The Finnish economy continues to underperform amid slow productivity growth and persistently weak private demand, according to the annual assessment released by the International Monetary Fund (IMF) on Monday.

While a stronger recovery is expected beginning next year, downside risks remain, said the IMF, adding that despite consolidation efforts, the fiscal deficit has widened.

The IMF made the assessment following a consultation with the Finnish authorities late October and early November.

A team from the IMF, led by Alex Pienkowski, held discussions in Helsinki and Tampere during October 28-November 7 with Minister of Finance Riikka Purra, Governor of Bank of Finland Olli Rehn, other senior officials, and representatives from the private sector, banks, labor unions, and other stakeholders.

The IMF suggested committing to credible consolidation efforts to lower debt over the medium term, enhancing productivity by strengthening tertiary education, supporting AI adoption, and reducing trade barriers within the European Union.

It said that the recovery of the Finnish economy has been slow, but growth is expected to accelerate next year. Productivity growth has been weaker-than-expected, and the cyclical recovery has been slow.

In fact, following a contraction in 2023, real GDP grew by 0.4 percent in 2024 but slowed again in 2025. Looking back, heightened uncertainty, falling house prices, and the increase in interest rates since 2022 dampened private consumption, while private investment, including in construction, fell significantly.

On the external side, net exports supported growth despite higher tariffs. Activity this year is expected to remain subdued, with annual growth projected at 0.25 percent. Looking ahead, output is projected to increase by 1.5 percent in both 2026 and 2027, supported by a gradual recovery in domestic private demand as real wages rise, the housing market starts to recover, and several large investment projects begin.

Inflation has remained contained at around 2 percent. Headline inflation has moderated, with falling energy prices offsetting stronger core inflation. Price moderation and higher wages have allowed real incomes to return to 2019 levels. Headline inflation is expected to remain at 2 percent in the medium term.

The fiscal position has deteriorated significantly. The fiscal deficit widened by 1.5 percent of GDP, reaching 4.5 percent in 2024. Despite consolidation efforts, weak revenue growth, higher defense spending, and pressure from health and social services will likely keep the 2025 deficit broadly unchanged. As a result, public debt – already exceeding levels observed in Nordic peers – is expected to approach 90 percent of GDP in 2025.

Risks are tilted to the downside. On the external front, risks include escalating trade tensions and geoeconomic uncertainty. Domestically, challenges stem from a slower-than-expected labor market recovery, sharper declines in house prices, and further labor productivity weakness. Larger spending needs and higher long-term interest rates may also pose risks to public debt.

Some fiscal adjustment is expected next year, but deficits will remain high over the medium term. Despite reductions in personal and corporate income tax rates and increased defense spending, previous consolidation efforts and the anticipated economic rebound will lead to some modest but welcome deficit reduction in 2026.

However, further out, the overall fiscal deficit is projected to remain above 3 percent, while the debt will approach 95 percent of GDP by the end of the decade. This will limit policy space to deal with future shocks and could erode market confidence over debt sustainability.

Further consolidation efforts are needed to place public debt on a downward trajectory. The authorities should seek to consolidate by 0.5 percent of GDP (€1.5 billion) annually, until the fiscal balance is closed and debt begins to decline. Consolidation measures must be well-targeted and efficient, with attention given to both revenue and expenditure.

Recent reforms have laid the ground for stronger growth, but further efforts are needed to increase the labor supply and reduce labor market rigidities. There is evidence that recent labor market reforms and increased immigration have supported a much-needed increase in labor supply. The government continues to streamline the unemployment benefit system and ease labor market regulations to strengthen work incentives. Additionally, attention must be given to tertiary education attainment, which has stagnated in recent years at levels below peer countries. Upskilling the labor force, along with adapting active labor market policies, will also be crucial to facilitate AI adoption.

Reducing barriers to firm growth will boost productivity. Finland has a strong foundation to create innovative start-up firms. However, these businesses often face barriers to scale-up, which reduces economic dynamism, limits their ability to compete internationally, and constrains productivity growth of the economy. Domestic red tape should be reviewed to ease regulatory barriers, while the efforts to improve access to funding and investment should continue.

While the banking system remains resilient and systemic risks are contained, vulnerabilities persist.

The macroprudential toolkit should be further enhanced to strengthen the resilience of the banking sector. The systemic risk buffer on credit institutions should be maintained at 1 percent given structural vulnerabilities and the authorities should gradually phase in a positive neutral rate for the Counter-Cyclical Capital Buffer. Given elevated household debt, existing borrower-based measures—particularly loan-to-value limits and loan maturity limits—should be maintained at current levels. Debt-to-income and debt-service to income limits should also be incorporated into the policy toolkit. Finally, maintaining a clear macroprudential framework with a well-defined objective is essential to safeguard financial stability.