The recovery has not been derailed, but the war in Iran is set to temper Finland’s upswing
Finland’s robust recovery at the start of the year came as a marked upside surprise. However, a prolonged closure of the Strait of Hormuz could materially restrain growth going forward. In local government finances, the outlook has improved thanks to adjustment measures, although fiscal conditions are expected to remain tight in 2026–2027.
Exports and investment have been driving Finland’s economy upwards for some time. Encouragingly, private consumption has also clearly picked up. Even construction is beginning to gain some traction, supported by data centre and infrastructure projects, although the volume of residential construction continues to decrease.
“The breadth of the recovery lends credibility to a more durable cyclical turning point. Even so, those hoping for a brisk rebound will still need to keep their expectations in check. Given the current geopolitical turbulence, the outlook remains highly exposed to downside risks,” says Timo Vesala, Chief Economist at MuniFin.
The crisis in the Middle East has the potential to deliver precisely what Finland’s recovery needs least: weaker export demand, slower gains in purchasing power and tighter monetary conditions.
“At the same time, Finland is supported by several resilience factors that should help the economy weather the turbulence. Finland’s degree of energy self-sufficiency is high, a substantial pipeline of large-scale investment projects remains in place, and cyclical expectations in the corporate sector have stayed relatively upbeat,” Timo Vesala comments.
This is the first economic forecast published by MuniFin in which it has been possible to assess the GDP effects of a closure of the Strait of Hormuz. MuniFin is lowering its forecast for GDP growth this year from 1.5 per cent to 1.1 per cent. Growth is projected at 1.3 per cent in 2027.
Because growth is now expected to be weaker than previously forecast, the improvement in employment is also likely to be delayed. MuniFin expects the unemployment rate to stand at 9.6 per cent still in 2027. Inflation is forecast to rise above 2 per cent this year and next.
“Forecast uncertainty is heightened by the fact that the adverse effects of the Middle East crisis accumulate in a non-linear manner. The most severe disruptions will only become visible with a lag if the crisis drags on further,” Timo Vesala notes.
By 2028, the factors weighing on the recovery are expected to ease, and MuniFin forecasts GDP growth to accelerate to 2.0 per cent, unemployment to decline to 8.7 per cent and inflation to fall back below 2 per cent.