## IMF Executive Board Concludes 2024 Article IV Consultation with Finland

_IMF News, March 11, 2024_

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## Bibliographic details
- Published: March 11, 2024

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### Overview
- On March 7, 2024 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Finland and endorsed the staff appraisal without a meeting.
- Finland’s economy recovered swiftly from the pandemic, but growth slowed after Russia’s war in Ukraine.
- Activity is estimated to have contracted by 0.5 percent in 2023.
- Inflation has fallen to more normal levels and financial conditions appear to be easing.
- Structural challenges: adverse demographics and weak productivity have resulted in low trend growth, weighing on public finances.
- Key downside risks: a resurgence of the energy crisis; an escalation of the war in Ukraine; further tightening of global financial conditions; possibility of a deeper “balance sheet recession.”

### Economic Outlook and Projections
- A shallow recovery is expected in 2024 as inflation pressure continues to ease and a modest recovery in real earnings supports consumption.
- Growth projections:
  - GDP contraction of 0.5 percent in 2023 (estimated).
  - Economic growth expected to be around ½ percent in 2024.
  - Growth projected to rebound to around 1½ percent in the medium term.
- Inflation:
  - Average inflation expected to remain below 2 percent in 2024 due to negative base effects and a growing output gap.
- External position:
  - The external position in 2023 is assessed to be moderately weaker than implied by fundamentals and desirable policy settings.

### Executive Board Assessment (summary)
- Finland’s growth has stalled; a modest recovery is expected this year.
- Elevated interest rates, sluggish trading partner growth, and a declining housing market are weighing on activity.
- Unemployment is expected to increase slightly, particularly as the construction industry cuts back on employment.
- Improvement in household purchasing power and loosening financial conditions will contribute to a modest recovery in the second half of the year.
- Medium-term growth is expected to be driven by increases in investment and employment resulting from labor market reforms.

### Fiscal Assessment and Policy Recommendations
- Fiscal outcomes and risks:
  - Increased expenditure in energy-related compensation, defense, high index-linked increases in social benefits, and support for Wellbeing Service Counties is expected to have increased the deficit to 2.5 percent of GDP in 2023.
  - Debt ratio has climbed to 76 percent, surpassing those of other Nordic countries.
  - The worsened fiscal outlook is expected to persist, putting public debt on a risky path over the medium term.
- Government plans and assessment:
  - The new government plans to adjust medium-term fiscal deficit by 2 percent of GDP through spending cuts and employment-driven fiscal gains, targeting overall fiscal deficit of 1 percent of GDP by 2027.
  - Staff assessment: existing measures fall short; consolidation will likely be diluted by new spending pressures and expected revenue shortfalls.
- Recommended fiscal strategy:
  - Begin a structural adjustment of around ¼ percent of GDP in 2024, growing to ½ percent per year over the medium term.
  - Aim to balance the budget by 2028.
  - Further spending cuts required, including efficiency gains from the Wellbeing Service Counties.
  - Supplement spending restraint with revenue measures such as excise tax indexation, expansion of carbon taxation, VAT rate standardization, and revising dividend taxation for non-listed companies.

### Employment, Productivity, and Structural Reforms
- Enhancing employment and productivity is essential for economic growth.
- Support for government measures:
  - Boost employment through social benefit reforms, greater labor market flexibility, and lowering the labor tax wedge.
  - Establish robust systems to closely monitor the impact of these reforms on employment.
  - Improve higher education, lower skill mismatches, and more effectively attract and integrate international talent.
  - Focus research and development investment on catalyzing private sector funding.

### Climate Goals
- Progress noted on expanding the production of low-emission energy, but further action is needed to achieve the 2035 carbon neutral target.
- Policy suggestions:
  - Consider strengthening carbon pricing.
  - Increase the role of carbon-sinks in the land use sector.

### Financial System Resilience and Macroprudential Policy
- Financial system status:
  - Banks have sufficient capital to withstand adverse macroeconomic shocks, including geoeconomic fragmentation and weakening of profits and capital ratios.
  - Banks’ high dependence on short-term wholesale funding makes them susceptible to liquidity shocks.
  - Banks are exposed to systemic events in the Nordic region, CRE market volatility, falling house prices, and still high household indebtedness.
- Recommendations:
  - Tighten liquidity regulation.
  - Continue continuous and close monitoring of systemic risks.
  - Further tighten macroprudential policy to target pockets of vulnerability and increase financial system resilience.
  - Legislate a positive neutral rate on the CCyB.
  - Enhance the systemic risk monitoring framework.
  - Add debt-to-income and debt-service-to-income limits to the macroprudential toolkit; these measures could be activated when concerns regarding adverse effects on demand and house prices subside.
- Staff welcomed recent tightening including reinstatement of systemic risk buffer to the pre-pandemic level.

