20240310-IMF-Finland_2024_Article_IV_Consultation-Press_Release_and_Staff_Report_83页_2mb

Finland 2024 Article IV Consultation Summary

Core Content

The IMF conducted the 2024 Article IV consultation with Finland, which concluded on March 7, 2024, with the Executive Board endorsing the staff appraisal. The consultation focused on economic developments, policy priorities, and risks to Finland's growth and fiscal sustainability.

Main Economic Developments

• Economic Growth: Finland's economy experienced a swift recovery from the pandemic but slowed significantly after Russia's invasion of Ukraine. A contraction of 0.5% was estimated in 2023, with a shallow recovery expected in 2024.
• Inflation: Inflation has decreased to more normal levels, with headline inflation at 1.3% in December 2023 and core inflation at 2.9%. Inflationary pressures are expected to continue easing.
• Labor Market: Despite weak economic activity, the labor market has remained relatively strong. The unemployment rate rose slightly to 7.6% in December 2023, but the participation rate and employment rates peaked in early 2023 and declined moderately. A moderate wage settlement in 2023 reduced inflationary pressure.
• Housing Market: House prices have fallen back to pre-pandemic levels, with a near 10% decline since their peak. Household indebtedness remains high at 124% of net disposable income.
• Financial Conditions: Financial conditions have tightened since the global financial crisis, but show signs of partial easing in 2023. Credit growth has contracted, and liquidity positions remain strong.

Outlook and Risks

• Economic Recovery: A modest recovery is expected in 2024, with growth projected at around 0.5%, and a rebound to 1.5% in the medium term. This is driven by expected increases in investment and employment from recent reforms.
• Fiscal Outlook: The fiscal deficit is expected to widen in 2023 to 2.5% of GDP, with public debt rising to 76% of GDP. The fiscal outlook is deteriorating due to higher discretionary spending and weak growth.
• Fiscal Consolidation: The government plans to reduce the fiscal deficit by 2% of GDP through spending cuts and employment-driven gains, aiming for a 1% deficit by 2027. However, further measures are necessary to close the gap.
• Structural Challenges: Adverse demographics and weak productivity have resulted in low trend growth, placing pressure on public finances. Structural reforms are needed to address these issues and improve long-term growth prospects.
• Climate Goals: Finland aims to achieve carbon neutrality by 2035, which is 15 years earlier than the EU. Further measures are required to support this goal, including strengthening carbon pricing and expanding carbon-sink initiatives.
• Financial Sector: The financial system remains resilient, with banks having sufficient capital and liquidity. However, risks are elevated due to high reliance on short-term wholesale funding and exposure to systemic events. Macroprudential measures should be strengthened, including tighter liquidity regulation and additional borrower-based measures.

Key Policy Recommendations

• Fiscal Sustainability: A structural fiscal adjustment of around 0.25% of GDP should begin in 2024, increasing to 0.5% per year over the medium term, with the goal of balancing the budget by 2028.
• Employment and Productivity: The government should focus on improving higher education, reducing skill mismatches, and attracting international talent. Labor market reforms should be complemented by measures to boost employment and productivity.
• Fiscal Revenues: Additional revenue measures, such as excise tax indexation, expansion of carbon taxation, VAT rate standardization, and revising dividend taxation for non-listed companies, are necessary to support fiscal consolidation.
• Financial Sector Resilience: Tightening liquidity regulation and introducing additional macroprudential tools, such as debt-to-income and debt-service-to-income limits, will help enhance financial system resilience.
• Climate Strategy: Further measures are needed to achieve Finland's ambitious climate goals, including strengthening carbon pricing and increasing the role of carbon-sinks in the land use sector.

Economic Indicators (2021–2029)

Key Risks

• Energy Crisis Resurgence: A potential resurgence of the energy crisis could negatively impact growth.
• Escalation of the War in Ukraine: This could lead to further economic disruptions.
• Global Financial Conditions: Tightening global financial conditions pose a risk to economic stability.
• Balance Sheet Recession: A deeper balance sheet recession is a concern for future growth.

Summary

Finland's economy has faced challenges post-pandemic, with a contraction in 2023 and weak growth in 2024. Inflation has eased, but structural issues such as adverse demographics and low productivity continue to hinder long-term growth. The government's fiscal adjustment plans are not sufficient to meet its deficit targets, and further measures are needed to ensure fiscal sustainability. The financial system remains resilient, but macroprudential policies should be strengthened to address rising risks. Finland's ambitious climate goals require additional support, and structural reforms in education and labor markets are essential for future growth.