OP-Pohjola's economists: It looks like the economy will start to recover after all
The Finnish economy hit bottom in spring 2013 but has since then recovered very
slowly. OP-Pohjola's economists forecast that economic growth will strengthen in
2014, reaching an average growth rate of 1.7%. This forecast was the same as in
our previous forecast released in August. GDP is expected to grow by 2.5% in
- Despite the recovery, the overall economic picture this year too is not so
good after all. It is more about the last year's facelift model than a real
change. However, expectations in general are so low that even a slight recovery
means positive surprises this year, states Reijo Heiskanen, Chief Economist, OP-
The slow economic revival will increasingly be based on exports. The world
economy picked up during the second half of 2013. Growth in export markets is
expected to pick up more this year and the world economy should grow at a
moderate rate in 2015. For Finland, it is particularly gratifying that the euro-
area recovery is on a fairly solid basis, albeit slow.
In bond markets, all eyes are in the first place on the USA where minor monetary
tightening is putting pressure on higher return requirements for previously low-
risk bonds and higher interest on interest-rate swaps. The outlook for short-
term bonds is steady. The ECB will keep Euribor rates low by increasing
liquidity, if need be.
Exports also supported by better price competitiveness
Finnish exports rebounded in 2013. In particular, exports to Europe began to
recover. OP-Pohjola's economists expect exports to grow at a rate of over 4%
this year and the growth rate should speed up slightly next year. Historically
speaking, however, this slightly over 4% growth rate of exports in the recovery
phase is still slow. Exports recovery and subdued domestic demand is anticipated
to turn the current account into a surplus in 2014.
Improving price competitiveness too should support exports recovery this year.
Finland's unit labour costs are expected to decrease by one per cent between
2014 and 2015, which will improve relative unit labour costs by 2.5% vis-Ã -vis
the rest of the euro area. However, price competitiveness is still an average of
9% weaker against the rest of the euro area than before the financial crisis.
The Finnish market is anticipated to see a very slow growth. Disposable income
should not see any particular increase and consumers are expected to remain
relatively cautious. Consumer confidence is expected to improve in the course of
2014, which will gradually increase spending, and spending should begin to pick
up speed somewhat.
Capital spending declined on a wide front last year. Housing markets should
begin to improve in 2014. On the whole, capital spending is not expected to
begin its recovery until next year.
The inflation rate decelerated close to one per cent towards the end of 2013 and
OP-Pohjola's economists predict that consumer prices will rise by an average
1.3% this year. The outlook has remained unchanged since August. In 2015, the
inflation rate is projected to accelerate to 1.7%.
The export-led recovery will be based more on an increase in labour productivity
than in labour input. Employment is not expected to increase on average this
year and should increase by only 0.5% next year. Unemployment is projected to
remain at an average rate of 8.2% this year and to inch down to 8% in 2015.
Stopping an increase in deficits is possible
Along with the economic recovery, fiscal deficits should not widen this year for
cyclical reasons. As a result of previously decided spending cuts, the general
government deficit is expected to decline somewhat. The local government deficit
should also see an improvement as a result of a tax increase. The debt-to-GDP
ratio is projected to remain below 60% this year. In 2015, more spending cuts
will be required to reverse the upward trend in this ratio.
According to Chief Economist Reijo Heiskanen, if the economy follows the growth
pattern as predicted above, Finland could reverse the upward trend in its debt-
to-GDP ratio through additional spending cuts of 1.0-1.5 billion euros in 2015.
- It is worth making decisions on spending cuts in the framework budget debate,
considering that it is futile to expect any better economic situation than in
2015, says Heiskanen.
For more information, please contact:
Reijo Heiskanen, Chief Economist, tel. +358 (0)10 252 8354
Timo Hirvonen, Economist, tel. +358 (0)10 252 8515
Maarit LindstrÃ¶m, Vice President, tel. +358 (0)10 252 1695
Chief Economist Reijo Heiskanen will discuss economic prospects in OP-Pohjola
Nyt (OP-Pohjola Now) broadcast on 20 January 2014, starting at approximately 2
pm at op.fi > OP-Pohjola-ryhmÃ¤ > Uutishuone
OP-Pohjola Group is Finland's leading financial services group providing a
unique range of banking, investment and insurance services. The Group's mission
is to promote the sustainable prosperity, well-being and security of its owner-
members, customers and operating regions through its local presence. Its
objective is to offer the best and most versatile package of loyal customer
benefits on the market. OP-Pohjola Group consists of some 200 member cooperative
banks and the Group's central institution, OP-Pohjola Group Central Cooperative,
with its subsidiaries and closely-related companies, the largest of which is the
listed company Pohjola Bank plc.
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