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International Monetary Fund. European Dept.
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.
Pavol Jurca, Ján Klacso, Eugen Tereanu, Marco Forletta, and Mr. Marco Gross
We develop a semi-structural quantitative framework that combines micro and macroeconomic data to assess the effectiveness of combinations of borrower-based macroprudential measures in Slovakia. We expand on the integrated dynamic household balance sheet model of Gross and Población (2017) by introducing an endogenous loan granting feature, in turn to quantify the potential (ex-ante) impact of macroprudential measures on resilience parameters, compared with a counterfactual no-policy scenario, under adverse macroeconomic conditions. We conclude that (1) borrower-based measures can noticeably improve household and bank resilience to macroeconomic downturns, in particular when multiple measures are applied; (2) those measures tend to complement each other, as the impact of individual instruments is transmitted via different channels; and (3) the resilience benefits are more sizeable if the measures effectively limit the accumulation of risks before an economic downturn occurs, suggesting that an early, preemptive implementation of borrower-based measures is indeed warranted.
International Monetary Fund. European Dept.
This 2019 Article IV Consultation highlights that Finland’s economy has performed well over the past three years, however, has slowed in 2019. There are some vulnerabilities in household finances, and productivity growth remains weak, with trend growth also constrained by adverse demographics. A new coalition government targets greater social support and inclusion, higher employment, carbon neutrality by 2035, and a balanced budget by 2023. A key challenge is to balance plans to increase spending with the need to maintain fiscal buffers. The fiscal expansion is expected to provide useful cyclical support in the short run, but offsetting measures will be required to ensure the structural balance reaches the government’s medium-term target. The government aims for a substantial increase in employment, but the effectiveness of the proposed wage subsidies is unclear. Alternatively, incentives from tax and benefit schedules could be improved, especially for younger women, older workers, and those out of the workforce. Risks in the banking system remain low overall, but some types of lending are increasing household vulnerabilities. The recent recommendation to limit the ratio of household debt to income is both sensible and in line with steps taken in many other countries.
International Monetary Fund. European Dept.
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.
International Monetary Fund. European Dept.
This Selected Issues paper reviews the relationship between real GDP growth and domestic bank lending to the private sector in Hungary after the global financial crisis, It draws on a cross-country analysis of European countries. The recessions that followed the crisis were deeper and lasted longer than the average recession. Hungary, like some other countries, experienced a creditless recovery. Although it is difficult to disentangle the causes, this analysis concludes that (1) both credit demand and supply were hurt by the crisis; (2) key factors influencing credit developments include loan quality, deposit funding, and bank capital, as well as the macroeconomic environment; and (3) lending by Hungarian banks to the private sector finally seems to be picking up.
International Monetary Fund. Monetary and Capital Markets Department
This Technical Note discusses the findings and recommendations made in the Financial Sector Assessment Program (FSAP) for Finland in the area of banking supervision. The regulatory and supervisory framework for liquidity and funding risk has improved since the last FSAP, but certain vulnerabilities persist and require greater attention. Finnish banks continue to rely extensively on wholesale funding, as noted in the 2010 FSAP. Although supervisory action has managed to mitigate the problem, many banks remain heavily exposed to the risk of a dry-up of unsecured wholesale funding. Also, banks hold covered bonds issued by other banks as part of their liquidity buffer.
International Monetary Fund. Monetary and Capital Markets Department
This Technical Note discusses the findings and recommendations made in the Financial Sector Assessment Program for Finland in the area of macroprudential policy framework. The Finnish authorities regularly coordinate and collaborate with international bodies on macroprudential policy. Several macroprudential instruments were formally introduced in the legislation and activated recently. The 2014 Act on Credit Institutions implements macroprudential instruments, including those set out in the European Capital Requirement Directive. Despite the important progress made, there are some improvements that should be considered. The macroprudential policy toolkit should be expanded. The systemic risk buffer should be added to the toolkit, although its activation and level may still need further analysis.
International Monetary Fund. European Dept.
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.