OECD Economic Outlook, Volume 2026 Issue 1

Finland

After stagnating in 2025, Finland faces a fragile and uneven recovery in 2026, constrained by higher energy prices and global volatility owing to the evolving conflict in the Middle East. Elevated energy prices are eroding household purchasing power, raising production costs and weakening confidence, delaying the recovery in consumption. GDP growth is projected to remain modest at 0.8% in 2026 before strengthening to 1.2% in 2027 as energy pressures ease, external demand improves and lower interest rates support activity. Inflation is expected to rise temporarily to around 2.6% in 2026, while unemployment remains above 10%.

Finland’s medium‑term outlook is supported by competitive electricity prices and growing capabilities in green technologies and defence manufacturing. However, large deficits, rising public debt and higher interest costs require steady, credible fiscal consolidation while preserving priority investment. Key policy priorities include strengthening energy security and boosting productivity through better R&D commercialisation.

External shocks and weak confidence are weighing on domestic demand

A subdued recovery is underway. Private consumption started to pick up in the second half of 2025 and retail sales grew robustly in the first quarter of 2026. Residential construction remained depressed following the sharp correction in 2023–24, although the pace of decline slowed. The economy expanded 0.9% in the first quarter of 2026. However, other indicators, including low consumer confidence and shrinking employment, suggest that growth is not yet broad based. Pushed up by rising energy prices, harmonised headline inflation rose to 2.4% in April 2026. Despite continued declines in employment due to weak activity, the unemployment rate decreased from 10.6% to 10.4% in the first quarter of 2026, driven by a sharp contraction in the labour force following sustained expansion.

Finland

Source: OECD Economic Outlook 119 database.

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Finland: Demand, output and prices

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International developments remain a major drag on activity. Russia’s war of aggression against Ukraine led to the closure of the Finnish Russian border, the loss of bilateral trade and a decline in tourism from Asia due to airspace restrictions. Weak growth in Germany, Finland’s most important export destination for machinery, metals and intermediate goods, has weighed heavily on industrial exports. Since mid-2025, Finland has also faced higher tariffs in the United States on non-exempt goods. As a net energy importer with energy intensive industries, Finland is exposed to the evolving conflict in the Middle East via global energy prices, as well as knock-on effects on globally traded industrial products such as fertilisers and industrial gases, contributing to a deterioration of the terms of trade in 2026. This vulnerability is partly mitigated by the high share of non-fossil fuel electricity generation, which accounts for around 95% of total electricity output.

Monetary easing supports demand, while fiscal consolidation continues

Monetary conditions are gradually easing as ECB policy rate cuts feed through to financing costs, although transmission remains incomplete as high household indebtedness and cautious bank lending continue to weigh on credit demand and spending. Lower interest rates are expected to support investment and help stabilise housing activity. Fiscal policy remains contractionary over the projection period, reducing the structural primary deficit by around 0.2 percentage points of GDP from 2025 to 2027. While this occurs against a backdrop of weak activity, the adjustment is gradual and allows the automatic stabilisers to operate. Gross public debt continues to rise, approaching 100% of GDP by 2027, placing a premium on a credible medium-term fiscal framework. New fiscal rules introducing deficit targets and requiring a declining debt ratio over the parliamentary term should help anchor fiscal credibility. The government’s multiyear consolidation programme combines spending restraint, tax measures and regular spending reviews, partly offset by income tax cuts and a planned reduction in the corporate tax rate from 2027. No fiscal measures have been taken to cushion the energy price shock. However, defence spending continues to rise and is projected to reach at least 3% of GDP by the end of the decade.

The investment led recovery is expected to strengthen as external demand improves

GDP growth is projected to strengthen from 0.8% in 2026 to 1.2% in 2027, as easing monetary conditions, recovering investment and stabilising housing construction more than offset the drag from a tighter fiscal stance. Investment is expected to be driven by defence, energy and green‑industrial projects, underpinned by cheap and abundant low-emissions electricity. Private consumption is expected to be broadly flat in 2026, despite falling real disposable incomes, with households reducing savings, and then strengthen by 1% in 2027 as real incomes recover and employment growth resumes. External demand remains a constraint in 2026, with net exports subtracting from growth due to weak European demand and adverse energy‑related price effects. Improving growth in Germany over 2026–27 will help support Finnish export growth. Headline inflation will rise to 2.6% in 2026 before easing to 2.2% in 2027, while underlying inflation remains contained. The unemployment rate is expected to peak at around 10.5% and decline only gradually. While Finland maintains substantial strategic reserves, which limit risks for petrol and diesel supply, risks are tilted to the downside, mainly from persistently high energy prices and jet fuel shortages should the Middle East conflict be prolonged. Weaker-than-expected German growth or further trade fragmentation also represent material downside risks, while a faster than expected rise in German investment constitutes an upside risk.

Fiscal consolidation should continue while taking reforms to accelerate electrification

Maintaining a credible and gradual fiscal consolidation path is essential to stabilise public debt in a volatile international environment, while allowing automatic stabilisers to operate if the recovery weakens. Fiscal space should be preserved for priority public investment, notably in defence, energy and infrastructure. At the same time, lifting medium‑term growth will require accelerating resilience and productivity‑enhancing reforms. Faster permitting and grid investment and crowding in private investment to scale innovation in clean energy and green industrial projects would accelerate electrification, improving energy security. Productivity can be further boosted by easing skills shortages through higher‑education and foreign‑talent reforms, and fostering private investment in digitalisation and defence projects.