Govt forecasts recovery from recession, deficit in finances to remain
The economy has begun to recover from the recession, and growth will pick up next year, according to the forecast published by the Ministry of Finance on Monday.
General government finances will, however, remain in deficit and debt will accumulate further.
Finland's economy has continued to grow slowly since the beginning of the year, and growth is expected to strengthen towards the end of the year.
However, gross domestic product (GDP) will decrease by 0.2 per cent for this year as a whole.
In 2025, GDP growth will accelerate to 1.7 per cent. In 2026, GDP is expected to grow by 1.5 per cent.
Export demand will recover in the wake of rebounding world trade. Slower inflation and lower interest rates will boost purchasing power and growth of private consumption.
Next year, lower interest rates will also help the construction industry to recover from a steep downturn.
Energy transition and security projects will boost investment. Accelerating economic growth and the measures adopted by the Government to strengthen public finances will reduce the general government deficit from next year onwards.
“It seems that the patience of those waiting for an upward turn will be rewarded. However, the outlook for general government finances does not inspire similar confidence. Even though the deficit is shrinking and indebtedness is slowing down, public finances will remain close to the risk limit,” said Director General of the Ministry of Finance Mikko Spolander.
The recovery of world trade will drive the growth of Finnish exports. Export demand will be boosted especially by accelerating growth in the euro area. Finland's price competitiveness is at the long-term average level and will not present an obstacle to growth.
Private consumption has grown even though rising prices and interest rates have weakened household purchasing power. The rapid slowdown in inflation and lower interest rates will now ease the situation in households. Growth in consumption will pick up even though the social benefit cuts and the increase in value added tax (VAT) will slow down the recovery.
The rate of inflation has eased substantially, and domestic price pressures in particular will remain low.
Although VAT increases and other changes in indirect taxation will push up prices, inflation will slow down to 1.8 per cent this year. Inflation is also expected to remain low.
Construction has decreased dramatically, but the decline seems to have stopped now. Lower interest rates will stimulate the housing market in 2025. Investments in machinery and equipment have increased despite the recession. Going forward, investment will be boosted particularly by the energy transition and the advancing digital transformation.
The number of those employed will decrease by just over 10,000 this year. The fall in employment has been sharpest in the construction industry.
Next year, as the economy recovers, employment will rebound and continue increasing in 2026. The Government's employment measures and immigration will increase the supply of labour and create potential for employment as output stabilises.
The number of unemployed persons grew in many sectors earlier this year, but the rise seems to have halted in the summer. The unemployment rate is projected to rise to 8 per cent in 2024. Unemployment will decrease from next year onwards but will remain at 7.2 per cent in 2026.
Prolonged recession continues to strain general government finances this year – a recovering economy and government measures to gradually reduce deficits
In 2023, the general government deficit was 2.9 per cent of GDP. Consequently, the year began from an already weak position. Despite the moderate accumulation of tax revenue in relation to the cyclical situation, the general government deficit will climb to 3.7 percent of GDP this year.
Investments in preparedness and security will increase central government expenditure, while spending growth owing to inflation and wage increases will slow down. Expenditure has continued to grow rapidly in the wellbeing services counties and municipalities, and deficits will remain high.
Although high index increases in benefits will continue to considerably increase employee pension institution expenditure this year, the institutions will remain in strong surplus. Higher unemployment has increased the expenditure of other social security funds at the same time as the lowering of the unemployment insurance contribution has reduced their income.
As the economy recovers, tax revenue growth will pick up and unemployment expenditure will start to fall. In addition, the measures decided by the Government, of which approximately EUR 8 billion are included in the forecast at the 2027 level, will do much to strengthen central government finances from next year onwards. Government debt servicing expenditure and investment in defence will increase government expenditure during the forecast period.
Slower inflation will curb expenditure increases in central government and, from the next year onwards, also in the social security sector. Local government cost pressures, however, will not ease and staff shortages threaten to increase the costly outsourcing of services. As a result of these divergent forces, the general government deficit is projected to fall to 3.2 per cent of GDP next year and then gradually to 2.1 per cent in 2028.
Central and local government deficits combined with the economic downturn will increase the ratio of general government debt to GDP to over 80 per cent this year.
Shrinking deficits and accelerating economic growth will slow down the rise in the debt ratio from 2025 onwards. The debt ratio will continue to grow throughout the forecast period, but in a scenario where the Government's EUR 9 billion package of measures will be implemented fully as planned and on time, the debt ratio will stabilise temporarily at the turn of the parliamentary term.
Source: www.dailyfinland.fi
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