On January 15, the Executive Board of the International Monetary Fund (IMF) completed its Article IV consultation with Finland. The Finnish economy is showing signs of recovery from the recession in 2023, aided by easing inflation and real wage growth. However, challenges remain due to stagnant construction investment and weak external demand. Employment remains strong, supported by lower real wages, increased immigration, higher public employment, and rising participation rates.
The economy is expected to have contracted by 0.3 percent in 2024 but is projected to rebound to around 1.5 percent in 2025 as private investment and consumption recover alongside easing interest rates and stabilizing house prices. External demand is anticipated to improve slightly but will be countered by stronger imports. Risks are predominantly on the downside, with regional conflicts and geopolitical fragmentation posing significant threats. Structural issues such as adverse demographics and low productivity growth continue to impact the medium-term outlook.
The IMF Executive Board acknowledged Finland's growing economic momentum post-2023 recession but noted that structural challenges persist, particularly regarding low productivity growth and an aging population. "Directors welcomed Finland’s strengthening growth momentum following the 2023 recession and the decline in inflation," they stated. They emphasized the importance of fiscal sustainability and financial stability while implementing reforms aimed at boosting potential growth.
"Directors commended the authorities’ ongoing fiscal efforts," noting that further consolidation is necessary to reverse public debt dynamics amid pressures from defense spending and aging-related expenses. They agreed that adjustments should include both spending cuts and revenue measures while safeguarding investments in productivity-enhancing areas like education and research.
The resilience of Finland's banking system was praised, though vulnerabilities remain due to high reliance on wholesale funding, household indebtedness, and cross-border risks. "They welcomed the reinstatement of the systemic risk buffer," suggesting enhancements to macroprudential tools.
In terms of structural reforms essential for enhancing potential growth, Directors appreciated recent labor market changes but urged further efforts to increase labor force participation rates and address skill mismatches. Measures to improve productivity through better access to risk capital were also encouraged.
Finland's initiative in conducting joint Nordic-Baltic banking sector stress tests was recognized positively, with continued monitoring recommended for financial stability risks related to non-bank financial institutions.