Eastern European Markets

March, the 26th 2010

Bank of Finland forecast for 2010-2012:
Finland's economy will fade if the foundations of growth are not strengthened

The global economy has begun to recover from its most severe peace time crisis. 'Monetary and fiscal policies have been exceptionally supportive of economic growth and the financial markets,' said Governor Erkki Liikanen at the press conference marking the release of the Bank of Finland's latest forecast.

Global growth is expected to recover further in the immediate years ahead, but to remain slower than we have become accustomed to and geographically uneven. The financial sector's need to strengthen balance sheets will subdue lending, and this could lead to slower-than-forecast growth. Monetary and fiscal policymakers have already begun a step-by-step withdrawal of the reflationary support measures applied during the recession.

According to Governor Liikanen: 'Finland's real GDP has stopped contracting. GDP growth will, however, be much slower in the immediate years ahead than it was before the financial crisis. Real GDP will not reach the level of 2008 even by the end of the forecast period in 2012.' Finnish exports will lag behind developments in the export markets. Private consumption growth will continue to be sluggish, and investment will become a motor of growth only towards the end of the forecast period.

In these conditions, inflation is not forecast to be a problem for the economy. 'However, this will not correct the effects of previous excesses in price and cost trends, and the loss of competitiveness will remain a burden on the economy,' Governor Liikanen pointed out.

In 2008-2009, industrial output and employment in Finland declined rapidly and the GDP share of services correspondingly grew. The structural realignment of Finnish output combined with an ageing population will inhibit the pace of productivity growth. The decline in manufacturing output will push the current account into deficit in the forecast period, and, as a result, the net foreign debt position of Finland will start to deteriorate.

Unemployment has risen less than expected, due to a contraction in labour supply. This is partly on account of an acceleration in the rate of retirement. 'The slow recovery in growth is not expected to reduce unemployment from around 9%,' said Governor Liikanen.

Central government finances are in a difficult position, and, in terms of economic policy, this is a critical period. Securing the sustainability of the public finances will be a demanding task, but uncertainty over the direction of the economy and of solutions and delays in decision-making will undermine the shoots of growth. 'Finland's economy will fade if the foundations of growth are not strengthened, the price competitiveness of Finnish output sustained and the sustainability of the public finances secured. Work is required to accelerate the pace of productivity growth and secure the funding base for the public services,' Governor Liikanen stressed.

Getting the public finances back on to a sustainable footing will be very difficult without extending the number of years people spend in working life and achieving an improvement in productivity in basic public services. In such a case, cutting the accumulation of debt would require substantial tax increases and spending cuts.

If the competitiveness of the economy is not secured, this will further undermine the ability of Finnish companies to retain market share. 'Maintaining the competitiveness of Finnish output would require a labour market practice under which a general wage anchor would stabilise the overall development of the economy but at the same time provide a flexible framework for agreements at local level,' said Governor Liikanen.

Changes to the structure of taxation could also support the sustainability of the public finances and the possibilities for economic growth. Taxation should be used to encourage activities that help increase employment and generate new employment opportunities.

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