This 2016 Article IV Consultation highlights that the growth in Finland has turned tepidly positive again following a deep recession. GDP increased by 0.2 percent in 2015 driven by stronger private consumption and a rebound in investment. Although net export growth was weak, falling oil prices contributed to the nominal trade balance shifting into surplus, reducing the current account deficit. Better-than-expected fiscal performance brought the deficit back under the 3 percent Stability and Growth Pact limit in 2015. The recovery is likely to continue, but growth is set to remain slow at about 0.9 percent in 2016 and 1.1 percent in 2017. This outlook is subject to downside risks.
The economy recovered swiftly from the pandemic, but Russia’s war in Ukraine has worsened the outlook given Finland’s exposures to the fallout through trade and increase in energy prices, while high inflation and rising interest rates are weighing on household purchasing power. Long-standing structural challenges—from adverse demographics and low productivity growth—remain. Tighter financial conditions will test the resilience of Finland’s large financial system: banks are well-capitalized, but vulnerable to liquidity shocks and exposed to credit risks from other Nordics and high household debt.
This 2015 Article IV Consultation highlights that Finland’s exports have suffered owing to the declines of Nokia and the paper industry, compounded by weak external demand, especially from the euro area and Russia. The current account and fiscal balances have deteriorated, with the 2014 fiscal deficit breaching the Stability and Growth Pact’s 3 percent of GDP criterion. A modest recovery is projected to begin in 2015 and gradually strengthen in 2016. However, in absence of further reforms, growth is likely to remain much lower than pre-crisis. Weaker-than-expected growth in key trade partners would be a drag on exports, and spillovers from an external financial shock would create tighter financial conditions, with negative effects on output.
Recent growth has been healthy, and the unemployment rate has fallen to its lowest level since 2011. However, some underlying weaknesses remain. The rate in which new jobs are created and the “churn” of workers relocating across jobs has not picked up with the recovery, labor productivity growth remains weak, and the outlook for potential growth is constrained by a shrinking workforce. Household debt has been increasing as the economy has recovered, and some borrowers appear vulnerable to interest rate increases.
With strong policy support, Finland suffered a relatively mild economic contraction in 2020 followed by a swift recovery in 2021. Medium-term growth prospects are less strong, due to adverse demographics and low productivity growth—trends that precede the pandemic. Public debt has increased due to pandemic-related support and will remain on a rising trajectory in the medium term, largely reflecting permanent spending increases.
This 2007 Article IV Consultation highlights that growth in Finland has outpaced the euro area average. Inflation is among the lowest in the European Union, and the external current account and general government budget are both comfortably in surplus. The labor market has improved markedly since 2005, with rising participation rates and comparatively strong employment growth. The unemployment rate has dipped below the euro area average, and hovers near estimates of the structural unemployment rate.
Finland’s 2008 Article IV Consultation shows that spillovers from the global turmoil are adversely affecting activity and may weaken the financial system. From a cyclical perspective, a fiscal structural loosening is warranted. Its effectiveness in Finland’s small, open economy would be limited in the absence of an EU-wide fiscal package. The authorities have been confident that an EU-coordinated budget expansion is in the works. There has been agreement that loosening should be designed to minimize damage to long-term fiscal sustainability.
Owing to the high dependence of its exports on countries and commodities, Finland experienced the worst recession in the euro area. Executive Directors encouraged authorities to focus on improving bank cost efficiency, preventing excessive risk taking, and limiting liquidity and funding risks. Directors welcomed the establishment of the Nordic-Baltic Stability Group, and stressed the need to strengthen the effectiveness of cross-border supervision and crisis management arrangements. Directors welcomed structural reforms and also emphasized the need of a strong fiscal consolidation to secure fiscal sustainability.
1. The pandemic interrupted a protracted recovery from a sequence of shocks in the late 2000s. Labor productivity growth in Finland has been low, partly because the relatively rigid labor market (IMF 2018) and inefficient matching (IMF 2020) hindered reallocation of resources. Finland’s population has also been rapidly ageing, weighing on growth and public finances.