment levels • Exports to Russia face p ermanent decline • Uncertainty is toxic for investments • Public finances face permanent deficits FINLAND Holding ground Russia’s attack against Ukraine will slow down economic growth in Finland this year. The collapse of exports to Russia, the deterioration of consumer purchasing power due to rising inflation and the general uncertainty are weighing on economic activity. However, strong order books and a rise in export prices will keep the manufacturing cogs turning. A strong labour market, the lifting of re- strictions and the savings accumulated by households during the Covid pandemic will underpin growth in the service sector. War is slowing down the economy only slightly Finland’s economic growth is expected to slow down this year as a result of the war started by Rus- sia. Although exports from Finland to its eastern neighbour have decreased in the past decades, the total collapse of exports to Russia has still had a pro- found effect. Meanwhile, higher energy prices are eroding consumer purchasing power, and shortages in materials are hampering many companies. More- over, the uncertainty is postponing investments. The Finnish economy was performing well at the start of the war, and demand has remained at a good level. Order books in the manufacturing sector are full, the number of construction projects is record high and the service sector is still recovering. The more than 8 billion euros in savings accumulated by households during the pandemic will help sustain private consumption despite real incomes falling this year due to rising inflation. The Finnish economy as a whole will not suffer from a rise in the global prices of commodities and mate- rials in the same way as many other countries in Eu- rope. The prices of imports and exports in Finland have actually risen in tandem. We project GDP to grow by 2% this year. Next year, growth is expected to slow down to 1.5%. In light of this, the Finnish economy looks poised to survive the war relatively unscathed. Due to the unpredictable nature of the war, our eco- nomic forecast includes a considerable amount of uncertainty. However, it is clear that Finnish exports to Russia will remain low for a long time, while the price of oil will remain permanently at a higher level. On the other hand, the price of electricity will drop in the coming years. 2.0% GDP growth forecast for 2022 6.6% Unemployment trend rate in March 2022 4.7% Inflation forecast for 2022 Sources: Statistics Finland and Nordea. Energy prices stoke inflation The increase in consumer prices accelerated to 5.8% in March. Half of this increase can be explained by rising energy prices. Costs of housing are increased by the higher electricity prices as well as the increase in maintenance and renovation expenses. In Finland, district heating expenses have risen moderately compared to the higher gas heating expenses in many European countries, which has kept inflation among the lowest in the EU. Fuel prices are going up primarily due to the rise in price of oil, as well as a shortage of refining capacity. The price of electricity is already falling, which will be felt in consumer prices with a delay. The inflation- ary pressure caused by energy is expected to ease over the rest of this year. The price of food is expected to rise considerably this year on the back of higher prices for fertilisers and fuel used for agricultural machinery. Disruptions in imports from Russia and Ukraine are also raising global grain prices. Meanwhile, a new surge in global logistics problems and a shortage of compo- nents continue to push the prices of goods up 6 / FINLAND: MACROECONOMIC INDICATORS 2019 Real GDP, % y/y 1.2 Consumer prices, % y/y 1.0 Unemployment rate, % 6.7 Wages, % y/y 2.1 Public sector surplus, % of GDP -0.9 Public sector debt, % of GDP 59.6 ECB deposit interest rate (at year-end) -0.50 2020 -2.3 0.3 7.8 2.0 -5.5 69.0 -0.50 2021 2022E 2023E 3.5 2.0 1.5 2.2 4.7 1.9 7.6 6.6 6.3 2.3 2.6 3.0 -2.6 -2.1 -1.9 65.8 65.7 66.1 -0.50 0.25 1.25 24 / Nordea Economic Outlook / 2 / 2022
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