Bank of Finland ups GDP forecasts, but outlook gloomy

The Bank of Finland said on Tuesday the nation's economy had stopped contracting and raised its growth forecast for 2010, but it expects the upturn to remain slow for the next year or two. The bank said in its new economic forecast Finnish gross domestic product (GDP) would rise 1.6 percent in 2010, up from a previous forecast of flat GDP given last September.
For 2011 it forecast growth of 1.8 percent, versus a previous 1.6 percent, and gave a 2012 estimate of 2.2 percent. "GDP growth will ... 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," Governor Erkki Liikanen said in a statement.
"Finnish exports will lag developments in the export markets. Private consumption growth will continue to be sluggish, and investments will become an engine of growth only towards the end of the forecast period." Export-dependent Finland saw a deep recession last year, with GDP plummeting 7.8 percent as the global downturn dented demand for mobile phones, paper and machines.
The central bank said inflation should not be a problem for the economy, forecasting consumer prices to rise by 0.5 percent this year and 1.7 percent next year. However, Liikanen pointed out that previous "excessive" increases in prices and costs would continue to burden the economy and called for more work to be done to boost productivity.
"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," he said. "The slow recovery in growth is not expected to reduce unemployment from around 9 percent," Liikanen added.
The bank noted the jobless rate had risen at a slower pace than expected, partially due to an acceleration in retirement, and cut its forecast for 2010 unemployment to 9.1 percent from a previous 10.5 percent. Statistics Finland said earlier on Tuesday the adjusted unemployment rate was 9.1 percent in February, flat month-on-month.
At a news conference Liikanen painted three alternatives for Finland's future until 2020, and said that without economic reform the country would face persistently shrinking GDP and ballooning debt. He said in two of the three scenarios, Finland was facing sluggish growth and would not recover fully from the recession.
To secure annual growth of more than three percent, Liikanen said Finland should focus on measures including lengthening work careers, encouraging more competition in different fields and boosting productivity. "Such a growth trend would require that the foundations of the economy will be renewed with an open mind, and career paths be extended from the beginning and the end," Liikanen said.