Govt forecasts recovery from economic recession in 2025

Finland’s economy has returned to growth this year, and growth is expected to accelerate next year, according to the forecast published by the Ministry of Finance on Thursday.

On an annual basis, gross domestic product (GDP) is expected to decline by 0.3% in 2024 from the previous year. In 2025, GDP will grow by 1.6%, and in 2026 and 2027 by 1.5%, said the Ministry in a press release.

Finland’s economy has grown in each quarter of this year compared with the previous one, and growth will continue next year.

Consumption and investment will increase as price rises slow down and interest rates fall.

General government savings and tax increases, however, will curb economic growth.

“The economy is good one day and bad the next, but the turnaround in the factors supporting economic growth – inflation, interest rates and purchasing power – is already so strong that we expect growth to accelerate significantly next year. Through growth and measures to strengthen general government finances, deficits will also gradually begin to decrease,” said Director General of the Ministry Mikko Spolander.

Growth in Finnish exports is picking up, but more slowly than expected. The outlook for goods exports is overshadowed by the slow recovery of euro area manufacturing.

Despite the growth in exports, the impact of net exports on economic growth will remain small in the coming years, as imports will also increase as investment rises.

Finland’s current account will also be slightly negative throughout the outlook period.

Price increases have slowed down significantly and will remain moderate despite tax increases.

With the slowdown, real household income has started to increase. This has not, however, been reflected in an increase in consumption. Consumption has decreased and savings have increased significantly.

In the future, lower interest rates on loans will ease the debt servicing costs of mortgage borrowers, and the accumulated savings will begin to be used for consumption. Consumption growth will accelerate in 2026 as employment improves.

The sharp decline in construction seems to have come to a halt, but it will take time for the construction industry to recover. Both construction and investments in machinery and equipment will be boosted by the energy transition and related projects.

A high level of new investments is expected next year in particular, with defence procurement also driving up investment substantially.

Although the economy has grown, employment has weakened. The turnaround in the labour market will be postponed until 2025, when the economic recovery will increase demand for labour.

The general government entities – central government, local government and social security funds – started the year in a weak position and the situation has not improved over the year.

The long-awaited economic recovery has been delayed. This year, the general government financial deficit will rise to 4.2% of GDP. The deficit is projected to fall to 3.5% of GDP in 2025 and gradually to around 2% in 2029.

This year, general government expenditure has grown rapidly and tax revenue growth has been subdued. Central government spending increased, particularly due to investments in preparedness and security, which will continue throughout the outlook period.

In local government, expenditure growth has been driven by rapid increases in personnel costs and purchased services, although the fastest growth in expenditure appears to have passed.

Social security expenditure, on the other hand, has risen sharply as a result of both large indexation increases of pensions and higher unemployment. From 2025 onwards, pension expenditure growth will slow down and unemployment expenditure will also start to decline.

In 2025, tax revenue is expected to grow faster than in the current year as the economic recovery gains momentum and taxes are raised. Other adjustment measures decided by the Government will also strengthen central government finances in particular.

This year, the general government debt ratio will rise above 82% and further to 85% next year. The growth in the debt ratio is forecast to stabilise by the end of the decade.

If the Government's full EUR 9 billion general government adjustment package is implemented as planned, the debt ratio will stabilise by the turn of the parliamentary term and remain stable for a time. Thereafter, the debt ratio will rise slightly. After the population forecast update and other forecast changes, the sustainability gap is estimated to be 1.5% of GDP.