Finland: 2024 Article IV Consultation-Press Release; and Staff Report

The 2024 Article IV Consultation highlights that Finland’s economy recovered swiftly from the pandemic, but growth slowed after Russia’s war in Ukraine. Weak household income growth, falling house prices, higher interest rates, and low growth in Europe has caused activity to stall in Finland, with a contraction of 0.5 percent estimated in 2023. However, inflation has fallen to levels that are more normal and financial conditions appear to be easing. Structurally, adverse demographics and weak productivity have resulted in low trend growth, weighing on public finances. Enhancing employment and productivity are essential for economic growth. The mission supports the government's efforts to boost employment through social benefit reforms, greater flexibility in the labor market, and lowering the labor tax wedge. The financial system remains resilient, but rising systemic risks warrant vigilant monitoring. Banks have sufficient capital to withstand adverse macroeconomic shocks, including geo-economics fragmentation and weakening of profits and capital ratios. Additionally, debt-to-income and debt-service-to-income limits should be added to the macroprudential policy toolkit in order to prevent excessive household indebtedness and improve borrower’s repayment capacity. These measures could be activated when concerns regarding adverse effects on demand and house prices subside.