Finland: Staff Concluding Statement of the 2018 Article IV Mission
IMF News, November 6, 2018
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- Published: November 6, 2018
Economic Situation and Outlook
- Finland is enjoying its third consecutive year of economic recovery; strong growth continued into 2018.
- Employment and labor market:
- The employment rate has picked up sharply and the unemployment rate has declined to its lowest level since 2011.
- Wages have started to recover, but inflation remains low.
- External and fiscal balances:
- A pick-up in exports has improved external balances.
- Stronger tax revenues and lower spending, including on unemployment benefits, have improved fiscal balances.
- Growth projections and risks:
- Growth in 2018 is expected to be 2.8 percent.
- Growth is expected to be 1.9 percent in 2019 as global demand slows and financial conditions tighten.
- There are downside risks from the global environment, notably increased protectionism and higher bank funding costs.
- Long-term potential:
- The labor force is expected to decline as the working age population shrinks.
- Without a permanent increase in the rate of productivity growth, long-run potential growth is likely to be constrained to around 1¼ percent.
Structural reforms
- Recent reforms and effects:
- The 2016 Competitiveness Pact helped make Finnish exports more cost competitive.
- Changes to social benefits enhanced incentives to look for jobs.
- New rules for temporary hires have the potential to boost employment and labor flexibility.
- Remaining challenges:
- Firms face difficulties matching workers to job opportunities.
- Unemployment rates remain persistently high in some regions despite ample vacancies in others.
- Job mobility is low and has not picked up.
- Productivity growth is still below pre-crisis rates.
- Policy focus and recommendations:
- Increase labor market dynamism while maintaining a strong safety net.
- Promote higher rates of job-to-job movements to transfer skills and best practices across firms.
- Enhance the ability to differentiate wages at the firm level, consistent with the spirit of the 2016 Competitiveness Pact.
- Taper benefits to gradually fall with their duration to increase job search soon after losing employment and reduce risks of losing skills and long-term unemployment.
- Foster regional labor mobility by alleviating housing bottlenecks and improving transport infrastructure in and around fast-growing regions to facilitate commuting.
Fiscal Policy
- Fiscal position and risks:
- Public debt has been falling during the past three years, but remains above its pre-crisis level.
- Contingent liabilities are relatively large.
- The Finnish economy is highly exposed to trade and financial shocks, with potential for large demands on fiscal resources in times of stress.
- Demands for public services—especially for healthcare—are expected to increase considerably as the population ages.
- 2019 budget assessment:
- The 2019 budget implies a moderate tightening of fiscal policy.
- It provides for some new expenditure measures to boost employment, R&D, and education, but the deficit will nonetheless shrink because of the effects of previously-agreed measures.
- At this stage of the business cycle, the budget implies a moderate fiscal contraction in structural terms.
- Policy recommendations:
- Continued steady deficit reduction is appropriate to boost fiscal buffers.
- Revenues are already quite high in terms of GDP, implying limits to debt reduction from raising taxes and/or social security contributions.
- Public investment has been maintained at relatively high levels compared to other countries; consider the level of R&D spending and transport needs.
- Direct more effort toward raising the effectiveness of public spending alongside policies to boost potential growth.
- The planned health and social services reform targets substantial savings from efficiency gains which, if realized, would substantially contribute toward closing the fiscal sustainability gap and restoring fiscal buffers; however, savings are uncertain and depend crucially on implementation by the new counties that will organize public healthcare and social services.
Financial Policies
- Banking sector soundness and challenges:
- Immediate financial stability risks appear limited: the level of non-performing loans is low, and bank capital exceeds required levels by a clear margin.
- The system is highly concentrated, interconnected with financial sectors of other Nordic countries, and reliant on wholesale funding.
- The size of the banking sector has increased substantially with the recent redomicile of Nordea to Finland.
- Household vulnerabilities and macroprudential policy:
- Household debt has been rising, with increased leverage and a high share of floating rate loans making some households more vulnerable to interest rate hikes.
- Growth in consumer credit raises questions about borrower information, especially for loans from non-bank lenders.
- Recommendation to expand the macroprudential toolkit to debt-based instruments, such as debt-to-income and debt-service-to-income ratios, to limit household leverage.
- Authorities need more data, such as from a positive credit registry, to properly assess vulnerabilities and set these tools.
- Rapid growth of lending through digital platforms motivates additional data collection.
- Consider extra consumer protection measures covering loans from non-banks in addition to banks.
- Nordea redomicile and regional cooperation:
- Nordea’s redomicile to Finland increases demands on supervision and heightens the importance of continued close regional cooperation and preparedness for crises.
- Nordea is now supervised by the Single Supervisory Mechanism; resources of the ECB and the Finnish financial supervisory authority have been increased.
- The ECB and Nordic supervisors have committed to continuing close regional cooperation.
- The ECB and Finnish authorities have set capital requirements to ensure Nordea would have the same level of capital as before its redomicile.
- Work continues at the European level to fully implement the framework for resolving banks in distress, particularly important for a large and complex bank such as Nordea.
Mission Concluding Statement — November 6, 2018. IMF Communications Department.