Bank of Finland: Peak of growth passed - economic development still positive

Erkki Liikanen

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The Finnish economy has peaked, but although growth is slowing down, economic developments are still positive, predicts the Bank of Finland in its most recent economic survey.
      Positive employment developments, and the eagerness of the people to consume, which have maintained growth in recent times, are likely to decline somewhat next year. Investments have also decreased at the end of the year.
     
The Bank of Finland sees pitfalls for the Finnish economy especially in the form of inflation, which has increased in the whole euro zone to about three per cent - largely due to the rise in the price of raw materials and energy. In Finland, the annual inflation rate stood at 2.7 per cent in October.
      Finnish inflation is being spurred by next year's pay hikes that are greater than those in previous years. On the other hand, lower car taxation will ease inflation by about half a percentage point, the Bank of Finland estimates. The bank's forecast for next year's inflation is 2.3 per cent.
      "The rise in wages in Finland is among the steepest in the euro zone, and it places higher demands than before on productivity. If productivity does not improve, and if the rise in costs accelerates, jobs will be lost", said Bank of Finland Governor Erkki Liikanen at a press conference on Monday.
      Liikanen said that the European Central Bank needs to take care that pay increases do not further spur inflation. The ECB has predicted a decline in inflation next year, but the risk still exists that the multiplier effects of wage increases will cause it to accelerate.
     
European economic growth is also expected to slow down in the coming two years from the present 2.7 per cent. This has been apparent already in the latter part of the present year. Confidence of both consumers and industry in the economy has weakened.
      Several international institutions have lowered their economic forecasts for the industrialised world, while forecasts for China and Russia, for instance, have been upgraded.
      Turbulence on the world financial market has made forecasting more difficult than before. The subprime loan crisis on the US housing market reached Europe in August, and has caused uncertainty on the financial market throughout the autumn.
      The uncertainty continues, and it has not yet been possible tu sum up all of the problems. "The end of the year is coming a bit too soon. We still need some time before the whole picture is cleared up", Liikanen said.
      The disturbances on the US financial market are reflected in the bottom lines of European banks. Uncertainty increases the lack of trust between banks, while raising the interest rate on money that the banks lend each other.
     
Ordinary Finns have been affected by the US subprime crisis mainly in the form of higher interest rates on housing loans. Euribor rates, which Finnish home loans are linked with, are usually close to the ECB rate, which is now at four per cent. However, the three and 12-month Euribor rates are now closer to five per cent.
      Although the direct effects of the US financial crisis on Finland has been minor so far, Finland is by no means completely safe from this crisis. According to Liikanen, the most significant risks for the Finnish economy are in the form of drawn-out, and deeper uncertainty.


Links:
  Governor Erkki Liikanen: Growth is slowing, inflation developments contain risks (Bank of Finland press release 10 December 2007)

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