Following a deep recession in 2020 and further contraction in 2021Q1, the euro area economy recovered rapidly in the second and third quarters thanks to high vaccination levels, increasing household and business adaptability to the virus, and continued forceful policy support. Looking ahead, while supply chain disruptions, elevated energy prices, and resurgences of Covid-19 cases—including those related to the Omicron variant—are likely to pose near-term headwinds to growth, the recovery is set to continue in 2022 as the impact of the pandemic on economic activity continues to weaken over time and supply-side constraints ease. Medium-term output losses relative to pre-crisis trends will vary significantly across countries and sectors as will the extent of labor market scarring. Price pressures are building up as production bottlenecks are set to persist for a while. However, inflation—despite increasing significantly in recent months due to transitory factors—is projected to moderate during 2022 and remain below the ECB’s inflation target over the medium term. Uncertainty surrounding the outlook remains high and largely related to pandemic dynamics and legacies, including induced behavioral and preference changes.
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.
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.
On behalf of the Finnish authorities, we thank the mission team led by Wojciech Maliszewski for the candid and constructive discussions and the well-balanced Article IV Report. The mission was conducted under exceptional pandemic circumstances and took place both virtually and in person. The authorities highly appreciate staff’s views on economic context, outlook, risks, and policy priorities, which contribute to the policy debate in Finland. The authorities agree with the thrust of staff’s appraisal and agree that further efforts are required to combat medium and long-term challenges.