Bloomberg News

Finland Reduces Economic Forecast as Euro-Area Recession Spreads

June 19, 2013

Finland’s Finance Ministry cut its forecast for the northernmost euro member’s economy that’s mired in a recession along with its single-currency peers.

Gross domestic product will shrink 0.4 percent this year, compared with the 0.4 percent growth it forecast in March, according to a statement on the Helsinki-based ministry’s website today. The $250 billion economy will grow 1.2 percent in 2014 and 1.9 percent in 2015, less than in previous forecasts, the ministry said.

“The risks in the forecast are on the downside and mainly stem from the economic situation in the euro area,” the ministry said in a statement. “Industrial output will continue to fall in 2013 for the second year running and Finnish exports will grow more slowly than global trade throughout the outlook period.”

The waning economic outlook has eroded government finances and pushed the six-party coalition to decide on 600 million euros ($800 million) of budget cuts and tax increases in March, even as austerity was tempered with a cut in the corporate tax rate.

Finland’s economy is in its second recession in four years, with first-quarter output contracting 0.1 percent. Industrial production slumped an annual 9.7 percent in April, the most since November 2009, as the euro-area recession hurts demand for exports such as machinery and forest-industry products. Consumer spending isn’t making up for the shortfall in industrial output and unemployment has risen to 8.8 percent in April from 8.4 percent a year ago.

Budget Gap

The jobless rate will be 8.3 percent this year, the ministry said. Inflation will slow to 1.7 percent this year before accelerating to 2.1 percent, it said. Finland’s exports will be flat this year after last year’s contraction, and grow 3.7 percent next year.

The economic contraction means Finland’s budget deficit will widen to 2.5 percent of GDP this year from last year’s 2.3 percent. It will narrow to 2.1 percent next year and then to 1.6 percent in 2015, the ministry said. The measure includes central government finances, municipalities and pension funds. Government debt will increase to 59.9 percent of GDP by 2015, just short of the European Union’s 60 percent rule. The forecasts mean Finland will continue to comply with the EU’s fiscal rules, as it has done since 1996.

The government targets ending debt growth by 2015 and keeping its top credit rating. The economic woes and the three-year euro-area debt crisis are sapping its popularity.

Stable AAA

The opposition Center Party became the country’s most popular this month in a poll published by newspaper Helsingin Sanomat today. The Center Party rose to 20.6 percent backing, trumping the 19.1 percent for Prime Minister Jyrki Katainen’s National Coalition Party and 16.8 percent of Finance Minister Jutta Urpilainen’s Social Democrats.

Finland is the only euro member with a stable AAA rating at Standard & Poor’s, Moody’s Investors Service and Fitch Ratings. Germany and Luxembourg have negative outlooks on their top credit grades at Moody’s, and the Netherlands faces a possible downgrade at all three companies.

Finland’s borrowing costs fell yesterday when it sold 1.5 billion euros ($2 billion) more of existing bonds in an auction where bids trumped supply.

About a quarter of Finns under the age of 25 years are without jobs, compared with more than 50 percent in Greece and Spain. The jobless rate for people less than 25 years old in the euro zone has risen to 24.4 percent, while the rate for the full labor force in the 17-nation economy is 12.2 percent, the highest since the single currency was introduced.

The EU will today make proposals on how to combat youth unemployment. Finland has sought to tackle joblessness with a youth guarantee in force since the start of this year. The government promises a job, internship or further education to everyone under the age of 25 years within three months of becoming unemployed. The guarantee also applies to recent graduates who are less than 30 years old.

To contact the reporter on this story: Kati Pohjanpalo in Helsinki at kpohjanpalo@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net


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