In the immediate years ahead the Finnish economy will grow only moderately. GDP growth is forecast to be 1.5% in 2012 and 1.2% in 2013. The figure for 2014 will be an estimated 1.6%. ‘The forecast assumes that the global economy and international trade will grow more quickly towards the end of the current year. There is, however, a great deal of uncertainty over developments in Finland’s external environment, due to the debt crisis. The downside risks to the forecast are, therefore, substantial,’ stressed Governor Erkki Liikanen at the press briefing for the latest issue of the Bank of Finland journal Euro & talous.
In recent years, economic growth has depended on the domestic market. The recent rapid growth in household consumption is forecast to slow substantially in the immediate years ahead, with purchasing power developing more slowly and no improvement in employment. The substantial uncertainty in the economy will slow the pace of investment growth. Exports contracted in 2011 and are forecast to gradually pick up again. Finnish exports, which are weighted towards capital goods, will, however, not match the pace of world trade growth in the immediate years ahead.
The general government balance is forecast to improve by 1 percentage point relative to GDP by 2014. The central government debt ratio will stop growing in 2014, but the overall general government debt ratio will continue to grow due to a deterioration in the financial position of local government.
Inflation is forecast to be 2.9% in 2012. Rises in indirect taxation will push up consumer prices in both 2012 and 2013. Inflation is forecast to gradually slow.
Finland’s current account has weakened in recent years and in 2011 entered deficit. The deficit is due to deteriorating cost-competitiveness, export difficulties and the rising price of oil. The current account has also been weighed down by household and corporate debt. The current account deficit is forecast to remain close to the current level in the immediate years ahead.
The current account deficit increases the external financial risks to the Finnish economy while at the same time reflecting imbalanced developments in the domestic economy. Economic growth based on rising household and general government debt is not sustainable at a time when there is a need to save for the future costs of an ageing population.
‘Imbalances can be avoided by the pursuit of economic policies that reduce the general government and household deficits and at the same time improve the prospects for growth in the economy, Governor Liikanen emphasised. One component of such an approach is to continue consolidation of public finances and steps to control household debt. It is also important to improve the cost-competitiveness of Finnish output and increase labour supply, particularly by increasing the length of working careers.
Euro & talous 3/2012, Talouden näkymät
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