Finland’s economy fell into a recession in 2023. The recovery is expected to be gradual and to be driven by recovering domestic and external demand. HICP inflation is projected to decline to 1.4% in 2024, and the announced VAT hike is set to push it close to 2% in 2025. The planned consolidation efforts are expected to bring the general government deficit to below 3% by 2025, with public debt slightly exceeding 82% of GDP.
| Indicators | 2023 | 2024 | 2025 |
|---|---|---|---|
| GDP growth (%, yoy) | -1.0 | 0.0 | 1.4 |
| Inflation (%, yoy) | 4.3 | 1.4 | 2.1 |
| Unemployment (%) | 7.2 | 7.4 | 7.2 |
| General government balance (% of GDP) | -2.7 | -3.4 | -2.8 |
| Gross public debt (% of GDP) | 75.8 | 80.5 | 82.4 |
| Current account balance (% of GDP) | -1.4 | -1.6 | -0.8 |
The Finnish economy to emerge slowly from recession
In 2023, Finland’s real GDP contracted by 1%, as increases in prices and interest rates weighed on consumption and, particularly, on investment, amid weakening sentiment. Inventories also had a large negative contribution. The drop in investment was mainly driven by the construction sector, which has been affected for some time now by slowing housing demand and higher input costs. Government consumption supported domestic demand, given a significant rise in social and healthcare-related spending and wages. In addition, exports fell due to softening external demand. As imports dropped even more sharply, net exports made a positive contribution to growth.
With domestic and external demand set to recover gradually over the forecast horizon, real GDP growth is expected to be close to 0% in 2024 and to increase by 1.4% in 2025. Slightly improving consumer sentiment, wage growth exceeding inflation and cuts in labour taxation are set to strengthen purchasing power and support household spending in 2024. However, the new package of consolidation measures, consisting of tax increases and expenditure cuts, coming into force mainly in 2025, is expected to hold back a recovery in private consumption. Public consumption is forecast to slow down sharply in 2024 and contract in 2025. Investment and exports have been hampered by the temporary closure of ports and factories due to broad-based strikes earlier this year. Nonetheless, both are expected to slowly pick up on the back of easing financing conditions, better demand prospects for Finnish companies and an improving external environment.
Staff shortages set to keep labour market tight
As the economy contracted in 2023, employment started declining and the unemployment rate increased to 7.2%. However, given broad-based labour shortages due to a shrinking working-age population, the worsening in the labour market was relatively contained. Jobs growth is set to stagnate this year before picking up again in 2025 in line with accelerating economic activity, while the unemployment rate is projected to average 7.2% in 2025.
VAT hike set to maintain price pressures
HICP inflation averaged 4.3% in 2023 but declined considerably at the end of the year on account of falling energy prices. It is expected to, however, accelerate again in the second half of 2024, due to the planned increase in the standard VAT rate in September 2024. Overall, growth of consumer prices is forecast to decelerate to 1.4% in 2024. As the effect stemming from the increase in indirect taxes will continue into 2025, inflation is projected to increase to 2.1% in 2025.
A challenging path towards sound public finances
In 2023, the general government deficit rose to 2.7% of GDP. Amid a contracting economy, tax revenues declined, while government expenditure increased by 8% driven by a rise in public wages, interest expenditure and social spending, notably in relation to the newly set-up wellbeing services counties. Net budgetary costs related to measures to mitigate the impact of high energy prices in 2023 amounted to approximately 0.2% of GDP and was fully phased out that year.
For 2024, the projected deficit is set to increase to 3.4% of GDP as expenditure growth is forecast to exceed the projected increase in revenue. The latter is partially due to a sizeable cut in social security contributions that entered into force in 2024 and amounts to 0.5% of GDP. At the same time, spending on social benefits, wages and interest payments are to continue growing.
General government deficit is forecast to decline to 2.8% of GDP in 2025 as the economic recovery is set to support public revenue, while spending is projected to be contained due to consolidation efforts. In view of the deteriorating fiscal situation, a large consolidation package was announced in April 2024, estimated at approximately EUR 2.8 billion or 1% of GDP, and almost equally divided between tax hikes and spending cuts. The main announced revenue measure is an increase in the standard rate for VAT from 24.5% to 25.5%, which is set to enter into force in September 2024. Other tax increases and the elimination of several tax deductions as well as the spending cuts are expected to become effective in 2025.
In 2023, the general government debt-to-GDP ratio increased to 75.8%. The debt-to-GDP ratio is set to increase further to 80.5% in 2024 and 82.4% in 2025 due to persistent deficits and substantial stock-flow adjustments. This increase is, however, expected to be softened by the announced consolidation measures.