The war in Ukraine and the energy crisis are fanning uncertainty and driving up inflation. Reduced purchasing power will hit private consumption, and the economy will slide into a mild recession. Finland’s GDP will shrink by 0.5% in 2023. Growth will return in 2024, reaching 1.1%.
The alternative scenario in the Bank of Finland’s forecast for the Finnish economy examines risks surrounding the Bank’s December 2022 baseline forecast which, should they materialise, could lead economic growth to be weaker than projected. The scenario estimates the possible impacts on the Finnish economy if Russia’s war in Ukraine drags on and if the availability of energy weakens further and economic uncertainty increases.
In recent years, Finland’s public finances have shifted from one crisis to the next. The debt ratio has grown almost without interruption since the global financial crisis. Halting the accumulation of further debt in the immediate years ahead would aim to give sufficient room for manoeuvre in future crises and for coming generations.
Finland’s general government revenue and expenditure are chronically out of balance. Population ageing is adding to health and social services spending and at the same time public debt service payments are growing. A fiscal correction will require significant spending cuts and tax increases in future parliamentary terms. The Bank of Finland estimates that the sustainability gap is about 4% of GDP.
Finland’s general government debt ratio has grown almost without interruption since the global financial crisis. This trend differs significantly from that seen in the other Nordic countries. It is vital to build a strong political commitment to fiscal sustainability and to the resolute implementation of the measures this calls for.
Growth in Finland’s economy will stall temporarily due to Ukraine war and energy crisis. High inflation is weakening consumers’ purchasing power and general confidence in the economy. In the public finances, spending will continue to exceed revenues.
The energy crisis will push the Finnish economy into a mild recession in 2023, but this will be short-lived. Energy prices will gradually fall, and in 2024 the economy will return to growth.
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