Russia’s invasion of Ukraine in 2022 cast a new veil of gloom over the outlook for Finland’s economy. Due to the impacts of the war, Finland was forecast to enter a mild recession in 2023. The country’s economic growth will be overshadowed by the energy crisis and high inflation in the immediate years ahead.

For monetary policy preparation and decision-making, the Eurosystem needs an informed view of the economic conditions and near-term outlook in its member countries. This necessitates independent and analytical assessment of the economy covering the immediate years ahead.

Each year, the Bank of Finland publishes four forecasts for the Finnish economy. Two of these, in June and December, are extensive forecasts drawn up in cooperation with the Eurosystem. A considerably more limited interim forecast is published in March and September.

The Bank of Finland’s forecasts in 2022 dealt especially with Russia’s war in Ukraine, the energy crisis exacerbated by the war and the surge in inflation. The acute energy crisis and the sharp rise in inflation dampened Finland’s growth outlook.  

The outbreak of this war in Europe hindered the post-pandemic economic recovery and brought significant uncertainty to economic forecasts.

In the course of 2022, forecasts were revised downwards substantially, particularly in respect of growth for 2023.

March interim forecast drawn up amid high uncertainty

Russia’s invasion of Ukraine in February 2022 sparked very high uncertainty about the economy, because the extent and duration of the war were unknown factors.

In the March interim forecast, the Bank of Finland emphasised that Russia’s invasion of Ukraine had significantly altered the outlook for Finland’s GDP growth in the near term and that it brought great uncertainty to the economy.

Finland’s foreign trade with Russia shrank sharply as a result of the war. It was considered that the war’s economic impact would be prolonged if it were to take time to find replacements for lost Russian markets.

Due to the high level of uncertainty, the Bank of Finland’s March interim forecast was drawn up with two separate economic scenarios. In both scenarios, Russia’s war in Ukraine adversely affected Finland’s GDP growth and pushed up inflation.

The more favourable scenario was based on the assumption that the rise in inflation and the weakening of export demand would remain moderate and the economy would adjust fairly quickly after the initial shock. In this scenario, GDP was forecast to grow by 2% in 2022 and by 1.5% in 2023 (Table 10).

The less favourable scenario, in turn, assumed that the war would drag on, the Russian economic crisis would deepen and the adjustment in the Finnish economy would be slow. In this scenario, Finland’s GDP was forecast to grow by about 0.5% in both 2022 and 2023. Inflation would rise to 5% in 2022 and then fall to 3% in 2023.

June forecast indicated Russia’s war in Ukraine would stifle Finland’s economic recovery

In its June forecast, the Bank of Finland noted that Finland’s foreign trade with Russia had collapsed as a result of the war. Increased uncertainty and rising prices were undermining economic growth.

The forecast suggested that inflation would be driven up further by higher raw material and energy prices and the supply-side bottlenecks exacerbated by the war. Greater economic uncertainty would diminish the prospects for consumption and investment. Moreover, the high level of inflation would curb growth in private consumption and erode households’ purchasing power.

The Bank’s June forecast projected that Finland’s economic growth would be between the figures presented in the two March scenarios. The economy was forecast to grow by 1.7% in 2022, but growth would slow to 0.5% in 2023 due to the impacts of the war. Growth would then pick up to 1.5% in 2024, as the difficulties in the global economy subsided and inflation moderated. The forecast assumed that the impacts of the war and the pandemic would gradually subside.

The June forecast stressed that Finland’s economic growth might turn out to be lower than projected, and even a recession could not be ruled out. Inflation might climb higher than forecast, and the increase in market rates might be faster than assumed.

In spite of the many downside risks, the forecast suggested that more positive outcomes were also possible. Both exports and domestic demand could pick up by more than anticipated if companies are able to adjust quickly and find new markets to replace those lost.

September interim forecast expected energy crisis to shrivel economic growth towards end of 2022

The Bank of Finland’s September interim forecast drew particular attention to the fact that the energy crisis and inflation had increased the risk of a recession. The Finnish economy was expected to contract slightly in 2023. The faltering economy was also signalling an end to the favourable employment trend.

The September interim forecast emphasised that the exceptionally high inflation was diminishing households’ purchasing power and that consumer confidence had sunk to a very low ebb, curbing private consumption. The upward pressures on consumer prices were not to subside until 2023, when the rise in energy prices would slow.

Finland’s economic growth was revised upwards for 2022, but downwards for 2023 and 2024. The Finnish economy was projected to grow by 2.2% in 2022, following the strong start to the year, and to contract by 0.3% in 2023. Growth would return to just over 1% in 2024, close to the economy’s estimated long-term potential growth rate.

As with the previous forecasts, there were substantial uncertainties associated with the September interim forecast. The most prominent of these concerned the path to be taken by the energy crisis in Europe. There was also substantial uncertainty surrounding the inflation forecast. A prolonged high inflation rate would weaken households’ purchasing power more than predicted.

December forecast suggested the Finnish economy would slide into recession

The extensive December forecast suggested that the Finnish economy would slide into a mild recession in 2023 in response to the energy crisis exacerbated by Russia’s war in Ukraine and the surge in the cost of living.