### Key Statistics and Projections (2021–29)
- GDP growth (percentage change):
  - 2021: 2.8
  - 2022: 1.6
  - 2023: -0.5
  - 2024 (Proj.): 0.4
  - 2025 (Proj.): 1.9
  - 2026 (Proj.): 1.7
  - 2027 (Proj.): 1.5
- Domestic demand (percentage change):
  - 2021: 3.0
  - 2022: -3.0
  - 2023: 1.1
- Private consumption (percentage change):
  - 2021: 3.2
  - 2022: -0.8
  - 2023: 0.5
  - 2024 (Proj.): 1.3
  - 2025 (Proj.): 1.2
- Gross fixed capital formation:
  - 2021: 1.0
  - 2022: 3.1
  - 2023: -5.7
  - 2024 (Proj.): 2.0
  - 2025 (Proj.): 4.4
  - 2026 (Proj.): 3.4
  - 2027 (Proj.): 2.4
- Net exports (contribution to growth in percent of GDP):
  - 2021: 0.0
  - 2022: -2.0
  - 2023: 2.6
  - 2024 (Proj.): -0.7
  - 2025 (Proj.): -0.1
- Consumer price inflation (harmonized, average):
  - 2021: 2.1
  - 2022: 7.2
  - 2023: 4.3
- Consumer price inflation (harmonized, end-year):
  - 2022: 8.8
- Labor market:
  - Participation Rate (15-74 years):
    - 2021: 67.0
    - 2022: 68.0
    - 2023: 68.8
    - 2024 (Proj.): 69.3
    - 2025 (Proj.): 69.8
    - 2026 (Proj.): 70.2
    - 2027 (Proj.): 70.7
    - 2028 (Proj.): 71.2
    - 2029 (Proj.): 71.7
  - Employment:
    - 2021: 0.1
    - 2022: 0.6
  - Unemployment rate (in percent):
    - 2021: 7.6
    - 2022: 6.8
    - 2023: 7.4
    - 2024 (Proj.): 7.3
    - 2025 (Proj.): 7.1
- Potential output and output gap:
  - Output gap (in percent of potential output)1:
    - 2021: -1.0
    - 2022: -0.4
    - 2023: -1.9
    - 2024 (Proj.): -2.4
    - 2025 (Proj.): -1.7
    - 2026 (Proj.): -0.9
    - 2027 (Proj.): -0.2
- General Government Finances (Percent of GDP)2:
  - Overall balance:
    - 2021: -2.8
    - 2022: -2.5
    - 2023: -3.5
    - 2024 (Proj.): -3.4
    - 2025 (Proj.): -2.7
    - 2026 (Proj.): -2.2
    - 2027 (Proj.): -2.3
  - Primary balance3:
    - 2021: -2.9
    - 2022: -2.6
    - 2023: -3.2
    - 2024 (Proj.): -3.1
  - Structural balance (in percent of potential GDP)4:
    - 2021: -1.6
    - 2022: -2.1
  - Structural primary balance (in percent of potential GDP)5:
    - 2021: -1.5
    - 2022: -1.8
  - Gross debt:
    - 2021: 72.6
    - 2022: 73.3
    - 2023: 76.3
    - 2024 (Proj.): 79.6
    - 2025 (Proj.): 82.2
    - 2026 (Proj.): 84.0
    - 2027 (Proj.): 85.1
    - 2028 (Proj.): 85.6
    - 2029 (Proj.): 86.2
  - Net debt6:
    - 2021: -72.9
    - 2022: -59.3
    - 2023: -54.5
    - 2024 (Proj.): -49.6
    - 2025 (Proj.): -44.3
    - 2026 (Proj.): -39.6
    - 2027 (Proj.): -35.5
    - 2028 (Proj.): -32.0
    - 2029 (Proj.): -28.6
- Balance of Payments:
  - Gross external debt:
    - 2021: 208.6
    - 2022: 215.4
    - 2023: 216.1
    - 2024 (Proj.): 218.0
    - 2025 (Proj.): 216.5
    - 2026 (Proj.): 215.3
    - 2027 (Proj.): 213.9
    - 2028 (Proj.): 212.6
    - 2029 (Proj.): 211.4

*IMF Communications Department, Press Release No. 24/75, March 11, 2024. Executive Board concluded Article IV consultation on March 7, 2024.*

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## References

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_Source: https://www.imf.org/en/news/articles/2024/03/07/pr-2475-finland-imf-executive-board-concludes-2024-article-iv-consultation_