by Jukka Appelqvist, Chief Economist at the Finland Chamber of Commerce (Keskuskauppakamari)

When the previous economic survey by the Finland Chamber of Commerce was released in May 2023, there was cautious optimism in the air. The economic outlook was not great, but the early part of the year had turned out better than expected after the easing of the energy crisis in Europe. Unfortunately, the outlook has worsened in recent months and economic news have predominantly been negative. The situation is particularly difficult in construction and manufacturing.

Manufacturing is suffering from weak exports demand, which is evident for important trade partners, such as Germany, Sweden, and China. Construction, on the other hand, has been strongly affected by the rising interest rates and increasing construction costs. Households’ declining purchasing power has also negatively impacted intentions to buy homes.

Consequently, Finnish companies' views on economic outlook have become more pessimistic in the new survey relative to the previous survey released in May. Assessments have worsened broadly across various areas, including turnover, new orders, employment, and exports.

About quarter of respondents expect their turnover to increase in the next six months. In May, the corresponding figure was still one third. The share of respondents expecting a decrease in turnover has risen from just under 21% to 30%. In the new survey, over 45% of respondents considered the current situation regarding order books worse than at the same time last year. Just over 34% found it to be similar and less than 21% better. Expectations for the development of new orders in the next six months have also significantly weakened. Now 34.3% of respondents expect a decrease, and only 19% an increase. In May, less than 23% anticipated a decline in their future orders.

Expectations regarding employment have also weakened somewhat, although the situation can still be described as moderately good. Most respondents expect the size of their workforce to remain at least constant but 22% of respondents are anticipating a decrease. In May, less than 12% percent anticipated a decrease. In the official Labor Force Survey by Statistics Finland, the employment rate has so far remained at a high level even though the trend unemployment rate has already risen from 6.5% to 7.5%.

In recent months, the firms’ turnover has not developed as well as expected. In May, 44% of respondents assessed their turnover for the current year to be better than last year at the time of the survey. In October, the corresponding figure had decreased to just over 37%. However, it can still be said that sales have been reasonably good in the early part of the year considering the headwinds the economy is facing.

Figure 1. Development of order-books in six months

Respondents' views on the prevailing general sentiment in their own industry are quite gloomy. Almost half of the respondents, i.e. 48.5%, described the situation as being pessimistic or very pessimistic. The corresponding figure in the May survey was 33.6%. Only 15.4% of companies characterized the prevailing economic sentiment in their own industry optimistic.

Cost pressures and problems with supply chains have eased, but at the same time, weakening demand is threatening profitability. Over the next six months, 41.4% of companies expect a deterioration in their profitability. The figure is roughly at the same level as in December of last year when companies were battling with the energy crisis and rapid rise in producer prices. Profitability expectations had improved significantly during the early part of 2023 as production costs decreased, but now the weakened demand has brought crisis sentiments back.

Figure 2. Current overall sentiment in your industry

As expected, sentiments were bleakest in the construction industry. Sentiments in construction were already pessimistic in previous surveys, but the situation has deteriorated further. In construction, 80.8% of respondents considered the prevailing situation as pessimistic or very pessimistic in October. Also, in manufacturing and retail, the majority of respondents characterized sentiments as pessimistic. The proportion of respondents in manufacturing considering sentiments as pessimistic had increased from 34.4% in May to 55.4% in October, indicating a sharp decline in the economic outlook.

Expectations were most optimistic in the service sector. In the service industries, just over 32% respondents characterized sentiments as pessimistic. The situation is not fantastic, but 21% still characterized the prevailing economic situation as optimistic, and almost 47% considered it normal.

Even though the outlook for coming months is difficult, and Finland is likely to enter a recession over the winter, there are some positive factors that will hopefully help recovery in 2024. Purchasing power will gradually recover as salaries rise and inflation slows down, but it will take time before the household situation turns significantly supportive of growth.

Purchasing manager indices suggest that also exports demand will remain subdues in the Eurozone for the time being. However, at some point next year, we can expect the situation to improve. Also, the hiking cycle in monetary policy has likely become to an end and we can expect interest rates to start a modest decline in 2024. This will support both firms and households. However, the ECB is likely to proceed cautiously, and the focus of rate cuts will be in H2 2024. From the perspective of Finnish Economy, a quicker pace of cuts would be preferable given the clear slowdown in inflation and the weak economic outlook.

From Cautious Optimism to Uncertainty: An outlook into Finland's Economic Landscape