The Russian invasion war will not collapse the Finnish economy, but it revealed weaknesses

Aleksi Randell
Director General and CEO
Confederation of Finnish Construction Industries RT
Finland

The Finnish economy was in good shape at the beginning of this year. However, the full picture of the economy changed once again when Russia began their attack on Ukraine. The economy is still growing at a good pace this year, thanks to the strong performance last year and at the beginning of this year. Next year, the growth forecasts are on both sides of zero.

There is no major collapse in sight. Finland’s economic dependence on Russia has decreased since the occupation of Crimea. The negative effects are reaching Finland through general uncertainty, the slowdown in European growth, high inflation, and rising interest rates.

However, economic uncertainty affects construction. The coming winter will bring about the third crisis in the construction industry within a short time. In 2020, the Covid-19 pandemic threatened to close construction sites, put urban living on hold, and caused uncertainty regarding the use of public spaces. This year, the war begun by Russia has broken supply chains and further increased costs that the pandemic had already affected.

The coming winter is once again plagued by uncertainty and a new crisis, this time related to the sufficiency of energy. Europe is heading towards a recession, which will mean that Finland’s economic growth will also be temporarily halted at some point. We can no longer rely on zero interest rates and consumer confidence, which have helped us through the previous crises. The only certainty is that there will be surprises. Nevertheless, the current forecast indicates that the economy will keep growing. This is important for construction, even if next year we will only hit the mark with a surplus. In 2024, growth will once again accelerate, which gives new hope for the construction industry.

The industry will continue to grow until the end of the year due to ongoing projects and successful housing projects. Next year will initiate a decline. There is a lot of uncertainty, and many indicators of negative development. Our development forecast is therefore moderate and presumes that the inflation will decelerate and the financial market will remain operational.

As inflation has peaked during the autumn, price increases should slow down in the coming year. This will help stabilise interest rates and restore the trust of consumers who may have been alarmed by declining purchasing power and savings. Consumers should get used to the higher but still rather low interest rates. The inflation and the climbing interest rates have already affected housing prices. However, the housing market in Finland remains stable. Its development is mainly dependent on domestic developments. Sweden’s problems are not Finland’s problems, even though there are some opinions to the contrary. The crisis does not seem to be causing great harm to mortgage-holders. On the other hand, the weak development of existing capital stock will be a challenge for developers. For some time now, inflation has been gnawing at construction projects in an extraordinary way from many directions.

Consumers will be tightening their purse strings for a while, but there is potential elsewhere in the economy. There are some industrial and public sector projects set to start in the spring. Infrastructure development will be weak, but some investments in the security of supply and energy self-sufficiency will be necessary at some point. Renovation will increase, as there will be a growing need for it. This means that negative consumer attitudes alone are not enough to paralyse the industry. Some uncharacteristic public sector decisions and loss of confidence in companies and especially the financial market would also be needed. Regardless of rising stress levels in the financial market, there is no indication of a new financial crisis.

The construction industry has successfully navigated exceptionally murky waters despite the constant shortage of workforce and materials. Thanks to the determination of the industry, the pandemic did not shut down worksites. Hard work and innovation have helped counteract the material shortages and rising costs caused by Russia’s war of aggression in Ukraine.

Unfortunately, the war in Ukraine continues, the world is separating into blocs, and the competition for scarce resources and technological leadership is intensifying. In March, the Confederation of Finnish Construction Industries RT carried out a scenario project that outlined short-term scenarios of how the Ukraine crisis could develop in stages. The scenarios helped identify effects and risks for construction industry parties.

As a result of the immediate effects of the war, the procurement of many construction materials became difficult and their costs rose to record levels. In the spring, it was difficult to obtain binding prices and delivery times for new projects. Delivery times were stretched and companies experienced difficulties at least in fulfilling existing contracts. Making investment decisions became more difficult. Some of the projects were rescheduled when it became almost impossible to anticipate the development of costs.

The continuation of the war and the rising iron curtain on the eastern border mean a big change, and emphasise the importance of preparedness. In practical terms, it means looking west for material deliveries. Logistic routes are being reorganised and material warehousing is increasing. Production chains are shortening and operations dispersing. Local production and security of supply are becoming a part of the discussion again, but with a new perspective.

Changes in supply chains and future reconstruction in Ukraine will maintain pressure on construction costs. One of the central findings of the scenario work was that a market operating in crisis conditions requires crisis-flexible contracts. At the beginning of the war, the rise in construction costs appeared to be a problem only for the builders. In fact, the increase in costs affects all parties, both owners and workers. If construction slows down to a point where supplying the market is impossible, the entire economy as well as societal development will slow down.

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