IMF Executive Board Concludes 2017 Article IV Consultation with Finland
December 13, 2017
On December 8, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Finland. [1]
Economic growth has picked up considerably, broadening to exports and equipment investment, and the current account is back to surplus. The economic recovery is expected to remain strong in the near term, but potential growth is constrained by labor market rigidities and aging. The mission projects growth of 2.8 percent in 2017 and 2.3 percent in 2018. But, even assuming higher productivity growth than over the past ten years and increased participation in the labor market, a shrinking working age population constrains longer-term growth to about 1¼ percent. Further increases in employment and productivity would be needed to raise this rate.
This outlook is subject to external and domestic risks. The economy is particularly sensitive to growth fluctuations in key trading partners. Financial shocks remain a risk due to banks’ reliance on wholesale funding and close connections to other Nordic economies. Both labor productivity and employment growth could fall short of projections, especially if reforms to enhance work incentives stall and if real wage increases were not to match productivity changes.
Better-than-expected fiscal outcomes in 2016 are projected to continue in 2017, but the public finances face long-term challenges from a declining working age population and escalating age-related spending. Avoiding a procyclical fiscal stance would help rebuild buffers over the medium term.
The government has made notable progress on structural reforms. However, some labor market outcomes—notably inefficient matching and low participation rates of some cohorts—indicate a need for further progress. The authorities are implementing a series of policies to contain costs and reshape employment incentives, but more is needed to ensure wages grow in line with productivity, at the sector and firm levels.
The banking system is adequately capitalized and profitable, and progress has been made to reduce some key vulnerabilities. However, Nordea’s plan to relocate its headquarters to Finland increases importance of adequate supervisory resources, discretion to increase capital requirements if needed, close regional cooperation, and completion of the banking union in the EU.
Executive Board Assessment [2]
Executive Directors agreed with the thrust of the staff appraisal. They welcomed the strengthening and broadening of the economic recovery. Strong growth is expected to continue in the near term. However, downside risks remain and employment and productivity need to increase to raise potential growth and support Finland’s social model. Directors underscored the need for structural reforms, especially in the labor market, to achieve these objectives. Ongoing government initiatives to realize fiscal savings and raise public sector productivity are important to ensure long-term fiscal sustainability.
Directors were encouraged by recent progress on structural reforms. Product market reforms have increased competition. The agreement on the Competitiveness Pact has promoted wage restraint and improved competitiveness. Directors underlined the need for collective bargaining to be more flexible at the firm level to better align wages with productivity and reduce unemployment. Further labor market reforms should aim to enhance work incentives, lengthen working lives and increase labor mobility.
Directors welcomed lower-than-expected budget deficits and emphasized that the current upturn presented an opportunity to rebuild fiscal buffers. This would require limiting procyclicality of the fiscal stance. Revenue surprises should be either saved or invested in growth-enhancing measures.
Complete implementation of the structural reform agenda remains critical for long-term fiscal sustainability. Health and social services reform is especially important to boost public sector productivity and contain age-related pressures on public finances. Directors highlighted the need to monitor reform outcomes closely and make adjustments, as needed, to realize planned saving.
Directors recommended that the macroprudential authority have more tools to guard against risks even as the financial sector is judged to be sound. Additional borrower-oriented macroprudential measures would help limit household vulnerabilities. The Systemic Risk Buffer legislation, to be implemented in 2018, would help to better safeguard financial stability.
Directors noted the challenges from the upcoming relocation of Nordea’s headquarters to Finland. The authorities should have the flexibility to set the Systemic Risk Buffer at an adequately high level that reflects the significant systemic risks posed by Nordea’s large size relative to Finland’s economy. In addition, Directors supported increased resource allocation to supervision to reflect higher regulatory complexity and supervision intensity, and stressed the importance of further deepening regional cooperation. More progress on completing banking union in the EU will also be important.
It is expected that the next Article IV consultation with Finland will be held on the standard 12- month cycle.
