2023

 

Economic development marked by rapid rise in interest rates

2023 became the year of beating inflation. The total cost of this exercise, with its rapid rate hikes, is unknown. The central banks’ rapid interest rate increases have had a significant impact on the economy in the euro area. At the same time, the Chinese economy suffered from weaker growth. The U.S. has been a a beacon of light in the economic landscape, but its activity has been supported by significant and unsustainable fiscal deficits.

The euro area interest rates, which are determined by the European Central Bank, continued their upward trend during 2023, but the growth stalled during the second half of the year. For this we can thank the rapid decline in headline inflation, which decreased from 9.2 per cent to close to 2 per cent by the end of the year. Overall, during the last months of 2023 inflation figures came in lower than expected. From an interest rate perspective, the outlook was therefore positive.

Most Finnish loans are linked to Euribor rates. Therefore, Finnish households and companies have experienced the cost of higher rates faster than in many other countries. House prices continued their downward path throughout the year, with very few indicators forecasting a positive turn in the near future. This in turn caused significant challenges for the construction industry, which has seen new building permits decrease at an alarming speed. The lower number of permits will affect construction activity negatively in 2024. At the same time, EU economies are also experiencing economic difficulties that affect the Finnish export sector. On a positive note, Finnish households’ purchasing power is improving. Earlier, salary increases did not make up for the losses caused by rapid inflation. During 2023, due to slower inflation and larger salary increases, purchasing power is growing again. However, it will take time for the purchasing power to surpass its earlier peak from 2021.

Overall, the economic mood in 2023 took a turn for the worse. Inflation uncertainty has faded during 2023 and the focus has turned to interest rate cuts. For Finland, the current outlook contains more negative than positive signals.

Lasse Corin
Chief economist

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