IMF Executive Board Concludes 2022 Article IV Consultation with Finland
IMF News, January 23, 2023
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- Published: January 23, 2023
Economic outlook and inflation
- Strong post-Covid recovery is faltering due to spillovers from Russia’s invasion of Ukraine.
- Growth developments:
- Government policies helped bring output back to the pre-pandemic trend and employment to a record-high level.
- Growth turned negative in the third quarter of 2022, reflecting reduced trade with Russia, higher energy prices, and higher interest rates weighing on private consumption and investment.
- Economic activity is expected to stall in 2023.
- Growth is projected to start recovering in 2024 and return to a subdued trend rate of around 1¼.
- Risks are skewed to the downside given uncertainties related to the war.
- Inflation:
- Energy prices are passing through to core prices, sustaining inflation.
- Headline inflation is expected to remain at about 4½ percent in 2023, and to return to the 2 percent target in the medium term.
- Labor market:
- Wage growth has remained moderate, but recent agreements in the public sector point to pressures.
Fiscal stance and public debt
- Fiscal developments:
- The fiscal deficit is expected to widen, providing a mild stimulus in 2023 and putting public debt on a riskier path.
- Deficits are projected to be higher than the pre-war path by about 1 percentage point.
- The widening of the 2023 deficit reflects measures to compensate for higher energy prices and higher security-related spending; the latter persists into the medium term.
- Under unchanged policies, the debt ratio would increase from around 72 percent of GDP in 2022 to close to 80 percent by 2028.
- Executive Directors’ views on fiscal policy:
- Fiscal policy in the near term should be supportive of monetary policy.
- A slightly tighter fiscal stance relative to 2022 would be desirable in 2023; security spending and support to the vulnerable should be prioritized.
- Directors encouraged better targeting of support measures in response to elevated energy prices.
- Noting widening fiscal deficits over the medium term, Directors agreed a gradual but sustained fiscal consolidation is needed to put the public debt ratio on a declining path and create room for aging-related spending.
- Authorities’ plan to strengthen the fiscal framework and carry out comprehensive spending and tax revenue reviews to identify possible consolidation measures is welcome.
Structural reforms and labor market policies
- Directors emphasized boosting employment and productivity as key for growth and sustainability.
- Policy recommendations:
- Further measures to reduce work disincentives.
- Improve access to tertiary education and attract foreign labor.
- More flexibility within the coordinated wage bargaining framework to support employment.
- Government proposal to increase R&D spending to 4 percent of GDP in the medium term was welcomed; Directors called for the spending to be targeted.
Financial sector stability and macroprudential policy
- Banking sector:
- The banking sector is well-capitalized and profitable, and in terms of solvency, resilient to adverse macroeconomic shocks.
- The banking sector is large, concentrated, highly connected with other financial systems in the Nordic region, and heavily reliant on wholesale funding, exposing it to liquidity shocks.
- Household debt remains elevated and corporate debt has risen.
- Directors’ recommendations:
- Strengthen operational independence of the financial supervisory authority (FIN-FSA).
- Reinstate systemic risk buffers.
- Enhance the banking sector’s resilience to liquidity shocks and cross-border exposures in the Nordic region.
- Improve the macroprudential toolkit to address vulnerabilities from high household indebtedness.
- Encourage legislating a positive neutral rate for the countercyclical capital buffer to help build macroprudential policy space in the medium term.
- Further strengthening of AML/CFT supervision remains important.
- Directors welcomed progress in strengthening oversight and broadly supported key policy recommendations of the 2022 Financial Sector Assessment Program (FSAP).
Climate policy
- Directors commended Finland’s ambitious climate goals but emphasized that further measures, including reforms to carbon pricing, would be needed to achieve the 2035 carbon neutrality target.
Executive Board assessment highlights
- Directors commended authorities’ decisive response to the spillovers from Russia’s war against Ukraine, including finding alternative energy sources.
- They welcomed adoption of structural reforms to boost employment and productivity.
- Noted deterioration of the economic outlook and elevated inflation.
- Urged focus on enhancing fiscal sustainability while continuing reforms to address structural impediments, reinforce financial system resiliency, and advance the green agenda.
- It is expected that the next Article IV consultation with Finland will be held on the standard 12-month cycle.
Finland: Selected Economic and Social Indicators, 2020–28 (selected rows and projections)
- Output and demand (Percentage change, unless otherwise indicated)
- GDP: 2020: -2.2; 2021: 3.0; 2022: 2.0; 2023: 0.0; 2024: 1.3; 2025: 1.2
- Domestic demand: 2020: -2.0; 2021: 2.8; 2022: 3.5; 2023: 0.1; 2024: 0.8; 2025: 1.6
- Private consumption: 2020: -4.0; 2021: 3.7; 2022: 2.5; 2023: -0.1; 2024: 0.6; 2025: 0.7; 2026: 0.9
- Public consumption: 2020: 0.3; 2021: 2.9; 2022: 1.9; 2023: 1.0
- Gross fixed capital formation: 2020: -0.9; 2021: 1.5; 2022: 4.3; 2023: -0.3; 2024: 2.1
- Net exports (contribution to growth in percent of GDP): 2020: -0.7; 2021: -0.2; 2022: -1.5; 2023: 0.5
- Prices, costs, and income
- Consumer price inflation (harmonized, average): 2020: 0.4; 2021: 7.2; 2022: 4.4; 2023: 2.2; 2024: 1.8
- Labor market
- Labor force: 2020: -0.4; 2021: 0.2
- Employment: 2021: 2.4
- Unemployment rate (in percent): 2020: 7.8; 2021: 7.6; 2022: 6.8; 2023: 7.3; 2024: 7.0; 2025: 6.9
- Potential output and gap
- Output gap (in percent of potential output)1: 2020: -2.7; 2021: -0.8; 2022: -0.5
- Growth in potential output: 2021: 1.1
- General government finances (Percent of GDP)
- Overall balance: 2020: -5.5; 2021: -2.6; 2022: -2.5; 2023: -2.8
- Primary balance3: 2020: -5.4; 2021: -1.6; 2022: -2.4
- Structural balance (in percent of potential GDP)4: 2020: -3.4; 2021: -1.8; 2022: -1.9; 2023: -2.3
- Structural primary balance (in percent of potential GDP)5: 2020: -3.3
- Gross debt: 2020: 74.8; 2021: 72.3; 2022: 72.1; 2023: 73.6; 2024: 74.7; 2025: 75.9; 2026: 77.1; 2027: 78.7; 2028: 80.3
- Net debt6: 2020: -64.1; 2021: -72.1; 2022: -66.5; 2023: -61.3; 2024: -56.8; 2025: -52.3; 2026: -48.2; 2027: -44.1; 2028: -40.0
- Balance of payments
- Current account balance: 2020: -2.9; 2021: -1.7; 2022: -0.6
- Goods and services balance: 2020: -3.0; 2021: -3.1; 2022: -2.1; 2023: -1.3; 2024: -1.2; 2025: -1.1
- Net international investment position: 2020: -4.5; 2021: -1.4; 2022: -4.1; 2023: -6.8; 2024: -8.2; 2025: -8.7; 2026: -8.9; 2027: -9.1; 2028: -9.0
- Gross external debt: 2020: 222.7; 2021: 208.1; 2022: 211.9; 2023: 215.1; 2024: 216.3; 2025: 216.1; 2026: 216.5; 2027: 217.4
IMF Communications Department, Press Release No. 23/09 (January 23, 2023).