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Table 1. Finland: Selected Economic Indicators, 2013–2022 |
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|
|
Est. |
Projections |
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|
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
|
|
(Percentage change, unless otherwise indicated) |
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|
Output and demand (volumes) |
||||||||||
|
GDP |
-0.8 |
-0.6 |
0.0 |
1.9 |
2.8 |
2.3 |
1.8 |
1.4 |
1.2 |
1.2 |
|
Domestic demand |
-1.1 |
-0.1 |
1.2 |
2.5 |
2.3 |
2.2 |
1.6 |
1.5 |
1.2 |
1.2 |
|
Private consumption |
-0.5 |
0.8 |
1.7 |
1.8 |
2.1 |
1.7 |
1.5 |
1.0 |
1.0 |
1.0 |
|
Public Consumption1 |
1.1 |
-0.5 |
0.0 |
1.2 |
0.3 |
0.4 |
0.8 |
2.0 |
0.8 |
0.8 |
|
Gross fixed capital formation |
-4.9 |
-2.6 |
0.7 |
7.2 |
8.1 |
2.9 |
3.1 |
2.2 |
2.0 |
2.0 |
|
Change in stocks (contrib. to growth in percent of GDP) |
0.0 |
0.2 |
0.2 |
-0.2 |
-0.7 |
0.5 |
-0.1 |
0.0 |
0.0 |
0.0 |
|
Exports of Goods and Services2 |
1.1 |
-2.7 |
0.8 |
1.3 |
7.7 |
2.1 |
3.6 |
3.0 |
3.0 |
3.0 |
|
Imports of Goods and Services2 |
0.5 |
-1.3 |
3.2 |
4.4 |
3.7 |
2.3 |
3.0 |
3.2 |
3.0 |
3.0 |
|
Net exports (contribution to growth in percent of GDP) |
0.3 |
-0.5 |
-0.9 |
-1.1 |
1.4 |
-0.1 |
0.2 |
-0.1 |
0.0 |
0.0 |
|
Prices, costs, and income |
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|
Consumer price inflation (harmonized, average) |
2.2 |
1.2 |
-0.2 |
0.4 |
0.8 |
1.2 |
1.7 |
1.9 |
2.0 |
2.0 |
|
Consumer price inflation (harmonized, end-year) |
1.9 |
0.6 |
-0.2 |
1.1 |
0.5 |
1.6 |
1.7 |
1.9 |
2.0 |
2.0 |
|
GDP deflator |
2.6 |
1.7 |
2.0 |
0.9 |
0.6 |
1.3 |
1.7 |
1.9 |
2.0 |
2.0 |
|
Unit labor cost, manufacturing |
-3.9 |
-0.3 |
2.2 |
-1.5 |
-4.8 |
-0.9 |
0.1 |
0.3 |
0.4 |
0.5 |
|
Unit labor cost, whole economy |
1.6 |
0.9 |
1.1 |
-0.3 |
-1.6 |
-0.9 |
0.7 |
0.9 |
1.0 |
1.0 |
|
Labor market |
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|
Labor force |
-0.5 |
0.1 |
0.4 |
-0.2 |
0.6 |
0.6 |
0.4 |
0.4 |
0.1 |
0.1 |
|
Employment |
-1.1 |
-0.4 |
-0.4 |
0.5 |
0.7 |
1.3 |
0.8 |
0.6 |
0.3 |
0.1 |
|
Employment rate (Percent of 15-64 WA population) |
68.5 |
68.3 |
68.1 |
68.7 |
69.4 |
70.5 |
71.3 |
71.9 |
72.2 |
72.5 |
|
Unemployment rate (in percent) |
8.2 |
8.7 |
9.4 |
8.8 |
8.7 |
8.1 |
7.8 |
7.6 |
7.4 |
7.4 |
|
Potential output |
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|
Output gap (in percent of potential output)3 |
-2.4 |
-3.7 |
-4.4 |
-3.5 |
-2.0 |
-0.9 |
-0.2 |
0.0 |
0.0 |
0.0 |
|
Growth in potential output |
0.7 |
0.7 |
0.8 |
1.0 |
1.2 |
1.2 |
1.2 |
1.2 |
1.2 |
1.2 |
|
(Percent of GDP) |
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|
General government finances |
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|
Overall balance |
-2.6 |
-3.2 |
-2.7 |
-1.8 |
-1.4 |
-1.7 |
-1.3 |
-1.0 |
-1.1 |
-1.0 |
|
Primary balance4 |
-1.4 |
-2.0 |
-1.6 |
-0.7 |
-0.4 |
-0.8 |
-0.5 |
-0.1 |
-0.2 |
-0.1 |
|
Structural balance (in percent of potential GDP) |
-1.2 |
-0.9 |
0.1 |
0.4 |
-0.6 |
-1.2 |
-1.2 |
-1.0 |
-1.1 |
-1.1 |
|
Structural primary balance (in percent of potential GDP) 4 |
0.0 |
0.2 |
1.2 |
1.4 |
0.4 |
-0.3 |
-0.4 |
-0.1 |
-0.2 |
-0.1 |
|
Gross debt |
56.5 |
60.2 |
63.6 |
63.1 |
63.0 |
62.7 |
62.3 |
61.3 |
60.8 |
59.9 |
|
