Finnish Economy Edges Back to Growth, but Debt and Defence Spending Keep Public Finances Under Pressure

Finland’s economy is showing tentative signs of recovery, the Ministry of Finance said on Tuesday, but rising defence expenditure, higher debt-servicing costs and a fragile consumer are likely to limit the speed of the rebound. The ministry expects gross domestic product to grow by 0.8 percent this year, with the pace accelerating to 1.6 percent in 2027 and 1.7 percent in 2028 — a trajectory that returns the economy to modest expansion but does little to close the fiscal gap.

The public finances remain the forecast’s weakest feature. The debt-to-GDP ratio is projected to cross 90 percent this year, driven higher by fighter jet procurement and the rising cost of servicing government liabilities in a higher interest-rate environment. The ministry stressed that without new consolidation measures, the fiscal position will not improve over the forecast horizon, as defence spending continues to climb.

Household consumption is expected to provide a modest boost, with spending forecast to grow by just under 1 percent this year. That marks a shift after several years in which Finnish households channelled income into savings rather than consumption. However, higher energy prices and elevated interest rates are eroding purchasing power, limiting the extent of the recovery in private demand. The ministry noted that energy costs remain elevated in the wake of supply disruptions, though a normalisation of shipping routes through the Strait of Hormuz — a key global oil transit point — is expected to ease inflationary pressures and support global and domestic growth into 2027.

Unemployment is projected to rise to 10.4 percent this year, a level that signals continued slack in the labour market even as output expands. The combination of a subdued growth profile, a widening fiscal deficit and a softening labour market presents a narrow path for policymakers: the cyclical improvement is insufficient to generate the tax revenue needed to offset structurally higher spending, leaving public debt on an upward trajectory unless fiscal policy is adjusted.

For foreign investors in Finnish sovereign debt, the forecast reinforces the message that consolidation measures are likely to feature prominently in future budgets. The debt ratio’s breach of the 90 percent threshold draws attention to fiscal sustainability metrics that rating agencies and institutional investors are tracking across the euro area. The brighter external outlook — particularly the expected normalisation of energy trade — provides a tailwind, but the domestic fiscal arithmetic remains challenging.