Finland: Staff Concluding Statement of the 2025 Article IV Mission

IMF News, November 8, 2024

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Canonical URL: Finland: Staff Concluding Statement of the 2025 Article IV Mission

A team from the International Monetary Fund (IMF), led by Mr. Alex Pienkowski, held discussions during October 29-November 8 for the 2025 Article IV Consultation.
The team met with Governor Olli Rehn, Permanent Secretary Juha Majanen, other senior officials, and representatives from the private sector, banks, labor unions, and other stakeholders.
Helsinki, Finland: Following a hard landing in 2023, the Finnish economy has started to recover. Modest growth is projected in 2025 and in the medium term, but risks are tilted to the downside.

GDP fell by 1.2 percent in 2023.
Quarterly growth turned slightly positive in the first half of 2024.
Annual growth is projected at -0.3 percent in 2024, as private investment continues to contract.
Output is projected to grow by 1.6 percent in 2025 as private investment spending partially recovers and private consumption increases further.
Medium-term growth is projected to be slightly below 1½ percent.
Employment since the pandemic has been robust, supported by weak real wages, higher immigration, greater public employment, and increased participation rates.
Recent steeper-than-trend fall in average hours worked noted; part cyclical or preference-driven, but may reflect market and policy failures requiring attention.

Based on preliminary data, 12-month headline inflation reached 1.5 percent in October, driven by falling energy prices and moderating core inflation.
Core inflation: 2.3 percent.
Headline inflation is expected to stabilize around 2 percent by the end of 2025.
Real wages are growing modestly; moderating corporate profits prevented further inflationary pressure.

Fiscal deficit increased to 3.0 percent of GDP in 2023.
Public debt increased to 77 percent of GDP in 2023.
The deficit is set to continue to increase in 2024 despite new fiscal consolidation measures announced in April 2024.
New fiscal consolidation measures announced in April 2024 amount to €3 billion (1 percent of GDP), including:
- An increase in VAT rates from 24 to 25.5 percent in September.
- Cost savings in central government operations.
- Scaling back obligations in health and social care.
The bulk of these measures will be realized in 2025.
Policy recommendation: Additional fiscal consolidation is needed to reverse the debt trajectory and credibly start reducing the fiscal deficit.
Quantified fiscal target: The authorities should aim to balance the fiscal budget by 2029.
Guidance on composition of adjustment:
- Protect productivity-enhancing spending such as public investment, R&D support, and education.
- Complement fiscal consolidation with structural reforms to accelerate the pace of the recovery.

Recent reforms: changes to unemployment benefits, social security and tax adjustments, and enhancements to employment services.
Policy focus:
- Increase labor force participation rates toward Nordic peers.
- Reduce skills mismatches and strengthen tertiary education.
- Authorities’ plan to increase the proportion of young adults attaining higher education degrees to approximately 50 percent by 2030 is welcome.
- Address barriers to higher-intensity work given the fall in average hours worked.
Innovation and firm dynamics:
- R&D expenditure relative to GDP remains high by EU standards despite a multi-year decline; authorities plan to support and raise it further.
- Finland has a notable venture capital sector supported by public-sector investment funds and a large domestic pension industry.
- Weak productivity growth and slow formation of high-growth young firms (“Gazelles”) relative to EU and Nordic peers.
Policy recommendations to support business dynamism:
- Review tax treatment of venture capital funding and rebates associated with investment spending by firms.
- Address potential barriers to entry and excessive regulation in the service sector.

Current strengths:
- Banks’ capital and liquidity buffers remain well above regulatory requirements.
- Stress tests indicate banks can withstand a deep recession scenario.
- Strong preparation and active counter-measures have contained impacts from a steep increase in cyber-attacks targeted at financial institutions.
Remaining vulnerabilities:
- Large and highly interconnected banks with significant direct lending, in particular to the real estate sector in other Nordic countries.
- Liquidity risks due to a high reliance on short-term wholesale funding.
- High household indebtedness and elevated debt service burdens.
Policy actions and recommendations:
- Staff welcome Finland’s initiative to lead discussions with neighbors to undertake a joint Nordic-Baltic banking sector stress test.
- Reinstatement of the systemic risk buffer (SyRB) on credit institutions at 1 percent in 2024 has enhanced resilience.
- Introduce a positive neutral rate for the Counter-Cyclical Capital Buffer and a full set of borrower-based measures to allow release of capital in periods of extreme stress.
- Enhance bank liquidity buffers to cover a predetermined threshold of wholesale funding outflows over a five-day horizon and hold a higher stock of high-quality liquid assets.
- Continue progress in implementing the 2022 Financial Sector Assessment Program recommendations, including in crisis management and non-bank financial institutions.

Downside risks (mostly external):
- An escalation of Russia’s war in Ukraine.
- Adverse shocks in other Nordic countries, including in the commercial real estate markets.
- Deepening geoeconomic fragmentation.
- Further tightening of global financial conditions.
Upside domestic risks:
- Higher investment and innovation from the green transition.
- Further expansion of the ICT sector.
- Stronger employment growth associated with the government’s recent reforms.

Source: Staff Concluding Statement of the 2025 Article IV Mission, November 8, 2024.