The Finnish economy is in recession and there is little light at the end of the tunnel, according to forecasts from the Bank of Finland (BoF) and the Finance Ministry.
Both institutions downgraded their forecasts on Tuesday, suggesting that the recession could be deeper than previously expected.
The ministry says that this year the economy will contract by half a percentage point, with 0.7 percent growth next year. That is down from the one percent growth the ministry was forecasting in October.
The Bank, meanwhile, agrees that the contraction this year will be 0.5 percent but says next year will see the economy shrink by 0.2 percent. Previously the bank's forecast had been for 0.9 percent growth.
"The operating environment outside Finland is difficult, and the outlook for the economy continued to deteriorate during the autumn. At the same time though, inflation has fallen in Finland and the purchasing power of households has improved," said Meri Obstbaum, who heads BoF forecasting.
The BoF said there was "widespread weakness" in the Finnish economy. It pointed out that higher interest rates are encouraging households to save rather than spend. At the same time, higher interest rates and general uncertainty are putting a damper on household consumption.
The institution also noted Finland has seen a significant reduction in investment, adding that investment into residential construction was particularly low. In this cyclical backdrop it said it expects unemployment rates to rise temporarily.
Inflation slowing
In brighter news, the BoF said inflation in Finland was easing, offering relief to households.
"Stronger purchasing power will lead to a rise in consumption by households, and the economy will start to pick up slowly. The growth in consumption will also be supported by a rise in wages and a still reasonably good employment situation," Obstbaum said.
While the BoF said the financial markets are expecting interest rates to fall, it noted that Finland's central government deficit is growing despite the government's budget cuts, and that the accumulation of debt will continue over the next few years.
It said public finances were being undermined by lower growth in tax revenues and reductions in social security contributions, as well as by strong growth in social benefits paid and the state's interest expenditure.
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Austerity on the way
The Finance Ministry forecasts are used to advise the government on what levels of public spending might be appropriate.
The downgrade in growth forecasts means that spending cuts or tax rises may be necessary, with ministers likely to be asked to agree a new plan in the spring.
The ministry forecasts that the government spending deficit will be 2.5 percent of GDP in 2023, and will expand to 3.5 percent in 2024 as tax cuts come online and spending increases.
After the recession the ministry expects the deficit to reduce to around three percent of GDP.
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