Economy recovering slowly, debt ratio set to stabilise briefly

The Finnish economy is slowly recovering from recession, with weak employment and economic uncertainty keeping households cautious. The general government debt ratio will stabilise briefly, but not permanently, at the end of the parliamentary term, estimates the Ministry of Finance in its forecast published on 22 September.

Finland’s economic recovery has been slow, but there are signs of faster growth ahead. A marked slowdown in inflation and falling interest rates have improved household purchasing power. However, economic uncertainty has so far caused households to channel their additional income into savings rather than consumption. Investments are projected to grow faster, driven significantly by energy transition and defence projects in the 2025–2027 forecast period.

Finland’s gross domestic product (GDP) is projected to grow around 1.0 per cent this year, 1.4 per cent next year and 1.7 per cent in 2027.

“The Finnish economy is recovering from a prolonged recession, but it is taking a long time for public finances to climb out of a deep slump. If we could reach a consensus on goals for managing public finances and for putting general government indebtedness on a sustainable declining trend, that would be a shared national achievement that future generations would thank us for,” said Director General Mikko Spolander.

Global economic recovery slowed by uncertainty and tariffs

Global economic uncertainty has decreased slightly thanks to preliminary customs agreements. Data on the global economy from early in the year has also been somewhat more positive than expected. Nevertheless, uncertainty remains high. This uncertainty and significantly higher US tariffs are holding back growth in real incomes and investments.

Finnish export growth is being significantly hindered by US trade policy and the appreciation of the euro but is being supported by the euro area recovery. Imports are growing faster than exports, as growth in demand in Finland is being fuelled by investments involving high levels of imported inputs.

Purchasing power to drive household consumption growth

Inflation has slowed substantially, and price rises will remain moderate. Falling prices of energy and owner-occupied housing have been the main factors bringing inflation down. The consumer price index would seem to indicate that the rise in prices has almost come to a halt, but this is due to lower interest rates on mortgages. Base inflation is over two per cent, and for the first time in a while is above the euro area average.

With inflation slowing down and wages rising, real incomes have also returned to growth. However, the increase in average household real incomes has been slowed this year by weak employment, cuts in social benefits and increases to consumption taxes. The growth of real disposable income will accelerate next year as employment picks up and earned income taxation is lowered. Despite increased purchasing power, consumption has not grown. Weak employment, economic uncertainty and low confidence in the economy have driven households to save rather than consume.

High volume of investments in the next few years

Investments will see clear growth this year after two years of decline. The situation in construction remains weak, however. Housing construction in particular is recovering slowly. Despite the increase in the number of sales, the housing market has still not yet recovered to a normal level. The number of homes currently being built is significantly below the long-term need. As construction begins to recover over the next few years, it will create economic growth.

At the same time, investments in the energy transition and the adoption of new technologies are growing briskly. Investments are also being boosted by defence procurement, which will grow significantly this year as the purchase of new fighter aircraft moves forward. The level of defence procurement will remain high in the coming years.

Employment beginning to grow

Employment did not turn to growth during the early part of the year. However, growth in output is expected to improve the employment situation starting next year. Year-on-year, the number of employed persons is slightly lower than last year, while unemployment is substantially higher, about 9.4 per cent of the labour force. A rise in the number of employed persons is expected next year, with unemployment falling to 9.0 per cent. Growth in employment is expected to continue in 2027, and the employment rate (age group 20–64) will reach 77.3 per cent.

Despite the weak employment situation, the labour force has grown substantially over the past few years and returned to growth early in the year. There is a great deal of room for employment growth on the labour market. The labour force is growing due to the Government’s employment measures and immigration. However, weak demand means that the growth in the labour force has so far mainly shown up as increased unemployment.  

General government debt ratio to stabilise briefly, but not permanently

Tax revenues will grow slowly this year due to the sluggish beginning of the year. Expenditure growth will be more moderate due to lower inflation and adjustment measures, though interest and defence expenditure will continue to grow sharply. The general government deficit will be 4.3 per cent of GDP this year.

The weak economic cycle is hitting central government finances the hardest. The central government deficit is 4.2 per cent of GDP. Central government is also carrying the burden of increased defence expenditure and debt servicing costs. This additional expenditure has further deepened the already significant central government deficit, leading to increased indebtedness. 

Accelerating economic growth and the implementation of adjustment measures next year will improve general government finances, and the deficit will be 3.6 per cent of GDP. The deficit will settle at 3.1 per cent of GDP in 2029.

General government finances are in a state of deep structural imbalance, and the general government sustainability gap is approximately 2 per cent of GDP, i.e. around EUR 7 billion, at the 2029 level. In 2029, the aggregate deficit of central and local government will remain over EUR 14 billion, which will create a major need for new debt.

According to the forecast, even economic growth that is brisk compared Finland’s recent history will not be enough to stabilise indebtedness in the long term, let alone put it on a declining track relative to GDP. In the forecast, the debt ratio will stabilise briefly in 2027, but then immediately return to growth. It will not be possible to bring indebtedness under control without bringing the funding of central and local government closer to balance. 

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