A steeper contraction in Finland’s economy was forecast for 2023 compared with the September forecast. The recession was estimated to be short-lived, however, and the economy was projected to slowly start growing again in 2024 as the energy crisis eased and uncertainty receded. Exports would also help drive economic growth once Finland’s export markets began to pick up.

Finland’s real GDP was projected to contract by 0.5% in 2023 and to rebound to 1.1% in 2024. In 2025, growth would pick up to close to its potential rate, i.e. to 1.5%.

The forecast suggested that the loss of momentum in economic growth was widespread across the economy. High inflation had eroded purchasing power, and consumer confidence had slumped to a very low level. Uncertainty was impacting private consumption and investment demand.

In the December forecast, the Bank of Finland paid particular attention to the trend in the labour market. The stalling of Finland’s economic growth and the decline in companies’ employment expectations would also reverse the favourable situation on the labour market. Employment growth would slow, causing a temporary rise in the unemployment rate. Employment would nonetheless remain good, given the brief duration of the recession and the structural nature of the labour shortage in many sectors.

Inflation was estimated to slow in the immediate years ahead, due to the easing of supply chain bottlenecks, the impact of monetary policy tightening and the weakening of domestic demand.

The December forecast also projected that the rise in the inflation rate would be slowed by a decline in the prices of crude oil and raw materials, but high electricity costs would keep price pressures high especially during the ensuing winter months. Some of the accumulated cost pressures would transfer to the prices of food, consumer goods and services after a time lag.

The risks surrounding the December forecast were predominantly on the downside. The outlook in Finland’s export markets continued to be uncertain due to the war in Ukraine. At the end of 2022, uncertainty surrounding the economy was still very high, although it had dissipated to some extent during the year. The worst concerns about the widening of the war and the availability of energy had faded somewhat.

Table 10.
Bank of Finland’s forecasts in 2022 2022 2023 2024 2025
March interim forecast
- Scenario 1: favourable GDP growth 2,0% 1,5% - -
- Scenario 2: weak GDP growth 0,5% 0,5% - -
June forecast 1,7% 0,5% 1,5% -
September interim forecast 2,2% -0,3% 1,1% -
December forecast 1,9% -0,5% 1,1% 1,5%
Source: Bank of Finland.

Preparation of forecasts relies on forecasting models and analyses

The Bank of Finland prepares its forecasts and the related alternative scenarios using the Aino 2.0 model, which was developed to simulate the Finnish macroeconomy. A further version of the model – Aino 3.0 – is also used extensively in drawing up analyses and alternative scenarios.

Continued development work on the forecasting models and related data systems and tools is an integral part of the preparation of forecasts for the Finnish economy

Aino models capture main elements of the Finnish macroeconomy

The Bank of Finland uses various economic and statistical models for forecasting and analytical work. Aino 2.0 and Aino 3.0 are macroeconomic models of the Finnish economy. They are dynamic stochastic general equilibrium (DSGE) models, which are particularly suited for the analysis of business cycle fluctuations.

Both Aino models updated in 2022

The Bank of Finland introduced the Aino 2.0 model in 2016. The model is used for producing the Bank of Finland’s economic forecasts and examining different scenarios.

The Aino 3.0 model, based closely on Aino 2.0, models more precisely the household sector, household debt and the housing market.

The Bank of Finland began the development of Aino 3.0 in 2017, and the first version was completed in 2020. Since then, work has continued on developing both versions of the model.

In 2022, the structure of Aino 2.0 was updated and its parameters were re-estimated so that it would better capture business cycle dynamics in the Finnish economy. A corresponding updated version of Aino 3.0 was also introduced.

Aino 3.0 enables more precise analysis of linkages between real and financial sides of the economy

The Aino 3.0 model expands the toolkit used at the Bank of Finland for cyclical and policy analysis. It enables a more precise analysis of the linkages between Finland’s real economy and the financial system.

Aino 3.0 provides a tool for examining, among other things, the implications of household debt for business cycle dynamics, or the channels of transmission of the European Central Bank’s monetary policy to the Finnish economy. The model can also be used to analyse, for example, the effects of tighter bank credit standards on investment and economic growth in Finland.

In 2022, Aino 3.0 was employed to produce the alternative scenario that was published in connection with the Bank of Finland’s December economic forecast. The alternative scenario examined the risks surrounding the forecast which, if they were to materialise, could lead economic growth to be considerably weaker than expected.

The scenario was used for estimating the extent to which household sector indebtedness could deepen the recession if the cost of living and interest rates were to rise faster than expected.

In support of its forecasts, the Bank published a number of reviews and articles about the Finnish economy on the Bank of Finland Bulletin website. Many of these concerned the economic impacts of Russia’s war in Ukraine and the related energy crisis and surge in inflation. Further topics included Finland’s public finances and cost competitiveness.

In connection with its forecasting and monitoring work, the Bank also publishes an economic review (in Finnish) on its publications website.

The economic review examines the most recent data on the Finnish economy and looks at the latest indicators. It also presents GDP forecasts generated by short-term indicator models. In 2022, the Bank of Finland started presenting these economic reviews in the form of a concise set of slides.

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Research at the Bank of Finland in 2022