Finland flag Finland: Economic and Political Overview

The economic context of Finland

Economic Indicators

Despite being vulnerable to the international conjuncture, Finland is often cited as a model example for its economic performance, competitiveness and innovative success. However, according to IMF estimates, GDP contracted by 0.1% in 2023 (from +1.6% one year earlier) due to weak private consumption and a decline in manufacturing and construction activity. The Finnish GDP is expected to experience an upturn in 2024, propelled by a gradual recovery in private consumption and investment, with a specific focus on advancing the green transition. Additionally, the construction sector is projected to recommence its growth in the latter part of 2024 and achieve full recovery by 2025, driven by increased private investment and a more favourable financial environment. The overall growth is forecast at 1% this year and 1.3% in 2025 (IMF – 0.8% and 1.5%, respectively, according to the EU Commission).

Despite the government's budget proposals featuring reductions in environmental and social expenditures, these measures were insufficient to counterbalance the planned escalation in security and defence spending (Finland joined Nato in March 2023), along with tax breaks. Hence, the general government budget was estimated at 1.7% of GDP last year, with a further expansion expected in 2024 (to 1.9% - IMF) due to a decline in revenue stemming from changes in social security contributions. Moreover, the deficit is forecasted to be influenced by increased defence expenditures, costs associated with research and development measures, and investment funding throughout the projected period. Additionally, higher interest costs and expenditure growth attributed to inflation are anticipated to contribute to the widening deficit. Meanwhile, the ongoing implementation of a more restrictive monetary policy by the European Central Bank is impacting the lending environment for both households and businesses in Finland. The general government debt-to-GDP ratio stood at 73.6% in 2023, with a small increase attributed to the primary deficit within central government finances, as well as deficits in local governments. The projection indicates a continued upward trend in the general government debt-to-GDP ratio, reaching 76.5% in 2024 and further escalating to 79% in 2025 (IMF). The challenges to debt sustainability and strains on public finances resulting from an ageing population are alleviated by a robust public sector balance sheet, reinforced by substantial pension assets: as of Q1 2023, the total pension assets in Finland amounted to approximately 90% of GDP, with approximately 37% situated within the public sector system. Although debt-servicing costs are increasing, they are still relatively low. Following its peak in 2022, HICP inflation decreased to 4.5% in 2023, primarily due to declining energy prices. The combination of weakened economic activity and Finland's enhanced energy independence in gas has also contributed to this decline. Conversely, the persistent increase in service prices will continue to exert a downward pressure on inflation. Projections indicate that inflation will drop around 2% in 2024 and remain at the same level in 2025.

Finland's GDP per capita – estimated at USD 59,869 (PPP) in 2023 by the IMF - is among the highest in the world and higher than the EU-27 average, allowing the country to offer a high living standard. The distribution of wealth is relatively balanced, although social inequalities have risen in recent years. Finland is the European country most impacted by an ageing population and the fall of its labour force, a phenomenon that weighs heavily on its public finances. Other challenges that the country will be facing are the decreasing productivity in traditional industries and the need for a reduction of high labour costs. Following a good performance in 2022, the unemployment rate rose to 7.3% last year, accompanied by a decrease in the number of job vacancies, though still notably elevated compared to historical norms. Projections indicate that unemployment will reach 7.4% in 2024, before gradually decreasing, as wage growth is expected to decelerate, influenced by the slowdown in the inflation rate and an uptick in employment.

 
Main Indicators 20222023 (E)2024 (E)2025 (E)2026 (E)
GDP (billions USD) 282.11300.50308.06318.58329.77
GDP (Constant Prices, Annual % Change) 1.3-1.00.41.91.9
GDP per Capita (USD) 50,84754,00855,12756,93158,889
General Government Balance (in % of GDP) -1.0-1.5-1.8-2.2-2.3
General Government Gross Debt (in % of GDP) 73.576.780.082.684.7
Inflation Rate (%) 7.24.31.21.92.0
Unemployment Rate (% of the Labour Force) 6.87.27.67.47.3
Current Account (billions USD) -7.22-3.07-1.86-1.28-0.67
Current Account (in % of GDP) -2.6-1.0-0.6-0.4-0.2

