GDP records sharpest contraction since Q3 2023 in Q2

GDP growth underperforms preliminary estimates in Q2: A revised national accounts release showed that GDP contracted 0.4% in Q2 after flatlining in Q1 on a seasonally adjusted quarter-on-quarter basis, marking the worst print in nearly two years. The result came in below the Euro area’s average growth rate and missed flash data estimates, which had pointed to flat sequential growth for a second consecutive quarter. In annual terms, the economy shrank 0.3% in Q2, following a 0.6% increase in Q1.

Household consumption drags down economic growth: The contraction was mainly driven by private spending—which accounts for about 50% of GDP—falling 1.3% in Q2 (Q1: +0.1% qoq s.a.), the worst result since Q2 2024, as low consumer confidence kept savings high and weakened consumption in the services sector. In addition, public spending dropped 1.0% in Q2 (Q1: -1.8% qoq s.a.) due to ongoing fiscal consolidation by the government after last year’s bloated deficit. Meanwhile, fixed investment grew 3.4% in Q2, following a 1.8% increase in Q1. The economy was also hampered on the external front: Exports of goods and services swung into contraction and fell 0.2% (Q1: +3.1% qoq s.a.), dragged down by sluggish EU growth, which accounts for over 60% of Finnish exports. Conversely, imports of goods and services rebounded, expanding 2.5% in Q2 (Q1: -0.8% qoq s.a.), marking the highest reading since Q2 2022.

Domestic demand to guide 2025’s recovery: Our Consensus is for GDP to rebound in Q3 on a sequential basis, with private consumption likely recovering on increasing household purchasing power and falling interest rates. Similarly, our panelists expect economic growth for 2025 as a whole to increase relative to 2024, as both private spending and fixed investment rebound on lower interest rates. Higher-than-expected unemployment, given low vacancy levels, is a key downside risk.

Panelist insight: Nordea’s Juho Kostiainen noted: “Overall, the summer's economic data has been weak, with a few exceptions. The unemployment rate has already risen to 9.6 per cent and housing prices have continued to fall for more than three years. However, the basic fundamentals for economic growth are in place as purchasing power improves, global uncertainties decrease and the oversupply of the housing market slowly melts”.

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