Finland’s general government revenue and expenditure are chronically out of balance. Population ageing is adding to health and social services spending and at the same time public debt service payments are growing. A fiscal correction will require significant spending cuts and tax increases in future parliamentary terms. The Bank of Finland estimates that the sustainability gap is about 4% of GDP.
Climate change is forcing the economy to transit towards a more sustainable future. Transition risks are related to the process of adjustment to a low-carbon economy. Granular data are needed to analyse the transition risks.
Finland’s cost competitiveness has strengthened in recent years, but it has yet to fully recover to the level attained before the financial crisis. Improving cost competitiveness is especially important now, when companies are searching for new markets to replace lost trade with Russia.
Over recent decades, Finnish households have constantly accumulated debt in relation to their income. The household DTI ratio is projected to stabilise in the immediate years ahead as the growth in the housing loan stock abates.
Manufacturing industries, in particular, are suffering from supply chain problems and rising costs. The results of a business survey show that the majority of companies believe they can replace the lost volume of exports to Russia with new markets.
Housing loans are larger and of longer duration than previously. Borrowers should not take on too much debt, so that a rise in interest rates or everyday expenditure will not squeeze their finances too tightly.
If prolonged, the war can weaken the profitability of the corporate sector. It will be harder for companies to service their debts, if energy continues to be expensive and their products and services do not earn as much as before.
The rapid rise in house prices has increased the risks on the housing markets of the other Nordic countries. The risks from Sweden’s housing market and growing household debt can very easily spread to Finland.
In order to prevent crises, authorities should have a more flexible range of means at their disposal to strengthen banks’ risk resilience and contain excessive growth in credit and household indebtedness.
The IMF’s new comprehensive Climate Strategy is a clear signal that the IMF intends to meet the challenge of climate change. The new Climate Strategy emphasizes the significant impacts that climate risks, climate policy actions as well as adaptation and transition needs will have on macroeconomic stability and envisions integrating climate change into most surveillance and capacity development activities.
The sustainability gap estimate tells us by how much the general government fiscal balance needs to be permanently adjusted so that public debt does not grow out of control in the future. The updated estimate is 3.5% relative to GDP.
During the COVID crisis, the Eurosystem has purchased securities on the markets and granted banks loans on favourable terms. These measures have helped avoid a deep recession and deflation in the euro area.
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