Net debt (negative of net financial worth) |
-53.1 |
-53.5 |
-53.5 |
-50.3 |
-47.2 |
-43.9 |
-41.0 |
-38.7 |
-36.4 |
-34.2 |
|
(Percent) |
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|
Money and interest rates |
||||||||||
|
M3 (Finnish contribution to euro area, growth rate, e.o.p.) |
4.1 |
1.3 |
5.0 |
2.0 |
... |
... |
... |
... |
... |
... |
|
Finnish MFI euro area loans (growth rate, e.o.p.) |
7.7 |
3.8 |
0.9 |
1.3 |
... |
... |
... |
... |
... |
... |
|
Domestic nonfinancial private sector credit growth (e.o.p.) |
4.4 |
2.6 |
3.1 |
0.7 |
3.3 |
4.7 |
4.7 |
4.6 |
4.5 |
4.4 |
|
3-month money market rate |
0.2 |
0.2 |
0.0 |
-0.3 |
... |
... |
... |
... |
... |
... |
|
10-year government bonds yield |
1.9 |
1.4 |
0.7 |
0.4 |
... |
... |
... |
... |
... |
... |
|
(Percent of GDP) |
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|
National saving and investment |
||||||||||
|
Gross national saving |
19.8 |
19.7 |
20.3 |
20.8 |
22.7 |
23.3 |
23.8 |
23.9 |
24.2 |
24.4 |
|
Gross domestic investment |
21.4 |
20.9 |
20.8 |
22.0 |
21.8 |
22.7 |
22.9 |
23.0 |
23.2 |
23.4 |
|
Balance of payments |
||||||||||
|
Current account balance |
-1.6 |
-1.3 |
-1.0 |
-1.4 |
0.2 |
0.2 |
0.5 |
0.5 |
0.5 |
0.5 |
|
Goods and Services balance |
-0.5 |
-0.6 |
-0.5 |
-1.2 |
-0.1 |
-0.2 |
0.0 |
0.0 |
0.0 |
0.0 |
|
Net international investment position |
3.9 |
-3.2 |
-6.1 |
-2.5 |
-2.3 |
-2.0 |
-1.4 |
-0.8 |
-0.2 |
0.4 |
|
Gross external debt |
207.7 |
218.7 |
218.8 |
203.5 |
201.4 |
198.9 |
195.2 |
191.5 |
187.6 |
183.9 |
|
Exchange rates (period average) |
||||||||||
|
Euro per US$ |
0.75 |
0.75 |
0.90 |
0.90 |
... |
... |
... |
... |
... |
... |
|
Nominal effective rate (appreciation in percent) |
2.6 |
1.9 |
-2.4 |
2.0 |
... |
... |
... |
... |
... |
... |
|
Real effective rate (appreciation in percent)5 |
2.2 |
1.3 |
-4.0 |
1.1 |
... |
... |
... |
... |
... |
... |
|
Memorandum items |
||||||||||
|
Nominal GDP (in Euro billions) |
203.3 |
205.5 |
209.6 |
215.6 |
... |
... |
... |
... |
... |
... |
|
Nominal GDP (in U.S. dollar billions at market exch. rates) |
270.1 |
273.0 |
232.6 |
238.6 |
... |
... |
... |
... |
... |
... |
|
Sources: Bank of Finland, International Financial Statistics, Information Notice System, Ministry of Finance, Statistics Finland, and Fund staff calculations. |
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1 Stronger increase in 2019 is reflective of the 2018 budget proposal's medium-term fiscal estimates. |
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2 The lower annual growth in 2018 is due to negative carryover from 2017, given high growth in 2017Q1. |
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3 A negative value indicates a level of actual GDP that is below potential output. |
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4 Adjusted for interest expenditure. |
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5 CPI-based real effective exchange rate. |
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[1] Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summing up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm .
[2] At the conclusion of the discussion, the Managing Director, as a Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.
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