OECD Economic Outlook, Volume 2025 Issue 1

Finland

The Finnish economy is set to grow by 0.7% in 2025 and 1.1% in 2026 after contracting by 0.1% in 2024. Lower interest rates will support private consumption and investment, notwithstanding subdued confidence. Inflation is projected to remain modest, as lower energy prices and weak activity offset pressures from rising import costs. Imports should recover gradually, while export growth will be dampened by trade restrictions and lower global growth. Unemployment will remain elevated in 2025 before gradually declining. Russian hybrid warfare, including infrastructure sabotage and cyber-attacks, and escalating trade barriers continue to be key risks.

Fiscal consolidation remains essential to place public debt on a downward path, amid rising pressures from population ageing and growing defence and security needs. Priorities include improving the efficiency of spending, particularly in health, and further normalising reduced VAT rates once the recovery is firmly underway. Boosting private R&D investment, expanding the pool of high-skilled workers through a more effective allocation of study places and better integration of foreign talent, as well as enhancing investment in renewable energy, will be key to strengthen innovation and investment and revive productivity.

Weak confidence and high unemployment continue to weigh on the recovery

Economic activity is gradually recovering. GDP grew in the first three quarters of 2024 but stalled in the fourth quarter, mainly due to sluggish private consumption and investment, before rising by an estimated 0.1% in the first quarter of 2025. Consumer and business confidence remain below long-term averages, particularly in construction. The unemployment rate stood at 9.5% in March, up from 8.4% a year earlier, reflecting continued weakness in construction and job losses in the public sector. Both headline and core inflation have picked up somewhat in 2025, although lower energy prices and subdued domestic demand are helping to contain underlying inflationary pressures. Wage growth moderated in 2024 after strong gains in 2023, but nominal earnings still outpaced inflation. House prices have stabilised after earlier declines, while falling interest rates are reducing household mortgage expenses.

Finland

1. Real price index of old dwellings in housing companies.

Source: European Commission; Bank of Finland; and Statistics Finland.

Statlink

Finland: Demand, output and prices

Statlink

External headwinds and geopolitical risks overshadow the outlook. Weak demand in key trading partners has dampened exports, while escalating trade restrictions, including the 10% US import tariffs on EU goods and increasing geoeconomic fractures have heightened uncertainty. Russia’s war of aggression against Ukraine continues to weigh on regional stability and the economic recovery. Russian hybrid warfare threats, including cyberattacks and infrastructure sabotage, have undermined business sentiment.

The fiscal stance needs to tighten more

Fiscal policy is set to tighten gradually in 2025, following an expansionary stance in 2024, with consolidation of a bit over ½ per cent of GDP. The fiscal deficit widened to 4.4% of GDP in 2024, driven by rising pension costs and spending pressures from health and defence, which were only partly offset by higher revenue from the increase in the standard VAT rate in September. Most wellbeing services counties, which assumed responsibility for social welfare and healthcare from municipalities in 2023, continue to record deficits despite efforts to reduce staffing. Ongoing consolidation, including spending cuts in social welfare programmes, is projected to reduce the deficit to 3.7% this year. The General Government Fiscal Plan for 2026–29 announced in April will slow the pace of consolidation. The plan includes cuts to personal and corporate income tax rates and a rise in defence spending, from 2.4% of GDP in 2024 to 3% by 2029, part of which will be implemented only after the 2026 projection horizon. Abstracting from the uncertain dynamic effects of tax cuts, these measures widen the fiscal gap by around 1.7% of GDP. With European Central Bank policy rates gradually declining, retail interest rates in Finland have been adjusting swiftly, given the high share of variable-rate mortgages, which will help drive a moderate recovery.

A modest recovery is expected but is surrounded by elevated external risks

Growth is projected to recover gradually, with GDP rising by 0.7% in 2025 and 1.1% in 2026, following two consecutive years of contraction. Lower interest rates, rising real wages and stabilising house prices are expected to support private consumption. Investment is also set to recover gradually, although heightened uncertainty, persistent weakness in construction and elevated unemployment may continue to weigh on domestic demand. Exports are projected to slow due to increasing trade restrictions and weak trading partner growth. Inflation is expected to remain moderate, at around 2% in 2025 and 2026, as rising import costs are partly offset by lower energy prices. The recovery is fragile and risks to the outlook remain tilted to the downside. A further escalation of global trade tensions could weaken export performance and delay investment. The persistent geopolitical rift with Russia may dampen confidence and foreign investment. On the upside, positive spillovers from stronger-than-expected investment in the green industrial transition or higher-than-anticipated large-scale defence and industrial orders, such as for steel and icebreakers, could lift growth above current projections.

Facilitating investment and expanding the skilled workforce are key to boosting productivity

Stepping up fiscal consolidation is key to reversing the rise in public debt and rebuilding fiscal buffers in the face of population ageing and growing security needs. Improving the efficiency of public spending, particularly in the health sector and wellbeing services counties, remains essential for achieving debt sustainability. Further normalising reduced VAT rates as the recovery gains traction would help broaden the tax base and raise revenue. Strengthening investment through government support, such as R&D tax credits, and improving regulatory predictability, especially in renewable energy, forestry and clean technologies, will spur Finland’s green industrial transition, where the country holds vast potential. Additionally, expanding the supply of high-skilled labour through better allocation of higher education places, faster completion rates, and more effective attraction and integration of foreign talent would also help boost innovation, investment and productivity.