According to the Bank of Finland new forecast, the global economy and world trade will continue to grow fairly quickly, but at a very different pace in different regions. ‘Emerging economies’ share of the global economy will overtake the advanced economies towards the end of the forecast period,’ said Governor Erkki Liikanen at the press conference for the latest issue of the Bank of Finland journal Euro & talous. The risks to the growth forecast are, however, on the downside and reflect the present exceptional uncertainty that has been heightened by the events of recent weeks in North Africa and Japan.
The strong growth in emerging economies has boosted demand for raw materials, driving up commodity prices. This has led to higher inflation all over the world. The risks to the inflation forecast are on the upside. They relate to the feeding through of commodity price rises into consumer prices and the pressures that exist for increases in indirect taxation. ‘Monetary policy ensures that inflation expectations remain firmly anchored and that broad-based inflationary pressures do not materialise,‘ said Governor Liikanen, referring to the March meeting of the ECB Governing Council.
The Finnish economy has recovered swiftly from the deep recession. The global recovery has particularly boosted exports of forest and chemical industry products and fabricated metals. Domestic demand has also picked up, with rapid growth in private consumption and a significant increase in housing investment.
According to the Bank of Finland’s new forecast, Finland’s GDP growth will accelerate close to 4% in the current year due to the substantial carry-over effect from the accelerated growth in output in 2010. GDP growth will, however, slow to around 2½% in 2012–2013, while the pre-recession level of output will not be reached before 2012. ‘The positive growth figures reflect the economy’s rise from the depths of recession. The restructuring accelerated by the recession will weaken the longer-term prospects for growth,’ said Governor Liikanen. Industry’s share of GDP has declined, while the share of service sectors, with their characteristically slower productivity growth, has increased.
Consumer price inflation in Finland has accelerated considerably over the past six months. Energy and other commodity prices have risen strongly, and the pace of rise in food prices has also increased. Changes in indirect taxation have also fuelled consumer price inflation.
Consumer prices in Finland have risen faster in recent years than the average for the euro area, and price levels are not expected to converge during the forecast period. ‘It is vital to invest in structural reforms to enhance competition domestically. At the same time, an upward spiral of wages and prices that would undermine sustainable growth and employment must be prevented,’ stressed Governor Liikanen.
Although Finland’s general government deficit is forecast to contract in 2011, in the absence of new fiscal policy initiatives central government finances will continue to suffer from a considerable structural deficit. ‘The timing of measures to reinforce the public finances will affect the burden sharing between generations. This is one of the reasons prompt action is vital,’ emphasised Governor Liikanen. The longer the essential decisions on taxation, expenditure and structural measures are delayed, the larger the share of the burden on today’s younger generations will be.