A trade war poses a threat to Finland’s economic recovery and its already fragile general government finances 

The Finnish economy is expected to grow, but the trade war may substantially slow down growth. In its forecast published on 30 April, the Ministry of Finance warns that general government finances remain weak, and that Finland has few buffers to reduce the impacts of a trade war.

The Finnish economy bottomed out during 2024, and the figures for the first months of 2025 indicate that the recovery has continued. However, changes in the international trade policy have significantly weakened the economic outlook. 

The forecast presents a baseline scenario, and two scenarios describing the impacts of a trade war and the tariffs targeting the EU on Finland’s gross domestic product (GDP). In the baseline scenario, which is based on the assumption that the tariffs will remain short-lived, GDP will grow by 1.3% in 2025, 1.6% in 2026 and 1.5% in 2027. 

In a scenario where the tariffs will be more long-lasting, GDP will grow at a substantially slower rate in 2025 and 2026. In this case, deficits would be substantially larger, and the general government debt would grow faster than in the baseline scenario.

“It is impossible to predict how the tariffs will develop, what prompts the changes in them, and what the end result will be. We therefore use a baseline projection and trade war scenarios as a basis for our forecast. The economy is overshadowed by uncertainty, but there are also several reasons for optimism,” says Mikko Spolander, Director General of the Economics Department at the Ministry of Finance.

The impacts of the decisions made by the Government in its mid-term policy review have not been taken into account in the forecast for the real economy.

The global economic outlook is overshadowed by uncertainty and the threat of a trade war

Uncertainty in the global economy has grown significantly as trade policy tensions have heightened during the early months of the year. The uncertainty will slow down both household consumption and investments by companies. The outlook for the euro area, the United States and the world as a whole has weakened. 

If no agreement is reached on lowering the high tariffs announced by the United States, they will significantly slow down global economic growth and Finnish exports. Without the tariffs, the outlook for Finnish exports would be positive. Indeed, service exports have been growing rapidly. 

Higher household purchasing power is boosting consumption

There has been a substantial slowdown in inflation, and it is also expected to remain at moderate levels. With inflation slowing down and wages rising, real incomes have also returned to growth. However, this year, the increase in average household real incomes will be slowed down by a weak employment situation, cuts in social benefits and tax rises. Next year, however, real incomes will rise faster as the employment situation improves.

In addition to a weak income and employment situation, household consumption has been negatively affected by weak confidence in the economy and a belief that prices will continue to rise. Indeed, households have been consuming less than they could afford. Easing of uncertainty would also boost consumption growth.

Investments will pick up significantly

There was a sharp fall in investments in 2023 and 2024, as rising interest rates have hit the construction sector in particular. However, in construction, the worst is already behind us, and residential construction is recovering. Nevertheless, construction activity may well remain below the level required to meet long-term needs. 

Investments in the energy transition and new technologies are expected to grow briskly. A record number of investments are planned in Finland, and many of them will also be carried out this year. Investments will also be substantially boosted by purchases of defence equipment as the first of the new fighter jets are delivered this year.

A turnaround in employment has not yet materialised

The employment rate will fall further, but an upturn is expected this year as output recovers. However, unemployment will increase this year to about 8.8%. A substantial growth in the number of employed persons is only expected in 2026, and unemployment will fall to 8.3%. Growth in employment is expected to continue in 2027, and the employment rate (age group 20–64) will reach 77.3%.

In addition to demand in the economy, the labour market will also be impacted by immigration and the measures to boost employment introduced by the Government. They will both boost the supply of labour and potential output, but during the outlook period, they will mainly manifest themselves in higher unemployment and a lower employment rate.

General government deficit will remain high

The state of Finland’s general government finances has proved more serious than thought. General government deficit amounted to 4.4% of GDP in 2024. This will also have an impact on this year’s situation. This year, the deficit is expected to stand at 3.8% of GDP. 

In its mid-term policy review, the Government announced an extensive package of growth measures, and in early April, it decided to increase defence expenditure to at least three per cent of GDP by 2029. As before, only the direct impacts of these decisions are considered in the forecast for general government finances, which means that no indirect impacts of the decisions boosting the level of economic activity are included. Direct impacts will substantially increase the general government deficit.

Earlier adjustment measures and the economic recovery will shrink the deficit to 3.2% of GDP in 2026, but the deficit will remain above three per cent throughout the outlook period until 2029. This year, the general government debt ratio will exceed 85%, after which the ratio will grow at a slower pace. During the outlook period, the debt ratio will reach close to 90% in 2029.

Most of the risks facing the economy are negative, and if they are realised, general government finances would be significantly weakened 

The risks and uncertainty arising from the trade policy and trade relations have reached exceptionally high levels. If these risks are realised, economic growth in Finland will slow down, and the general government deficit will widen. At the same time, the end of the war in Ukraine, reconstruction of the country, and investments in infrastructure and defence in many European countries may also boost demand for Finnish goods and services. 

The outlook for general government finances also involves risks other than the state of the economy. Higher defence expenditure will increase general government debt unless it is financed with new spending cuts or tax increases. The delayed impact of the employment measures already announced by the Government also involves risks. The wage negotiations in central and local government are still under way, and their results will be reflected in general government finances. However, the impact of the wage agreement may be positive or negative, depending on the end result. The risk arising from growth measures announced in the spring mid-term policy review is positive because only the impacts directly boosting the general government deficit are considered as growth impacts in the forecast. 

According to the forecast, the debt ratio is now close to 90%. With the deficit and the debt ratio already at high levels, Finland has few buffers for even harder economic times.

Inquiries:
Mikko Spolander, Director General of the Economics Department, tel. +358 295 530 006, mikko.spolander(at)gov.fi 
Janne Huovari, Senior Financial Adviser, tel. +358 295 530 171, janne.huovari(at)gov.fi (real economy) 
Jenni Pääkkönen, Senior Financial Advisor, tel. +358 295 530 131, tel. jenni.paakkonen(at)gov.fi (general government finances)