Bank of Finland foresees muted economic growth

THE FINNISH ECONOMY may be poised to shake off the recession but not exactly resume inspired growth, forecasts the Bank of Finland.

The monetary authority reported last week that it expects the national economy to expand by 0.8 per cent in 2025, a downgrade of 0.3 percentage points from its earlier forecast, 1.8 per cent in 2026 and 1.3 per cent in 2027.

“Private consumption is initially recovering slowly as consumer confidence in the economy is low, unemployment continues to increase and fiscal policy becomes stricter,” Juuso Vanhala, the acting head of forecasting at the Bank of Finland, stated at a press conference on Tuesday, 17 December.

“On the other hand, interest rates are expected to continue declining, which will support consumption and investments.”

The unemployment rate is expected to climb to 8.7 per cent in 2025 before falling by 0.5 percentage points in each of the two following years, to to 8.2 per cent in 2026 and 7.7 per cent in 2027.

The Bank of Finland estimates that the slowly brightening outlook will prompt businesses to loosen their purse strings and increase investments in facilities, machinery and equipment as soon as next year. In residential construction, however, a turn for the better is not yet imminent.

“In terms of exports, we’re coming off two lean years. Exports will pick up gradually starting in 2025 as the economic situation in export markets improves and the worldwide decline in interest rates spurs demand for the investment goods exported by Finland. The eurozone economy’s muted growth, however, is inhibiting the growth of Finnish exports,” remarked Vanhala.

The European Central Bank (ECB) is forecasting that the eurozone economy will expand by 1.1 per cent in 2025, 1.4 per cent in 2026 and 1.3 per cent in 2027.

“Economic growth in the eurozone is strengthening gradually as the rise in real household income boosts purchasing power. The declining interest rates will also strengthen consumption and investments in the eurozone over time,” analysed Olli Rehn, the governor of the Bank of Finland.

The ECB cut its interest rates four times this year, most recently by 0.25 percentage points to three per cent on 12 December. The markets are expecting the interest rate cuts to continue next year.

The Bank of Finland also expressed its concern about the tariffs promised by US President-elect Donald Trump. The Finnish economy, it estimated, might not grow by more than 0.3 per cent next year if the US slapped a general 60-per-cent tariff on imports from China and a 10-per-cent one on imports from other parts of the world, including Europe.

The US is by far the most important non-European export market for Finland, accounting for over 13 per cent of exports.

“Trade and security policy have rarely been as intertwined as they are in today’s Europe. The last thing we need right now is a trade conflict between allies. The path of negotiation would be preferred. And the EU can strengthen its negotiating position by showing its readiness to adopt countermeasures if the US threatens Europe with higher tariffs,” commented Rehn.

The Finnish economy will remain straddled with a “deep deficit” despite the modest recovery and the fiscal adjustments made by the right-wing coalition government, according to the Bank of Finland. The deficit in the public economy, it predicted, will widen to four per cent of gross domestic product in 2025 and stay above three per cent until 2027.

Public debt is expected to increase to 87 per cent of gross domestic product by 2027 – its highest level on record. As the sustainability deficit – the difference between public expenditure and revenue – is estimated to be around two per cent, the government is likely to continue borrowing at an unsustainable pace.

The Bank of Finland has calculated that additional fiscal adjustments of roughly four billion euros will be required in the coming seven years to put a stop to the rising debt ratio in the medium term. If the government succeeds in generating two billion euros in additional revenue with its employment measures, though, the need for adjustments would be equally lower.

The Ministry of Finance revealed last week that it has a considerably more optimistic view of the economic prospects of Finland. The Finnish economy, it said, should grow by 1.6 per cent in 2025, 1.5 per cent in 2026 and 1.5 per cent in 2027.

Aleksi Teivainen – HT