Momentous shift under way in global politics – Uncertainty casts shadow over growth in Finland and Europe
“A momentous shift is taking place in global politics in a dangerous way for Europe,” says Governor of the Bank of Finland Olli Rehn. “Europe must rapidly come up with measures to support Ukraine and to boost its own defences.”
Uncertainty is weighing on investment in the euro area and on its exports, and the risks are on the downside. Inflation is stabilising at the target level, but growth in the economy is subdued. A significant increase in Europe's defence spending and in its investment in defence could increase the euro area's production.
The Eurosystem forecast for the entire euro area shows an annual inflation rate of 2.3% for 2025 and 1.9% for 2026. Measures of underlying inflation also suggest that the inflation rate will settle at around the 2% target on a sustained basis.
“In the European Central Bank's Governing Council, we decided to further lower interest rates this month, as inflation has fallen and the economic outlook has weakened. We are not pre-committing to a particular rate path but will take decisions on a meeting-by-meeting basis, the next meeting being in April. As there is high uncertainty, the Governing Council will maintain complete freedom of action,” says Rehn. This was the sixth reduction in the deposit rate, which was lowered by 0.25 percentage points, to 2.5%.
Finnish economy's recovery slow
The Finnish economy is recovering from a recession. Growth in the economy is nevertheless modest and is being restrained by the low level of investment, in particular. The Bank of Finland’s March 2025 interim forecast expects the economy to grow at the same pace as it had forecast in December 2024, but the risk of weaker growth has increased. Growth in the Finnish economy will be 0.8% this year and will rise to 1.8% in 2026. In 2027, the final year of the forecast period, growth will slow to 1.3%.
Extensive trade war would weaken economic output worldwide
Calculations by the Bank of Finland show that United States’ import tariffs targeting EU countries and China could reduce global gross domestic product (GDP) by just over 0.5% in 2025 and again in 2026. The impact on the euro area’s economy could be slightly greater than this. A trade war may lead to both upward and downward pressures on prices.
The US has imposed considerable trade restrictions on its trading partners. “Widespread US tariffs on its imports from EU countries would, if implemented, hamper Finland’s goods exports, as the United States is an important export market for Finland. The elevated uncertainty may in itself curb private consumption and investment, as well as growth in Finland’s export markets,” says Governor Rehn.
Europe and Finland require investment in security and must find solutions for structural challenges in the economy. “Defence investments now have to be stepped up in an environment where the public deficits of EU Member States are already large. For this reason too, we need common European solutions that must be implemented in ways which effectively strengthen our shared external security,” underlines Rehn.
Presentation 11 March 2025, Governor Olli Rehn
Articles and interim forecast (in Finnish)
First, please LoginComment After ~