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Finland’s economy is projected to be the worst-performing in the eurozone for 2024, marking the second consecutive year of contraction. ETLA Economic Research predicts a GDP decline of 0.2% for the year, closely following a 1.2% drop in 2023. The economic downturn has been exacerbated by weak domestic demand, high interest rates, and sluggish export growth, leaving the nation grappling with structural challenges.
According to the Bank of Finland, unemployment has risen to 8.3% in 2024, up from 7.2% last year. Investment has also fallen sharply, reflecting the impact of monetary tightening by the European Central Bank (ECB). With 97% of housing loans tied to variable rates, Finland’s economy has been particularly vulnerable to rising interest rates, further curbing consumption and housing activity.
Despite these challenges, signs of recovery are emerging for 2025, driven by easing monetary policy and a stabilising labour market. ETLA forecasts a 1.4% GDP growth for next year, bolstered by low inflation, rising wages, and declining interest rates.
Finland’s economy has endured six consecutive quarters of negative annual GDP growth, with a slight uptick of 0.5% recorded in Q3 2024. Analysts remain cautious, however, predicting an overall contraction for the full year. S&P Global Ratings and Fitch Ratings have both forecast GDP declines of 0.4% and 0.3%, respectively, citing weak inventories and limited external demand as key drivers.
A report by Fitch downgraded Finland’s credit outlook from stable to negative, reflecting growing concerns over government debt. Public debt is expected to exceed 80% of GDP this year, up from 75.8% in 2023. Budget deficits have persisted since 2009, with the 2024 deficit projected at 3.3% of GDP.
To address fiscal imbalances, the Finnish government has announced a €9 billion consolidation programme aimed at reducing the deficit to 2.0% of GDP by 2027. Measures include spending cuts, tax increases, and labour market reforms. However, experts warn that these austerity measures could further constrain domestic demand in the short term.
One bright spot in Finland’s economic landscape has been its low inflation rate, averaging just 1% in 2024, well below the eurozone average. This has been attributed to falling energy prices and subdued wage growth. Analysts expect inflation to remain below the ECB’s 2% target until 2027.
“Decreasing energy prices and weak domestic demand have kept inflation in check, which is providing some relief for households,” noted an S&P Global report.
Recovery prospects for 2025
As the ECB begins lowering interest rates from their peak of 4.5%, economic activity in Finland is expected to pick up. Rising private consumption, driven by increased purchasing power and stabilising housing markets, is forecast to play a key role in the recovery.
ETLA anticipates investment growth to resume next year, particularly in construction, as interest rates decline and excess supply diminishes. However, the rebound in exports will depend heavily on the economic recovery of Finland’s main trading partners, Germany and Sweden, which have also faced economic challenges.
“The pace of recovery in Finland is closely tied to external demand, particularly from Germany and Sweden,” said Päivi Puonti, ETLA’s head of forecasting.
While short-term recovery prospects are improving, Finland faces significant structural hurdles, including low productivity growth and an ageing population. These challenges are compounded by geopolitical risks and global economic fragmentation.
To address these issues, ETLA has called for greater investment in productivity-enhancing measures, such as wind power and social service efficiency. Diversifying Finland’s export base is also seen as critical to reducing vulnerability to economic cycles.
“The government’s current measures are insufficient to address long-term structural challenges,” said Aki Kangasharju, CEO of ETLA. “A broader productivity programme is essential for sustainable growth.”
While the Finnish economy shows signs of stabilising, the path to sustained growth remains uncertain. Analysts warn that geopolitical risks, including rising protectionism and supply chain disruptions, could weigh on future recovery efforts.
Despite these uncertainties, the labour market is expected to improve modestly in 2025, with the unemployment rate projected to fall to 7.6%. Consumer and business confidence are also likely to rebound as interest rates decline further.
“Finland’s economy appears to be turning a corner, but significant challenges remain,” said Mikko Spolander, director general at Finland’s Ministry of Finance. “Structural reforms and targeted investments are essential to ensure a more resilient and sustainable recovery.”
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Source: www.helsinkitimes.fi
