Finland: 2024 Article IV Consultation-Press Release; and Staff Report

IMF Staff Country Reports, March 11, 2024

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Finland’s economy recovered swiftly from the pandemic, but growth slowed after Russia’s war in Ukraine.
Activity stalled with a contraction of 0.5 percent estimated in 2023.
Inflation has fallen to levels that are more normal and financial conditions appear to be easing.
Structurally, adverse demographics and weak productivity have resulted in low trend growth, weighing on public finances.

2023: contraction of 0.5 percent.
Recent developments: weaker household income growth, falling house prices, higher interest rates, and low growth in Europe have contributed to stalled activity.
Inflation: described as having fallen to levels that are more normal.
Financial conditions: appear to be easing.

Adverse demographics.
Weak productivity.
Low trend growth, with negative implications for public finances.
Enhancing employment and productivity identified as essential for improving economic growth prospects.

Support for government efforts to boost employment through:
- Social benefit reforms.
- Greater flexibility in the labor market.
- Lowering the labor tax wedge.
Emphasis on measures to enhance employment and productivity as central to restoring stronger growth and fiscal sustainability.

Financial system: remains resilient, but rising systemic risks warrant vigilant monitoring.
Banks: have sufficient capital to withstand adverse macroeconomic shocks, including geo-economics fragmentation and weakening of profits and capital ratios.
Macroprudential toolkit recommendation:
- Add debt-to-income and debt-service-to-income limits to prevent excessive household indebtedness and improve borrowers’ repayment capacity.
- These measures could be activated when concerns regarding adverse effects on demand and house prices subside.

Immediate concern: stalled activity and a 0.5 percent contraction in 2023 driven by weak incomes, housing market weakness, higher interest rates, and weak external demand.
Medium-term challenge: low trend growth due to demographics and productivity, stressing public finances.
Policy priority: raise employment and productivity via labor-market reforms, social benefit changes, and lower labor tax wedge.
Financial stability: system resilient but requires monitoring; add borrower-based macroprudential limits to the toolkit for use once near-term demand and house-price concerns ease.

Finland: 2024 Article IV Consultation-Press Release; and Staff Report