Trade war threat looms over Finland’s economic recovery, says ministry forecast

By admin On May 1, 2025

Photo Jussi Nukari / Lehtikuva

The Finnish economy is expected to grow modestly through 2025, but a trade war could reverse gains and worsen already fragile public finances, according to the Ministry of Finance.

In its latest economic forecast, the ministry outlines a baseline scenario in which Finland’s gross domestic product grows by 1.3% in 2025, followed by 1.6% in 2026 and 1.5% in 2027. The outlook assumes current EU-targeted tariffs will remain temporary.

But in an alternative scenario where tariffs persist, GDP growth would slow sharply, deficits would widen, and government debt would rise faster.

“The economy is overshadowed by uncertainty, but there are also several reasons for optimism,” said Mikko Spolander, Director General of the Ministry’s Economics Department. The forecast does not factor in the indirect effects of policy decisions made during the Government’s recent mid-term review.

Uncertainty surrounding global trade policy has already dampened household consumption and business investment across the euro area. The ministry warns that if trade tensions escalate, Finnish exports, particularly to the US and other key markets, would suffer significantly. While exports of services have shown growth, industrial exports remain vulnerable to protectionist measures.

Inflation has eased, boosting household purchasing power. Combined with modest wage increases, real incomes are recovering. However, tax rises and social benefit cuts are expected to limit this year’s gains. Confidence remains low, with many households spending less than their income allows. If uncertainty recedes, consumption is expected to rebound.

Investments, particularly in construction, suffered steep declines in 2023 and 2024 due to high interest rates. Recovery in residential building has now started. The forecast sees a sharp increase in investment driven by Finland’s green transition, new technologies, and incoming deliveries of defence equipment including fighter jets.

Despite early signs of economic improvement, employment remains weak. The jobless rate is projected to rise to 8.8% in 2025. Only by 2026 is significant employment growth expected. The employment rate for working-age adults (20–64) is predicted to reach 77.3% by 2027.

General government finances remain under strain. The 2024 deficit reached 4.4% of GDP and is forecast to stand at 3.8% this year. Although prior adjustments and recovering growth may reduce the deficit to 3.2% in 2026, it is expected to stay above 3% until at least 2029.

Finland’s debt-to-GDP ratio is set to surpass 85% in 2025 and could approach 90% by the end of the forecast period. The Ministry notes that without new spending cuts or revenue increases, plans to raise defence spending to at least 3% of GDP by 2029 will add pressure to the national balance sheet.

The forecast highlights several risks. A prolonged trade conflict, stalled employment reforms, and the cost of public wage settlements could all worsen the fiscal outlook. At the same time, post-war reconstruction in Ukraine and rising defence investments across Europe could open new export opportunities.

The Ministry concludes that with debt and deficits already high, Finland has limited room to manoeuvre in the face of new economic shocks.

Source: www.helsinkitimes.fi