Helsinki - The Finnish economy is expected to contract by 0.5% in 2024, according to a forecast released by the Bank of Finland on Tuesday. While growth is projected to resume in subsequent years, the recovery is expected to be gradual.

The forecast revised downward the growth projection for 2025 to 0.8% from the previous estimate of 1.1%. Subsequently, growth is expected to accelerate to 1.8% in 2026 before moderating to 1.3% in 2027, approaching the country's long-term growth potential.

"Consumer spending will be slow to recover," said Juuso Vanhala, Head of Forecasting at the Bank of Finland. "Consumer confidence remains weak, unemployment is still rising, and fiscal policy is tightening." However, declining interest rates are expected to provide some support to consumption and investment.

The forecast anticipates a gradual recovery in exports, driven by improving economic conditions in Finland's key export markets and increased demand for Finnish investment goods as global interest rates decline. However, subdued growth in the euro area and potential tightening of US trade policy are expected to constrain export growth.

Inflation is expected to remain below 2% throughout the forecast period. While inflation has fallen significantly in 2024, tax increases are projected to impact inflation in 2025. Subsequently, rising domestic consumer demand will contribute to modest inflation in 2026-2027.

Despite the economic recovery and fiscal adjustment measures, the Finnish government's finances are expected to remain deeply in deficit. The fiscal deficit is projected to reach 4% of GDP in 2024 and is not expected to fall below 3% until 2027. As a result, the public debt ratio is projected to rise to 87% in 2027. The Bank of Finland estimates a sustainability gap of approximately 2%, indicating that the current path of public debt accumulation is unsustainable.