The outlook for the Finnish economy has deteriorated again. Sovereign debt problems and related uncertainty over the state of the financial system are weakening both foreign and domestic demand. ‘Developments in recent months have made it clearer than before that economic growth will at best be sluggish in the immediate years ahead,’ said Governor Erkki Liikanen at the press conference for the release of the latest issue of the journal Euro & talous.
GDP is forecast to grow 2.8% in 2011, but only 0.4% in 2012. For 2013, growth of 1.8% is expected. ‘The forecast is based on the assumption that the euro area debt crisis will not get any worse and the slowdown in growth in both the euro area and the global economy will be relatively short-lived. This assumption contains a clear downside risk for the forecast,’ stressed Governor Liikanen.
Export growth has been weak, due to the capital-goods-weighted structure of Finnish exports and a contraction in the export of services. The trade account has entered deficit, and the current account is forecast to only just remain in surplus. The strong increase in economic uncertainty will postpone investment projects in Finland, as elsewhere, and investment growth will peter out. Household consumption will grow much more slowly, with sluggish growth in real incomes and a weak trend on the employment front.
‘The deteriorating economic outlook puts Finland’s public finances in a different light,’ said Governor Liikanen. To bring the public finances onto a sustainable footing will require substantial measures in addition to the decisions already announced by the Government. The objective of reversing the upward trend in the central government debt ratio will require contraction of the central government deficit relative to GDP by 2½ percentage points. Due to the ageing population, ensuring the long-term sustainability of the public finances will require even more substantial measures.
In contrast to many other countries in Europe, Finland still has the possibility to bring its public finances onto a sustainable path through controlled, carefully planned measures. Particularly useful would be action to prolong working careers and reforms to boost labour productivity in basic public services. ‘If these steps are not taken in time, we could end up in a situation where we are forced to rapidly reduce the general government deficit at a time when economic growth is weakening,’ warned Governor Liikanen.
Inflation has accelerated in 2011 to an estimated 3.4%. Consumer price rises have been driven by higher world market prices for energy and other commodities plus changes in indirect taxation. Inflation is forecast to slow to 2.5% in 2012 and 1.7% in 2013.
The deteriorating economic outlook also has implications for employment. If unemployment were to increase, this would have long-lasting effects, with the skills of the unemployed progressively deteriorating and more people becoming excluded from working life. Particularly worrying would be an increase in youth unemployment and the number of long-term unemployed.
The escalation of the financial crisis has been reflected in banks’ difficulties in accessing wholesale funding. The position of financial institutions in Finland is better than in many other European countries, but the financial market uncertainty is also making it harder for banks operating in Finland to access funding. In order to support banks’ ability to lend to households and businesses, the ECB Governing Council decided, in addition to lowering its policy rates, to adopt new non-standard measures to enhance access to liquidity in the banking sector.