Finland: The Finnish economy enters a shallow recession in the fourth quarter
GDP dropped at a quicker pace of 0.4% on a seasonally adjusted quarter-on-quarter basis in the fourth quarter, below the 0.2% contraction tallied in the third quarter. Q4’s reading marked the sharpest downturn since Q2 2020 and the second consecutive quarter of decline.
On the domestic front, the downturn was broad-based. Private consumption remained subdued owing to higher inflation, deeper consumer pessimism and rising interest rates, falling 0.6% in the final quarter (Q3: -0.6% s.a. qoq). Even more so, public consumption dropped at the sharpest pace since Q2 2020, contracting 0.6% (Q3: +0.7% s.a. qoq). Lastly, fixed investment shrank 2.1% in Q4, swinging into contraction from Q3’s 1.4% expansion.
Additionally, faltering foreign demand against the background of a slowing EU economy weighed on the external sector. Exports of goods and services contracted 2.2% in Q4. Imports of goods and services also fell at a steeper rate of 2.2% in Q4 (Q3: -1.3% s.a. qoq), pointing to a sustained deterioration in domestic demand.
On an annual basis, economic activity dropped 0.4% in Q4, contrasting the previous quarter’s 1.6% expansion. That said, the reading was likely influenced by a high base effect.
Looking ahead, our panel sees the Finnish economy remaining in hibernation, with growth likely to contract further in Q1. Inflation will remain above the 2.0% target this year, exhausting consumer spending. In particular, elevated energy costs will continue to be a pain point for Finnish households. In addition, the economic decline should dampen the labor market, further denting consumption. Meanwhile, the stalling of the EU economy, particularly in H1 2023, as well as sanctions on Russia and Belarus, will hinder growth in the external sector. Tighter global financing conditions, volatility in energy prices and sticky inflation pose major risks to the outlook.