IMF Executive Board Concludes 2021 Article IV Consultation with Finland
IMF News, January 31, 2022
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- Published: January 31, 2022
Economic performance and outlook
- Finland experienced one of the smallest contractions in economic activity in 2020 among European countries due to a successful containment strategy and comprehensive policy response.
- The economic recovery in 2021 was strong; output and employment are now above their pre-pandemic levels.
- Consumer prices increased markedly in 2021, reflecting the global rise in raw materials’ prices and pandemic-related production bottlenecks.
- The current account has hovered around balance.
- Output is projected to grow at 2¾ percent in 2022, buoyed by private consumption and investment.
- Growth could be stronger with a faster unwinding of household savings, but pandemic-related risks to global growth remain high and could negatively impact Finland.
- Medium-term growth prospects are constrained by adverse demographics and low productivity—trends that precede the pandemic.
Fiscal policy and public finances
- Fiscal policy during the pandemic provided timely and needed support.
- Pre-pandemic, the government pursued an ambitious program to build a socially, economically and ecologically sustainable society, with additional spending financed largely through backloaded measures to boost employment.
- Public debt has increased to close to 70 percent of GDP and is projected to remain on an increasing trajectory in the medium term, as the current and planned employment measures will unlikely produce sufficient fiscal gains to bring the fiscal deficit back to its pre-pandemic level.
- Executive Directors recommended that fiscal policy should remain flexible in the near term, supporting the economic recovery as needed.
- Directors recommended a moderately faster and well-calibrated fiscal consolidation over the medium term, focused on expenditure reduction and guided by a spending review.
- Directors underscored the importance of enhancing policy credibility by returning to the original spending limit in the context of medium-term fiscal adjustment.
Structural reforms and climate policy
- Directors supported structural policies to boost employment and productivity.
- Recommended priorities include reducing labor market rigidities, improving employment prospects of women with care responsibilities, improving tertiary education, and addressing skill shortages.
- Directors highlighted the need for a more flexible wage bargaining system that supports employment and productivity.
- Directors commended the authorities for setting an ambitious target of net-zero greenhouse gas emissions by 2035 and called for a more comprehensive strategy to meet this goal.
- Many Directors encouraged the authorities to consider implementable measures that strengthen carbon pricing, complemented with fiscal incentives, informed by a deeper staff analysis on their social and sectoral impacts.
Financial sector and macrofinancial risks
- The financial system has weathered the pandemic well: banks are well-capitalized, liquid, and profitable.
- The lowering of structural capital buffer requirements at the onset of the pandemic provided additional lending and loss-absorbing capacity.
- The banking sector is large and highly concentrated, with high exposure to residential and commercial real estate; commercial real estate faces pandemic-related headwinds.
- The increase and changing composition of household debt has added to borrower-side vulnerabilities.
- Directors recommended restoring structural capital buffers in the banking system to pre-pandemic levels and enhancing the macroprudential toolkit, including introducing targeted borrower-based measures and a positive neutral countercyclical buffer requirement in the medium term.
- Directors noted that rising vulnerabilities in household finances and banks’ high exposure to real estate warrant continued close monitoring.
Executive Board assessment (summary of Directors’ views)
- Directors welcomed the authorities’ swift and comprehensive policy response to the pandemic, which helped limit its health and economic impact.
- While economic recovery is underway, supported by a high vaccination rate and a strong rebound in domestic demand, risks remain elevated amid high pandemic-related uncertainty.
- Macroeconomic policies should remain flexible in the near term, while structural reforms should continue to address longstanding challenges, including low productivity and an ageing population.
Finland: Selected economic and social indicators (key figures from table)
- GDP (percentage change): 2019: 1.3; 2020: -2.9; 2021: 3.4; 2022: 2.8; 2023: 1.5.
- Domestic demand (percentage change): 2019: -0.4; 2020: -2.7; 2021: 3.1; 2022: 1.2.
- Private consumption (percentage change): 2019: 0.7; 2020: -4.7; 2021: 3.8; 2022: 3.7; 2023: 1.4.
- Public consumption (percentage change): 2019: 2.0; 2020: 0.5; 2021: 3.3; 2022: -0.5.
- Gross fixed capital formation (percentage change): 2019: -1.6; 2020: -0.7; 2021: 1.0; 2022: 4.1; 2023: 2.6; 2024: 1.6; 2025: 1.8.
- Exports of goods and services (percentage change): 2019: 6.8; 2020: -6.8; 2021: 4.6; 2022: 5.0; 2023: 3.2.
- Imports of goods and services (percentage change): 2019: 2.3; 2020: -6.5; 2021: 3.6; 2022: 4.9.
- Net exports (contribution to growth in percent of GDP): 2019: 1.7; 2020: -0.1; 2021: 0.3.
- Consumer price inflation (harmonized, average): 2019: 1.1; 2020: 0.4; 2021: 2.1; 2022: 2.7; 2023: 1.9.
- Consumer price inflation (harmonized, end-year): 2019: 0.2.
- Labor market: Employment (percentage change): 2020: -1.5.
- Unemployment rate (in percent): 2019: 6.7; 2020: 7.8; 2021: 6.6; 2022: 6.5.
- Output gap (in percent of potential output): 2019: -3.7; 2020: -1.4.
- General government overall balance (percent of GDP): 2019: -5.4; 2020: -3.4; 2021: -2.1.
- Primary balance (percent of GDP, adjusted for interest): 2019: -0.8; 2020: -5.3; 2021: -2.2; 2022: -1.8; 2023: -1.7.
- Structural balance (in percent of potential GDP): 2019: -1.0; 2020: -2.5; 2021: -2.0.
- Structural primary balance (in percent of potential GDP): 2019: -2.6; 2020: -1.9.
- Gross debt (percent of GDP): 2019: 59.5; 2020: 69.5; 2021: 69.9; 2022: 69.3; 2023: 70.1; 2024: 71.4; 2025: 72.5; 2026: 73.6; 2027: 74.5.
- Net debt (percent of GDP): 2019: -62.6; 2020: -64.5; 2021: -57.6; 2022: -52.8; 2023: -49.6; 2024: -46.6; 2025: -43.7; 2026: -40.9; 2027: -38.2.
- M3 (Finnish contribution to euro area, growth rate, e.o.p.): 2019: 10.2.
- Finnish MFI euro area loans (growth rate, e.o.p.): 2019: 5.3.
- Current account balance (percent of GDP): 2019: -0.3; 2020: 0.8; 2021: 0.6.
- Net international investment position (percent of GDP): 2019: 4.0; 2020: -5.8; 2021: -4.5; 2022: -3.0.
- Gross external debt (percent of GDP): 2019: 224.2; 2020: 225.1; 2021: 225.4; 2022: 222.3; 2023: 222.9; 2024: 222.1; 2025: 221.6; 2026: 221.0; 2027: 220.4.
- Exchange rates (period average): Euro per US$: 2019: 0.89.
- Nominal effective rate (appreciation in percent): 2019: -0.6.
Press Release No. 22/19 — IMF Communications Department; January 31, 2022.
