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 2015. - 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- Pohjola. 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-à-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 Lindström, Vice President, tel. +358 (0)10 252 1695 Twitter:@OP_Pohjola_Ekon 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-ryhmä > Uutishuone OP-Pohjola-Group 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. This announcement is distributed by GlobeNewswire on behalf of GlobeNewswire clients. The owner of this announcement warrants that: (i) the releases contained herein are protected by copyright and other applicable laws; and (ii) they are solely responsible for the content, accuracy and originality of the information contained therein. Source: Pohjola Pankki Oyj via GlobeNewswire [HUG#1755465]