Finland is a laggard in the eurozone
The Finnish economy has underperformed the rest of the eurozone over the past two years. The Finnish economy has contracted by 2% in the past two years, while the eurozone has experienced growth of more than 1% on average over the same period.
High inflation has weakened consumer purchasing power across the continent, due to which private consumption has been muted in Finland and the rest of Europe alike. Purchasing power in Finland has begun to recover, but the pace of recovery is lagging the rest of the eurozone, where many countries have introduced large wage increases or one-off payments to compensate for the loss of purchasing power. Moreover, unemployment in Finland has gone up to as much as 8.3%, compared to an average unemployment rate of 6.5% in the eurozone.
Higher interest rates have affected households in Finland, where most mortgages have a variable rate, to a much greater extent than in other countries, where fixed-rate mortgages are preferred. The average interest rate on household mortgages in Finland has gone up from less than 1% to 4% within two years, whereas the average mortgage rate in the eurozone is still less than 2.5%.
The rise in interest rates has dampened demand for housing, resulting in a strong negative impact on the Finnish construction sector, which has performed clearly worse than elsewhere in Europe and is mostly the reason for the weak GDP trend in Finland. The construction of new housing in Finland has been slashed by almost half in the past two years, as house sales virtually hit a wall once interest rates shot up. The construction of rental housing has also decreased significantly, because there are plenty of vacant rental dwellings on the market following the rapid construction boom seen in past years. The construction market overheated in Finland in the years of low interest rates, contrary to many other eurozone countries, which were still coping with the aftermath of the financial crisis.
