The economic growth forecast of the Bank of Finland has been revised downwards as a result of the escalation of the conflict in Iran. According to the report, the nation's economic expansion commenced in the latter part of the previous year.
The expansion, sustained into the early months of this year, was fueled by private spending and investments. However, by the close of February, a shift occurred following the joint military strike launched by the United States and Israel against Iran.
Based on the latest revised forecast by the central bank, the economic growth of Finland is projected to be 0.6 percent in the current year, with an anticipated increase to 1.4 percent by 2027. According to the projections, the economy is expected to experience a 1.5 percent growth in 2028.
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At the same time, the report mentions that the projected increase in economic growth is uncertain, partially due to the ongoing conflicts in the Middle East and Ukraine. Moreover, another significant source of unpredictability stems from the escalating tensions in global trade, attributed to shifts in the United States' tariff regulations.
Juuso Vanhala, the chief forecaster at the central bank, acknowledged that the initial growth figures for this year have exceeded expectations from December, but cautioned that higher energy prices are impeding further growth. While the pace of growth has moderated, projections indicate that it will persist in the foreseeable future.
Vanhala emphasized the need to remain vigilant, as the global economic landscape is susceptible to rapid shifts that could alter current economic forecasts. Finland experienced a deceleration in inflation rates last year, however, the effects of the "energy shock" stemming from the conflict in Iran are anticipated to elevate consumer prices once again.
The rising cost of energy will raise consumer prices this year, but the impact on next year will depend crucially on the duration of the energy supply disruption," Vanhala says.
The complexity of this scenario further complicates the task of forecasting inflation, as highlighted by the central bank. It is projected that inflation will increase to 1.9 percent within the current year, with subsequent fluctuations expected to occur in either direction by a margin of a few tenths of a percentage point over the subsequent year.
The message highlighted the impact of halting fuel deliveries in the Persian Gulf, emphasizing that this action is likely to result in an increase in fuel prices. Subsequently, the rising fuel costs will gradually influence the prices of food, manufactured items, and various other commodities.
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The central bank has predicted a 10.2 percent unemployment rate for the current year, with expectations of gradual improvement as the business cycle progresses. It has forecasted a decline in unemployment to 9.7 percent by 2027 and further decrease to 9.2 percent in the subsequent year. The financial institution stated that its economic growth projections took into account various potential outcomes, highlighting the heightened level of risks.
"The duration of the war in Iran and its impact on the energy market constitute a key uncertainty factor in the forecast. Under the [considered] scenarios, a prolonged presence of energy supply disruptions could accelerate inflation and curtail growth for several years," the central bank says.