Govt forecasts recovery from recession but finances in deficit

Finland’s economy will recover from recession, but public finances will remain in deficit. according to the Economic Forecast published by the Ministry of Finance on Thursday.

Finland’s debt ratio will continue to grow, but more slowly, said the ministry.

The latest statistics considerably darkened the picture of Finland’s economic development over the past few years. The recession has been longer and deeper than previously estimated.

However, Finland’s economy will begin to improve this year, through it will not yet show growth on an annual basis. Finland’s Gross Domestic Product (GDP) is projected to grow 1.6 per cent in 2025 and 1.5 per cent in 2026.

Domestic demand will improve as inflation slows, interest rates drop and household incomes grow.

On the other hand, the government's adjustment measures will reduce demand, increase prices and weaken economic growth by a total of about 0.5 per cent in 2025 and 2026.

“As the economy begins to recover, public deficits will shrink and indebtedness will level off. However, there is not much room for manoeuvre to reach our goals. Efforts to improve the economy’s capacity to generate income and strengthen public finances must be continued over the long term and across parliamentary terms,” said Senior Ministerial Adviser Jenni Pääkkönen.

The global economic outlook has improved. In particular, global trade is expected to pick up after a weak 2023.

However, economic growth will remain weak this year in the euro area, and especially in Germany, which is an important market for Finland.

Exports were also hit by strikes in the beginning of the year. Nevertheless, Finland’s exports will benefit from global economic growth because of strong price competitiveness.

Private consumption has grown slightly despite household purchasing power being hit by rising prices and interest rates and consumer confidence being low.

Opportunities for household consumption will improve, and the growth of private consumption will speed up next year.

However, growth will be slowed by the Government’s additional adjustment measures, which will constrict the growth of household disposable income and raise prices.

Investment will also begin to grow in 2025 as interest rates fall, the construction industry begins to recover and the number energy transition and security investments increases.

Employment will fall in 2024, but return to growth starting in 2025 as a result of increasing demand and measures to boost employment. The employment trend has been reasonably good compared to the economic situation. This is because of a clear increase in immigration, which has increased the labour force and the number of people in employment.

Employment growth will be quite strong and broad in 2025 and 2026. This will be supported by output growth and by the measures taken by the Government to boost employment, the first of which will come into effect in 2024. In 2026, the employment rate of persons aged 15 to 64 will be 74.5 per cent and the unemployment rate 6.7 per cent.

Public finances improved momentarily in 2022, but then took another negative turn.

In 2023, the public deficit was 2.7 per cent of GDP, or just over EUR 7 billion. As the economic situation has deteriorated, no significant growth of tax revenues can be expected this year.

General government expenditure, by contrast, is growing rapidly. The deficit will continue to grow to 3.5 per cent of GDP in 2024. In light of this and other information, the Government decided on measures to strengthen public finances by EUR 3 billion as part of the General Government Fiscal Plan for 2025–2028.

Without these additional measures, the public deficit would remain over 3 per cent of GDP for several years, debt would grow rapidly and the debt ratio would rise to nearly 90 per cent in 2028.

The impact of the measures decided by the Government has been taken into account in the Economic Forecast.

The deficit is estimated to be under 2 per cent of GDP at the end of the forecast period in 2028.

The Government's measures will slow the growth of the debt ratio, which will stabilise at around 84 per cent at the end of the forecast period.

The measures will significantly improve public finances, but based on current information, will not be enough to reverse the growth of the debt ratio.