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Finance Ministry predicts modest economic growth in shadow of war in Ukraine

The ministry's figures predict that GDP will grow by 1.5 percent this year, down from a previous forecast of 2.9 percent.

Taloustieteilijä ja  valtiovarainministeriön kansantalousosaston osastopäällikkönä Mikko Spolander kuvattuna Valtiovarainministeriössä Mariankatu yhdeksässä Helsingissä.
The Finance Ministry's Head of Department Mikko Spolander unveiled the latest economic forecast at a press conference on Wednesday morning. Image: Toni Määttä / Yle
Yle News

Russia's invasion of Ukraine will have a sizeable impact on Finland's economic growth over the next two years, according to an outlook published by the Ministry of Finance on Wednesday.

The ministry's figures predict that Finland's Gross Domestic Product (GDP) will grow by 1.5 percent this year and by 1.7 percent in 2023.

A previous forecast, published by the department last September, had forecast growth of 2.9 percent during 2022.

Speaking at a press conference on Wednesday morning announcing the latest report, the ministry's Head of Department Mikko Spolander said Russia's war on Ukraine has drastically changed the economic outlook.

"The Finnish economy was showing good growth and forecast increases were evident. Russia’s invasion of Ukraine then clouded the outlook and turned the increases into slower growth and accelerating inflation. In the longer term, the effects of the war will lead to a structural change in both the economy and society," Spolander said.

As a result of sanctions imposed by the EU, the US and other Western countries, inflation has continued to rise, thereby reducing the purchasing power of households. The sanctions will also virtually end Finland's trade with Russia, in turn reducing the Finnish economy's growth this year.

The ministry's forecast assumes that the economic sanctions imposed on and by Russia will remain in place for a prolonged period of time. The report further assumes that no new restrictions will be imposed to prevent the spread of coronavirus infections, which would also have a negative impact on the economy.

Increased government spending

The economic effects of the war in Ukraine are also expected to extend to Finland's public finances.

At the same time, the ongoing war and growing geopolitical tensions reinforce the need for Finland to spend more on defence. During the recent budget framework talks, the government decided to increase defence spending by some 1.5 billion euros between 2023 and 2026.

This combination of slowing economic growth and increased government expenditure will take a toll on public finances and the overall health of the economy.

"Interest rates have also started to rise," Spolander noted. "Rising interest rates will increase public spending as maturing loans are renewed and new ones taken out. It raises interest spending in a situation where there is no room for compromise."

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