Source: IMF – World Economic Outlook Database, October 2021

Main Sectors of Industry

Agriculture represents 2.3% of the Finnish GDP and employs around 4% of the population (World Bank, latest data available). Due to the unfavourable climate, agricultural development is limited to the maintenance of a certain level of self-sufficiency in basic products. Moreover, Finland's accession to the EU has further accelerated the process of restructuring and downsizing of the agriculture sector. The country has around 42,000 farms with 8% of arable land (12% of the country’s arable land is destined for organic cultivation), while almost three-quarters of the land area is covered with forests (FAO). Cereal production dominates, followed by milk production and animal husbandry. Dairy farming is the sub-sector that generates the largest turnover. According to figures from the Natural Resources Institute, there were a total of 42,427 agricultural and horticultural enterprises in Finland in 2023 of which 85% were family-run, 9% were farming syndicates, while farms owned by heirs and limited liability farms represented about 5%.

Industry accounts for 25.6% of GDP, employing roughly 21% of the active population. Forestry is a traditionally well-developed sector for Finland as the country exports a rich variety of goods, ranging from simple wooden products to high-tech tags, labels, paper, cardboard and packaging. Other key industrial sectors are metal production, mechanical engineering and electronic goods. Finland also specialises in exporting information and communication technologies and is among the countries that invest substantially in R&D (around 2.99% of its GDP, World Bank). Overall, manufacturing contributes 16% of GDP. According to Statistics Finland, the value of the sold output of the industry was around EUR 104.5 billion in 2022 (+21% y-o-y). The metal industry accounted for 40% of sold output, the chemical industry for 24%, and the forest industry for 19%.

The services sector employs almost three-quarters of the workforce and accounts for 59.1% of GDP. It is also responsible for generating the largest number of new businesses. The Finnish banking system is dominated by three major groups of deposit banks: OP Group, Nordea Bank Finland, and Danske Bank Plc Group. The information technology sector is growing at a fast pace, and so are the cleantech and biotechnology sectors. The latest data by Statistic Finland shows that in 2022 the volume of service industries grew by 14.7% compared to one year earlier.

 
Breakdown of Economic Activity By Sector Agriculture Industry Services
Employment By Sector (in % of Total Employment) 4.1 21.4 74.5
Value Added (in % of GDP) 2.4 25.1 59.5
Value Added (Annual % Change) -2.4 2.1 2.8

Source: World Bank, Latest Available Data. Because of rounding, the sum of the percentages may be smaller/greater than 100%.

 

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Indicator of Economic Freedom

Definition:

The Economic freedom index measure ten components of economic freedom, grouped into four broad categories or pillars of economic freedom: Rule of Law (property rights, freedom from corruption); Limited Government (fiscal freedom, government spending); Regulatory Efficiency (business freedom, labour freedom, monetary freedom); and Open Markets (trade freedom, investment freedom, financial freedom). Each of the freedoms within these four broad categories is individually scored on a scale of 0 to 100. A country’s overall economic freedom score is a simple average of its scores on the 10 individual freedoms.}}

Score:
76,1/100
World Rank:
17
Regional Rank:
10

Economic freedom in the world (interactive map)
Source: Index of Economic Freedom, Heritage Foundation

 

Business environment ranking

Definition:

The business rankings model measures the quality or attractiveness of the business environment in the 82 countries covered by The Economist Intelligence Unit’s Country Forecast reports. It examines ten separate criteria or categories, covering the political environment, the macroeconomic environment, market opportunities, policy towards free enterprise and competition, policy towards foreign investment, foreign trade and exchange controls, taxes, financing, the labour market and infrastructure.

Score:
8.10/10
World Rank:
10/82

Source: The Economist Intelligence Unit - Business Environment Rankings 2021-2025

 

Country Risk

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Sources of General Economic Information

Ministries
Ministry of Economic Affairs and Employment
Ministry of Agriculture and Forestry
Ministry for Foreign Affairs
Ministry of Justice
Statistical Office
Statistics Finland
Central Bank
Bank of Finland
Stock Exchange
Nasdaq OMX Stock Exchange
Economic Portals
Finnguide
 

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Latest Update: March 2024