After expanding in the first half of 2023, GDP is expected to contract in the second half of the year on the back of higher financing costs and weak private consumption. Real GDP is projected to grow only by 0.1% in 2023 and gradually accelerate to 0.8% in 2024 and 1.5% in 2025. Supported by declining energy price, inflation is set to decelerate to 4.4% in 2023, before falling below 2% in 2024. The general government deficit is forecast to increase to 2.4% of GDP in 2023, to 3.2% in 2024 and to 3.4% in 2025, leading to an increase of the debt-to-GDP ratio to 79.1% by 2025.
| Indicators | 2023 | 2024 | 2025 |
|---|---|---|---|
| GDP growth (%, yoy) | 0,1 | 0,8 | 1,5 |
| Inflation (%, yoy) | 4,4 | 1,9 | 2,0 |
| Unemployment (%) | 7,2 | 7,3 | 7,0 |
| General government balance (% of GDP) | -2,4 | -3,2 | -3,4 |
| Gross public debt (% of GDP) | 74,3 | 76,9 | 79,1 |
| Current account balance (% of GDP) | -0,5 | -0,2 | 0,7 |
Growth expected to resume in 2024
Finland’s GDP was unchanged in the first half of 2023 compared to the previous year. Weak confidence and output indicators suggest that real GDP is expected to contract in the second half of 2023. This can be attributed to higher financing costs, weak private consumption, and a decline in manufacturing and construction activity. Gross fixed capital formation, in particular residential construction activity, is projected to fall by 4.1% in 2023. The build-up of inventories in 2022 has been absorbed in 2023, as reflected also in a projected 4.5% decrease in imports in 2023. A decline in imports of goods, especially in the first half of the year, has been partially compensated with the increase in imports of services. At the same time, exports are expected to remain flat in 2023 thus providing a positive contribution from net exports on growth.
Overall, GDP growth is projected to grow by a meagre 0.1% in 2023. It is set to pick up in 2024 boosted by a slow recovery of private consumption and investment, particularly targeting the green transition. The construction sector is expected to also resume its growth in the second half of 2024, and fully recover in 2025 as a result of a uptick in private investment and a more supportive financial environment.
The labour market slowly worsening
After a good performance in 2022, employment growth slowed down already in the first half of 2023 mainly due to the decline in construction. The unemployment rate increased above 7% and the number of job vacancies declined, albeit still remaining high compared to historical levels. Unemployment is projected to reach 7.3% in 2024, before edging down to 7% in 2025. Compensation per employee is expected to grow by 5.1% in 2023 and wage growth is forecast to slow down in 2024 and 2025 following the deceleration of the inflation rate and the pickup of employment.
Inflation to decline below 2% in 2024
After reaching 7.2% in 2022, HICP inflation is projected to ease to 4.4% in 2023 on the back of declining energy prices. Combined with a weak economic activity, Finland’s increasing energy independence on gas has played a significant role in lowering inflation. On the other side, the continuous rise in service prices will persistently have a negative impact on inflation throughout the forecast horizon. HICP inflation is forecast to fall below 2% in 2024 and maintain the same level in 2025.
Public finances to remain under pressure
The general government deficit is expected to increase to 2.4% of GDP in 2023, due to the slowdown in economic growth and to already planned expenditures, mainly in the field of national defence and border-guard spending.
The general government deficit is forecast to widen further to 3.2% of GDP in 2024, when a decrease in revenue is foreseen as a result of changes in social security contributions. In addition, the deficit is projected to be impacted by additional defence spending, costs from R&D-related measures and investment funding over the forecast horizon, as well as by higher interest expenses and expenditure growth resulting from inflation. These factors will also impact 2025 and the deficit is expected to further increase to 3.4%. Deficit projections also take into account a complete phasing out of COVID-19 emergency measures and of measures to mitigate the economic and social impact of high energy prices (estimated at 0.3% of GDP in 2023) by the end of 2023.
The general government debt-to-GDP ratio is expected to increase to 74.3% in 2023, mainly due to the primary deficit in central government finances, but also in local government and in the wellbeing services counties( ) finances. The general government debt-to-GDP ratio is forecast to continue increasing, reaching 76.9% in 2024 and 79.1% in 2025.