The economic outlook darkened – the Bank of Finland is now predicting very modest growth

In December, the Bank of Finland predicted 0.8 percent growth for Finland this year.

Finland’s economy turned to growth at the end of last year, driven by private consumption and investments, and growth continued in the beginning of the year. However, the Bank of Finland has revised down its growth forecast in its interim forecast published today.

According to the Bank of Finland, the rise in energy prices caused by the Iran war is holding back growth.

According to the Bank of Finland’s recently published interim forecast, economic growth this year will be 0.6 percent, which is 0.2 percentage points slower than the Bank of Finland’s December forecast. Next year, growth is predicted to reach 1.4 percent, while the previous forecast was 1.7 percent. The forecast for economic growth in 2028 has remained at 1.5 percent

According to the Bank of Finland, the growth outlook is particularly clouded by the great uncertainty about the Iran war and the ongoing war in Ukraine. Tensions in international trade have also intensified due to changes in the US customs policy.

Forecasting Manager of the Bank of Finland Juuso Vanhala says that the starting point for this year’s growth was even slightly better than predicted in December, but the rise in energy prices is holding back growth.

“Despite the slowdown, growth is expected to continue. However, the outlook can change quickly in the current world situation,” says Vanhala in the press release.

Unemployment high

Inflation slowed down last year. However, the energy shock caused by the Iran war accelerates the rise in prices and, according to the Bank of Finland, increases the uncertainty of the inflation forecast.

The Bank of Finland predicts that inflation in Finland will accelerate to 1.9 percent. According to the forecast, inflation will slow down to 1.5 percent in 2027, and at the end of the forecast period it will slightly accelerate, to 1.8 percent.

The stoppage of oil and natural gas transport in the Persian Gulf will increase fuel prices in Finland in particular. The increase in the price of fuel is transmitted with a delay to the prices of food and industrial products, for example.

In the forecast of the Bank of Finland, it is assumed that the duration of the energy shock will remain relatively short and its transmission to other prices will be moderate.

“The rising cost of energy will increase consumer prices this year, but the effect on next year depends essentially on the duration of the energy supply disruption,” says Forecasting Manager Vanhala.

The labor market situation remained weak last year and the unemployment rate rose high.

The Bank of Finland estimates that this year the unemployment rate will be 10.2 percent, but the employment situation will improve when the economy improves. The Bank of Finland predicts that next year the unemployment rate will fall to 9.7 percent and further to 9.2 percent in 2028.

A grim forecast

It’s good to note that the Bank of Finland’s December forecast was already harsher than many other economic forecasters. For example, in December, the Ministry of Finance predicted 1.1 percent growth for Finland this year.

In connection with the recently published interim forecast, the Bank of Finland has also made alternative calculations of faster inflation and weaker growth.

The duration of the Iran war and the effects on the energy market form the main uncertainty factor in the forecast. In the calculations, prolonged disruptions in energy supply can accelerate inflation and slow down growth for several years.

How long would the Iran war have to last so that the entire Finnish economy would sink to zero growth this year?

Juuso Vanhala, Head of Forecasting at the Bank of Finland, tells Kauppalehti that it is difficult to estimate this, because in the alternative calculations they only estimate the effect of the price of energy on growth, not the effect of, for example, the possible growing caution of consumers.

According to Sen Vanhala, it can be stated that the longer the war continues and the higher the energy prices rise, the wider the price pressure will spread in the economy, for example, and the greater the economic effects will be.