IMF Executive Board Concludes 2018 Article IV Consultation with Finland

IMF News, January 16, 2019

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IMF Executive Board Concludes 2018 Article IV Consultation with Finland

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Bibliographic details

• Published: January 16, 2019

Economic outlook

• Finland is in its third consecutive year of economic recovery according to the IMF.
• Growth:
  • Growth in 2018 is expected to be 2.4 percent.
  • Growth is projected at 1.9 percent in 2019 as global demand slows and financial conditions tighten.
• Risks to the outlook:
  • An increase in protectionism could weaken demand for Finnish exports and damage confidence.
  • Higher bank funding costs could mean tighter credit.
• Inflation and external demand:
  • Wages have started to recover, but inflation remains low.
  • Export market shares have improved slightly, leading to a pickup in exports.

Recent reforms and labor market issues

• 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 potential to boost employment and labor flexibility.
• Remaining problems:
  • Productivity growth remains below pre-crisis rates despite the recovery.
  • 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.
• Labor market outcomes:
  • The employment rate has picked up sharply and the unemployment rate has declined to its lowest level since 2011.

Fiscal policy and public finances

• 2019 budget and reforms:
  • The 2019 budget implies a moderate tightening of fiscal policy.
  • The planned health and social services reform targets substantial savings from efficiency gains which, if realized, would make a substantial contribution toward closing the fiscal sustainability gap and restoring fiscal buffers.
  • Savings from the proposed reform are uncertain and will depend crucially on implementation.
• Fiscal guidance from Directors:
  • Given looming age‑related spending pressures and contingent liabilities, Directors underscored the need to continue to rebuild fiscal buffers.
  • Directors supported the moderate tightening implied by the 2019 budget.
  • Fiscal policy should concentrate on raising the effectiveness of public spending, such as those proposed in the social services and health care reform.

Financial sector and household vulnerabilities

• Banking sector features and risks:
  • The banking sector is sound but highly concentrated, interconnected with other Nordic countries’ financial sectors, and reliant on wholesale funding.
  • The size of the banking sector has increased substantially with the recent redomicile of the largest Nordic financial group to Finland, increasing demands on supervision.
  • Immediate financial stability risks appear limited, but increased size and regional interconnection heighten the importance of continued close regional cooperation and preparedness for crises.
• Household financial vulnerabilities:
  • Household debt has been increasing as the economy has recovered, and some borrowers appear vulnerable to interest rate increases.
  • Growth in consumer credit raises questions about whether some borrowers are sufficiently informed about loan conditions.
  • Directors recommended additional consumer protection measures, such as better information disclosure requirements and interest rate caps.
  • Directors suggested improving macroprudential policies by using debt‑based tools and gaining access to better data, such as from a comprehensive positive credit registry.

Executive Board Assessment and policy recommendations

• Overall assessment:
  • Executive Directors agreed with the thrust of the staff appraisal and welcomed the continued good economic performance, while noting growth is likely to slow as global demand moderates and financial conditions tighten.
• Structural reform priorities:
  • Given relatively modest potential growth, Directors stressed the need for structural reform, particularly in the labor market, and cautious fiscal policy.
  • Focus reforms on increasing labor market dynamism while maintaining a strong safety net.
  • Increase wage flexibility at the firm level and further change unemployment benefits to foster increased job search.
  • Efforts to increase regional labor mobility could help reduce regional disparities in unemployment rates.
  • Emphasize targeted infrastructure investment to bolster long‑term productivity growth.
• Financial supervision and monitoring:
  • Given increased banking sector size and regional interconnection, strengthen supervision, regional cooperation, and crisis preparedness.
  • Monitor risks from the real estate sector closely due to the high level of household indebtedness.

Key statistics (as reported by the IMF)

• Output and demand (percentage change):
  • GDP: 2018 2.4; 2019 1.9.
  • Domestic demand: 2018 2.3; 2019 1.8.
  • Private consumption: 2018 2.1; 2019 1.8.
  • Gross fixed capital formation: 2018 3.7; 2019 3.0.
  • Exports of goods and services: 2018 3.2; 2019 3.3.
  • Imports of goods and services: 2018 3.0; 2019 3.0.
  • Net exports (contribution to growth in percent of GDP): 2018 0.2; 2019 0.1.
• Prices, costs, and income:
  • Consumer price inflation (harmonized, average): 2018 1.2; 2019 1.4.
  • Consumer price inflation (harmonized, end-year): 2018 1.5; 2019 1.5.
  • GDP deflator: 2018 1.6; 2019 1.6.
  • Unit labor cost, manufacturing: 2018 -0.8; 2019 0.0.
• Labor market:
  • Employment (percentage change): 2018 1.4; 2019 0.9.
  • Unemployment rate (in percent): 2018 7.6; 2019 7.3.
• Potential output:
  • Output gap (in percent of potential output): 2018 -0.5; 2019 0.0.
  • Growth in potential output: 2018 1.4; 2019 1.5.
• General government finances (percent of GDP):
  • Overall balance: 2018 -1.0; 2019 -0.3.
  • Primary balance: 2018 -0.1; 2019 0.5.
  • Structural balance (in percent of potential GDP): 2018 -0.8; 2019 -0.5.
  • Gross debt: 2018 60.5; 2019 59.8.
• Credit, external sector, and other indicators:
  • Domestic nonfinancial private sector credit growth (e.o.p.): 2018 4.8; 2019 4.6 (Proj.).
  • Current account balance (percent of GDP): 2018 -0.5; 2019 0.1.
  • Gross external debt: 2018 185.6; 2019 188.9.
  • Nominal GDP (in Euro billions): 2017 223.9; nominal GDP (in U.S. dollar billions at market exch. rates): 2017 252.8.
• Sources cited in the statistical tables: Bank of Finland, BIS, International Financial Statistics, IMF Institute, Ministry of Finance, Statistics Finland, and Fund staff calculations.

References

• IMF Policy Advice -- A Factsheet