After a recession in 2023 and a slight contraction in 2024, the economy is forecast to rebound by 1.5% and 1.6% in 2025 and 2026 respectively, driven by the recovery of private consumption and investment. Increasing foreign demand is set to support exports of goods and services. HICP inflation is expected to rise due to the increase in the standard VAT rate that entered into force on 1 September 2024. Combined with fiscal consolidation measures, these developments are projected to reduce the deficit to 2.5% by 2026, while the public debt-to-GDP ratio is set to increase to 85.3% of GDP.
| Indicators | 2024 | 2025 | 2026 |
|---|---|---|---|
| GDP growth (%, yoy) | -0,3 | 1,5 | 1,6 |
| Inflation (%, yoy) | 1,0 | 2,0 | 1,8 |
| Unemployment (%) | 8,2 | 7,9 | 7,5 |
| General government balance (% of GDP) | -3,7 | -3,0 | -2,5 |
| Gross public debt (% of GDP) | 82,6 | 84,7 | 85,3 |
| Current account balance (% of GDP) | -0,6 | -0,9 | -0,9 |
Economic recovery on the horizon
After Finland’s economy fell into a recession at the end of 2023, real GDP growth was subdued in the first half of 2024. Construction activity has been the main drag on growth for a prolonged period, in the wake of rising financing costs, with sector sentiment remaining low. Exports of goods declined, registering a sharp drop in the first quarter of 2024 due to several weeks of port strikes. Private consumption stagnated in the first half of 2024, as the unemployment rate increased and some social benefits were cut. On the positive side, government consumption and net exports supported growth more prominently lately. In particular, strong growth in services exports since the beginning of the year and steady investment in equipment suggest that the economy is bottoming out. Together with decreasing borrowing costs, sentiment in industry and the services sector is improving, as is consumer confidence, and this should pave the way for a sustained recovery. Nevertheless, real GDP is projected to slightly contract in 2024, due to a sizeable negative carryover effect.
For 2025 and 2026, real GDP is expected to expand by 1.5% and 1.6% respectively. Growth is set to be driven by domestic demand, even though the government has announced additional fiscal consolidation measures, which will mostly come into force in 2025. Despite the 2024 hike in the standard VAT rate and the reduced or frozen indexation of benefits, higher wage growth is set to support disposable incomes and, thus, private consumption. Decreasing financing costs and a falling supply of new dwellings should give impetus to the recovery of construction investment. Export growth is expected to gain traction as foreign demand gradually recovers.
Labour market to gradually improve
In a context of falling vacancy rate, employment growth slowed to 0.8% in 2023, dragged down by a sizeable decline in the construction sector, while the unemployment rate increased to 7.2%. In 2024, employment is expected to fall by 0.6%, in line with the weakening economic activity, with the decline concentrated in the manufacturing, construction and professional services sectors, while labour shortages persist in other sectors, notably healthcare. With the broader improvement in economic conditions, employment is expected to recover gradually in 2025 and 2026, by 0.6% and 0.8% respectively. The unemployment rate is projected to pick up to 8.2% in 2024, before falling to 7.9% in 2025 and 7.5% in 2026.
Higher inflation due to the VAT hike
Declining energy prices continued to slow down HICP inflation and kept overall price increases below 1% since the beginning of 2024. However, the increase in the standard VAT rate, in force since 1 September 2024, already had a visible impact on the inflation rate in the third quarter. Mostly due to the higher VAT rate, HICP inflation is forecast to increase from 1% in 2024 to 2% in 2025, before declining to 1.8% in 2026, thanks to the easing of some price pressures.
Consolidation efforts set to reduce deficits
In 2024, the general government deficit is set to increase to 3.7% of GDP, from 3.0% in 2023, driven by considerable increases in government spending and a slowdown in public revenue growth. On the expenditure side, increases in government consumption and social benefits are the main drivers. Higher interest expenditure has been weighing on the general government balance as well. At the same time, public revenue is falling further behind spending due to cuts in social security contributions and a decline in some tax receipts amidst the economic slowdown.
The general government deficit is forecast to decrease to 3.0% of GDP in 2025 as the announced consolidation measures are expected to come into force, while revenue growth is set to get a positive boost from the economic recovery. In April 2024, the government announced a large consolidation package concerning both revenue and expenditure, following a first consolidation package adopted in 2023. The expenditure cuts are scheduled to come into force in 2025 and reach the full envisaged effect in a couple of years. Revenue is projected to increase on the back of the 2024 hike in the standard VAT rate, as well as of higher taxes on income and social contributions. In 2026, the general government deficit is forecast to further decrease to 2.5% of GDP, thanks to recovering public revenue, while expenditure growth is projected to slow down.
Due to persistent deficits, the debt-to-GDP ratio is projected to reach 82.6% in 2024 and is forecast to increase further to 85.3% in 2026.