OECD Economic Outlook, Volume 2025 Issue 2

Finland

After a recession in 2025, the Finnish economy is set for a gradual investment-led recovery, with GDP growth of 0.9% in 2026 and 1.7% in 2027. Lower interest rates, a stabilising housing market, rising defence spending and stronger trading partner growth will support the rebound. However, United States tariffs, global insecurity, and fiscal consolidation remain headwinds. Spare capacity will keep inflation below 2% in 2026 and 2027, while improving activity will gradually reduce unemployment.

The government should pursue gradual fiscal consolidation to stabilise and reduce high and rising public debt. Finland’s low electricity prices, strong engineering capabilities and Germany’s recovery provide an important window for industrial and infrastructure investment. Rather than broad tax cuts, targeted incentives and fast-tracking approvals should support R&D, defence, green industry and AI projects.

The economy is under pressure

Weak consumer confidence and plummeting housing construction to correct oversupply have been heavily weighing on growth. Private consumption contracted by an average of 0.3% quarter on quarter in the year to June 2025. Residential investment fell 19% in 2023 and 18% in 2024, and contracted further in the first half of 2025, albeit at a slower pace. Lower interest rates are expected to at least stabilise the market and there are tentative signs the housing market and construction activity are bottoming out. Employment growth is weak, and the unemployment rate continues to rise, reaching 9.9% in the third quarter of 2025. Reflecting feeble activity, lower input costs and the dropping out of the 2024 VAT effect from the annual rate, core inflation (excluding food and energy) has continued to decline to 1.9% year-on-year in October 2025.

A series of negative international shocks have hit the economy hard. Russia’s war of aggression against Ukraine and hybrid warfare against Europe led to the indefinite closure of the border with Russia, cessation of exports to Russia and a sharp decline in tourism from Asia due to Russian airspace closures. This has been compounded by persistently anaemic growth in Germany, a major destination for Finland’s industrial exports. Companies have been able to find new markets, including by expanding exports to the United States. However, since mid-2025, Finland, like all EU countries, faces tariffs of 15% in the US market for non-exempt goods.

Finland

Source: Statistics Finland; and OECD Economic Outlook 118 database.

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Finland: Demand, output and prices

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Lower interest rates will help offset fiscal consolidation and revive growth

The large reduction in the ECB’s benchmark policy rate over the past two years will help boost growth with a lag. This will help offset the drag from ongoing fiscal consolidation. The fiscal deficit is high, reaching 4.4% of GDP in 2024, and public debt (Maastricht definition) is high and rising, and was around 83% of GDP in 2024, necessitating fiscal consolidation. A total of net EUR 10 billion (3.6% of GDP) in consolidation measures is planned through to 2027. This is expected to reduce the structural primary deficit by 0.7% of GDP between 2025 and 2027. Measures include tax increases and spending cuts in social welfare programmes, and the introduction of regular spending reviews. However, from 2026, there will also be personal income tax cuts, and the corporate tax rate will be reduced in 2027 from 20% to 18%. New fiscal rules introduced in November 2025 with broad political support will help maintain consolidation momentum. The new rules require the government to set an end-of-parliamentary-term target for the fiscal deficit below 3% of GDP and reduce the public debt-to-GDP ratio by at least 0.75 percentage points of GDP per year on average over 8 years.

The recovery is expected to gradually strengthen

Finland’s economy is expected to strengthen gradually, with GDP projected to rise by 0.9% in 2026 and 1.7% in 2027. Policy rate cuts, a recovery in construction, increased defence spending (rising to 3% of GDP by 2029), and stronger European growth, notably in Germany, are expected to offset persisting geopolitical and trade risks. This is expected to reduce the net drag of international shocks on the economy by around 1% of GDP. The volatile geopolitical environment remains a key downside risk, with growth significantly lower if tensions escalated. On the upside, Finland’s innovative industry and low electricity prices position it well to supply rising defence and green industrial demand, potentially boosting investment and exports more than projected. Finland is a global leader in icebreaker construction and further deals could follow the recent EUR 5.2 billion deal to supply 11 (four built in Finland and seven in the United States) icebreakers to the United States to use in patrolling the Arctic.

Targeted fiscal support and regulatory reform would help reinforce the investment-led recovery

To reduce high public debt, Finland should continue gradual fiscal consolidation, given the difficult international environment and significant spare capacity. The automatic stabilisers should be allowed to operate if the recovery falters. The key to maintaining fiscal policy credibility is implementing the government’s pre-announced and coherent programme. To reinforce the recovery, it is important to keep using well-targeted measures to crowd-in private sector investment, R&D and innovation in the AI, digital, defence and green industries. Streamlining permitting, especially for grid infrastructure, and regulatory reform to fully recognise the benefits of advanced emissions reduction technologies would accelerate the green transition.