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Business Environment

Business Environment

Business environment

Economic growth this year is still weakened by higher prices, tighter monetary policy and weak exports. The Bank of Finland forecasts that GDP will contract by 0.4 per cent in 2023. However, inflation in the eurozone will slow down this year, which will support consumers’ purchasing power, and the labour market will remain good. It is forecast that GDP will swing to growth of 0.9 per cent in 2024 and to strengthen further in 2025 (source: Bank of Finland).

The interest rate market has remained tight, even though inflation seems to have passed its peak both globally and in Finland. As expected, the European Central Bank continued to raise interest rates in June, increasing key interest rates by 0.25 per cent to curb inflation. The ECB key interest rate is now 3.5 per cent. Inflation has started to slacken, but remains high in relation to central bank targets in both Europe and the USA. Interest rate hikes aim to return inflation to the medium-term target of two per cent. The ECB expects to make further interest rate hikes in July, but has not issued guidance for the period after that. The market expects interest rates to start declining slightly in the longer term. The particularly rapid rise in market interest rates has tightened financing conditions for both households and companies. Surging interest rates and inflation have posed challenges to consumers, which has been clearly evident in the strong weakening of demand in the housing market (source: Bank of Finland, Forecast for the Finnish Economy and OP Financial Outlook, June).

Consumer confidence plummeted immediately when Russia invaded Ukraine. Consumer confidence remains weak, but confidence in Finland’s economy improved in the spring. This is still considered to be a very unfavourable period for investments. The balance figure for the consumer confidence indicator was -8.8 in June, while it was -10.8 in March 2023 (source: Statistics Finland).

Construction began to contract in autumn 2022. New construction startups and permits have plummeted during the past year. Construction is expected to contract by 3.5–6 per cent during the present year, while this decline will level off next year. At the end of 2022, the intentions of households to buy a residential unit declined significantly due to surging energy prices and higher interest rates. The volume of new housing construction began to fall off in autumn 2022 and this decline has remained strong during the entire first part of the year. A total of 38,300 residential units were started up in 2022, but it is expected that the number of residential start-ups will decrease substantially this year. The trend in building permits for business premises began to decline in 2022 as uncertainty and high costs hindered tender operations. On the heels of the weak trend in permits, the volume of the construction of business premises continued to fall in the first part of the year. The construction of business premises is supported by public-sector construction and investments in the green transition, so its outlook is more upbeat than other types of construction. Investments in the years ahead will be supported by a slowdown in the rise of construction costs (source: Confederation of Finnish Construction Industries RT and Forecon).

The real estate market has had a challenging start to the year and the trading volume has slowed down. During the first half of the year, real estate transactions amounted to about EUR 1.4 billion. This is the lowest H1 volume since 2013. During the second quarter, the transaction volume amounted to around EUR 1.0 billion (EUR 410 million Q1/2023). Compared to the second quarter of 2022, the volume dropped by more than 50 per cent (EUR 2.2 billion Q2/2022). Housing accounted for over 40 per cent of the transaction volume in the first half of the year. The second-highest transaction volume was accounted for by industrial properties (20%). Transactions by foreign investors represented around 57 per cent of the total volume. Investors are cautious due to the recession, inflation and rising interest rates, and yield requirements have increased in all property segments. Investors expect that real estate transactions will pick up in the latter half of the year (source: KTI).

In SRV’s view, near-future demand for residential units will remain weak in both the consumer and investor segments. Surging interest rates, high inflation and tighter availability of loan financing have significantly reduced the willingness and opportunities of customers to purchase residential units, and for this reason the number of new housing project startups will remain at a very low level in the near future. That said, the strong fall in the construction volume will most likely cause a bottleneck in market supply in the future – the lack of new startups means that a very low number of residential units will be completed in 2024. The business construction market is more polarised than the housing market, and there is still demand for properties in good locations, though the yield requirements are higher. In addition, the public sector is continuing to make investments, and industry has investment projects in the pipeline.

Half-year report January – June 2023, 20 July 2023