Economy remains downbeat in Q1

Second release downwardly revises Q1’s print to a stagnation: After contracting for two straight years, the Finnish economy failed to find its footing at the outset of 2025: A revised national accounts release revealed that GDP flatlined in Q1 in seasonally adjusted quarter-on-quarter terms. The reading undershot the Euro area average and came in below both a preliminary estimate of a 0.1% expansion and Q4 2024’s 0.2% rise—which was upwardly revised from a 0.2% decline. As a result, the economy remained around its 2020 size, when the pandemic hit. On an annual basis, the economy shrank 0.1% in the first quarter, swinging from the prior quarter’s 0.8% rise.

Fiscal austerity saps momentum: Domestically, the quarterly downturn was largely driven by a 2.0% fall in public spending, which deteriorated from a 0.6% expansion in the prior quarter and marked the weakest result in a year and a half. This came as the government ramped up its efforts to contain the budget deficit at the outset of the year, cutting unemployment benefits and housing allowances among other measures. More positively, private spending—which makes up over half of GDP—rebounded by 0.5% (Q4 2024: -0.5% qoq s.a.) and fixed investment growth accelerated to 1.6% from 0.5% in Q4 2024; both readings were the strongest in a year, with households and investors benefiting from a faster rise in real wages and interest rate cuts. On the external front, exports of goods and services fell at a softer pace of 0.4% in Q1 (Q4 2024: -1.9% qoq s.a.). Rebounding goods exports outweighed a steeper decline in exports of services, hinting at front-loading efforts by exporters ahead of U.S. tariff hikes. Conversely, imports of goods and services—which contribute negatively to GDP—swung into a 0.2% expansion in Q1 (Q4 2024: -1.4% qoq s.a.), providing a further headwind to economic activity.

Trump’s tariffs to cap economic recovery in 2025: Our panelists expect sequential GDP growth to return in Q2 and then to stabilize through Q4. As a result, our Consensus is for the economy to rebound overall in 2025, with interest rate cuts fueling recoveries in both fixed investment and private spending; the country has a large share of variable mortgages; household consumption should also benefit from robust real wage growth. That said, rising protectionism in the U.S. should keep GDP growth around the pre-pandemic decade average, with our Consensus Forecast for Finland’s exports downgraded several times since January. Further tariff hikes in the U.S.—a key trading partner—in the event of a trade war with the EU could further dampen demand for Finnish goods and services.

Panelist insight: Nordea’s Juho Kostiainen commented: “The import tariffs imposed by the US and the enormous uncertainty surrounding them, as well as the volatility in international financial markets, are likely to freeze the budding economic growth, at least temporarily. […] In the baseline scenario, we expect the import tariffs imposed by the United States on Europe to remain at around 10 percent and trade policy uncertainty to decrease significantly in the coming months. If the assumptions about the reduction in tariffs and uncertainty prove to be too optimistic, this year's growth forecast will also melt away, and Finland could see its third consecutive year of economic contraction. In the base case, private consumption and investment will drive economic growth. Export development is expected to continue to be positive, driven by service exports, which will not be affected by tariffs.”

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