## Finland: Staff Concluding Statement of the 2018 Article IV Mission

_IMF News, November 6, 2018_

## Source details

**Canonical URL:** [Finland: Staff Concluding Statement of the 2018 Article IV Mission](https://www.imf.org/en/news/articles/2018/11/06/finland-staff-concluding-statement-of-the-2018-article-iv-mission)

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## Bibliographic details
- Published: November 6, 2018

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### Economic Situation and Outlook
- Finland is enjoying its third consecutive year of economic recovery; strong growth continued into 2018.
- Employment and labor market:
  - The employment rate has picked up sharply and the unemployment rate has declined to its lowest level since 2011.
  - Wages have started to recover, but inflation remains low.
- External and fiscal balances:
  - A pick-up in exports has improved external balances.
  - Stronger tax revenues and lower spending, including on unemployment benefits, have improved fiscal balances.
- Growth projections and risks:
  - Growth in 2018 is expected to be 2.8 percent.
  - Growth is expected to be 1.9 percent in 2019 as global demand slows and financial conditions tighten.
  - There are downside risks from the global environment, notably increased protectionism and higher bank funding costs.
- Long-term potential:
  - The labor force is expected to decline as the working age population shrinks.
  - Without a permanent increase in the rate of productivity growth, long-run potential growth is likely to be constrained to around 1¼ percent.

### Structural reforms
- Recent 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 the potential to boost employment and labor flexibility.
- Remaining challenges:
  - 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.
  - Productivity growth is still below pre-crisis rates.
- Policy focus and recommendations:
  - Increase labor market dynamism while maintaining a strong safety net.
  - Promote higher rates of job-to-job movements to transfer skills and best practices across firms.
  - Enhance the ability to differentiate wages at the firm level, consistent with the spirit of the 2016 Competitiveness Pact.
  - Taper benefits to gradually fall with their duration to increase job search soon after losing employment and reduce risks of losing skills and long-term unemployment.
  - Foster regional labor mobility by alleviating housing bottlenecks and improving transport infrastructure in and around fast-growing regions to facilitate commuting.

### Fiscal Policy
- Fiscal position and risks:
  - Public debt has been falling during the past three years, but remains above its pre-crisis level.
  - Contingent liabilities are relatively large.
  - The Finnish economy is highly exposed to trade and financial shocks, with potential for large demands on fiscal resources in times of stress.
  - Demands for public services—especially for healthcare—are expected to increase considerably as the population ages.
- 2019 budget assessment:
  - The 2019 budget implies a moderate tightening of fiscal policy.
  - It provides for some new expenditure measures to boost employment, R&D, and education, but the deficit will nonetheless shrink because of the effects of previously-agreed measures.
  - At this stage of the business cycle, the budget implies a moderate fiscal contraction in structural terms.
- Policy recommendations:
  - Continued steady deficit reduction is appropriate to boost fiscal buffers.
  - Revenues are already quite high in terms of GDP, implying limits to debt reduction from raising taxes and/or social security contributions.
  - Public investment has been maintained at relatively high levels compared to other countries; consider the level of R&D spending and transport needs.
  - Direct more effort toward raising the effectiveness of public spending alongside policies to boost potential growth.
  - The planned health and social services reform targets substantial savings from efficiency gains which, if realized, would substantially contribute toward closing the fiscal sustainability gap and restoring fiscal buffers; however, savings are uncertain and depend crucially on implementation by the new counties that will organize public healthcare and social services.

### Financial Policies
- Banking sector soundness and challenges:
  - Immediate financial stability risks appear limited: the level of non-performing loans is low, and bank capital exceeds required levels by a clear margin.
  - The system is highly concentrated, interconnected with financial sectors of other Nordic countries, and reliant on wholesale funding.
  - The size of the banking sector has increased substantially with the recent redomicile of Nordea to Finland.
- Household vulnerabilities and macroprudential policy:
  - Household debt has been rising, with increased leverage and a high share of floating rate loans making some households more vulnerable to interest rate hikes.
  - Growth in consumer credit raises questions about borrower information, especially for loans from non-bank lenders.
  - Recommendation to expand the macroprudential toolkit to debt-based instruments, such as debt-to-income and debt-service-to-income ratios, to limit household leverage.
  - Authorities need more data, such as from a positive credit registry, to properly assess vulnerabilities and set these tools.
  - Rapid growth of lending through digital platforms motivates additional data collection.
  - Consider extra consumer protection measures covering loans from non-banks in addition to banks.
- Nordea redomicile and regional cooperation:
  - Nordea’s redomicile to Finland increases demands on supervision and heightens the importance of continued close regional cooperation and preparedness for crises.
  - Nordea is now supervised by the Single Supervisory Mechanism; resources of the ECB and the Finnish financial supervisory authority have been increased.
  - The ECB and Nordic supervisors have committed to continuing close regional cooperation.
  - The ECB and Finnish authorities have set capital requirements to ensure Nordea would have the same level of capital as before its redomicile.
  - Work continues at the European level to fully implement the framework for resolving banks in distress, particularly important for a large and complex bank such as Nordea.

*Mission Concluding Statement — November 6, 2018. IMF Communications Department.*

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## References

- [Finland and the IMF](http://www.imf.org/external/country/FIN/index.htm)
- [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)
- [Mission Concluding Statements](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2018/11/06/finland-staff-concluding-statement-of-the-2018-article-iv-mission_