BANK OF FINLAND
Press release number 44
9 Dec 2004

Euro & talous 4/2004: Finnish economic growth remains satisfactory

Growth of the world economy is expected to continue at a respectable pace. This is the outlook presented in the recent issue of the Euro & talous.

World economic growth, after picking up a year ago, has now levelled off. Developments have varied a great deal across geographic regions. Growth in the United States, China, Russia and some other countries has been robust, while the euro area and Japanese economies slowed down during the summer and autumn months. One obstacle to strong growth has been the rise in the price of oil. On the other hand, the jump in oil prices is a reflection of the sustained robust growth of the Chinese and some other economies.

The latest forecasts by international organisations suggest that world economic growth will continue at a fairly good pace in 2005. However, for the year as a whole, growth is likely to be weaker than in 2004.

The rise in the price of oil has spurred inflation in the euro area, which is projected to remain above 2% pa in the coming months. Nonetheless, inflation expectations, measured on the basis of indexed-bond yields, have not picked up significantly. Stable inflation expectations, a moderated outlook for growth, and euro appreciation are gradually finding expression in a lower level of long-term interest rates in the euro area. Nonetheless, the factors that could jeopardise price stability over the medium term have not gone away.

The growth of euro area exports has slowed during the second half of 2004, nor has this been counterbalanced by domestic demand. Real GDP growth has decelerated. The strengthening of the euro is one of the growth-dampening factors - albeit, from a historical perspective, euro area competitiveness is still nearly at the average level of the 1990s. Euro area growth cannot rely solely on exports. Looking ahead, growth prospects will depend in large part on how effectively growth-oriented policy (Lisbon strategy) is realised. A key factor will be the policy actions aimed at improving the productivity of that part of the economy that is shielded from foreign competition.

Finnish GDP growth has accelerated in the course of 2004 and could just top 3% for the year. However, Finland has not experienced a traditional upswing, since export performance has been lacklustre. This has been the case despite robust demand growth in the country's export markets – excluding the euro area. Moreover, price developments for many of Finland's export products have remained weak.

The new Euro & talous issue includes four articles in addition to that on monetary policy. Harri Hasko examines the European Commission's proposal to strengthen the Stability and Growth Pact. Tapio Korhonen discusses the increasing risks associated with burgeoning debts and abundant liquidity. Tuuli Koivu considers whether China's rapid growth will continue, and Kari Korhonen examines the current situation and outlook for securities settlement.