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OP-Pohjola Group's financial forecast: Economy on hold

August 25, 2014 - London

Export market prospects have weakened during the summer. Growth in the euro area continues to be slow, with the ECB under pressure to relax its policy even further. Finland's economic growth will remain below one per cent in 2015.

World economy prospects have weakened during the summer. The global economy will grow practically at the same rate as last year. Economic growth will perk up only a fraction in 2015 and remain below average for a long time.

This weaker outlook is not caused entirely by the Ukraine crisis. Economic development in 2014 and 2015 will fall short of expectations in almost all major economies.

The effects of the Ukraine crisis and the sanctions that followed will have effects on Russia, Europe and the entire world that are very difficult to predict. The Russian economy was still growing a little in the early part of 2014, but a downward trend is expected during the autumn, and will probably remain weak next year. The assumption in the predictions of OP-Pohjola Group's economists is that the sanctions will remain in place for 12 months, and that the Russian economy will shrink by 2% next year.

The euro area recovery that was promising last year suffered setbacks in the early part of this year. Global export markets are not offering too much in way of relief, and the consequences of the Ukraine crisis are a burden on the economy, too. The euro area economy will continue to grow but the pace of growth will not accelerate much.

"The euro area development will fall clearly short of the ECB's prediction. We are predicting a growth of a mere one per cent, while the ECB's latest estimate is 1.7%. Inflation, too, is not in line with the predictions. The ECB must find new ways to support the economy, which will further weaken the euro," says OP-Pohjola Group's Chief Economist Reijo Heiskanen.

Moderate recovery in Finland in 2014

Finland's GDP has been more or less stagnating since the last quarter of 2012.Troubles with export markets are cutting short what looked like a cautiously promising increase, and the economy is not making much progress in the latter half of the year. Next year GDP will grow somewhat. OP-Pohjola's economists project the Finnish GDP to increase by 0.6% in 2015. The previous prediction, made in March, was 2.0%.

"The more modest prediction is mainly the result of poorer export market prospects. Compared to the March prediction, poorer export market prospects will erode more than 2 percentage points from Finland's economic growth in total in 2014 and 2015," says Chief Economist Heiskanen.

However, as the economic growth is slow, its effects will remain moderate. Unemployment will continue to increase, but not by much considering the conditions. Inflation will still slow down somewhat, as a result of which real wages will increase a little to enable a minor increase in consumption. The housing markets will remain stable. However, owing to poor exports, the current account deficit will not decrease by much.

The fiscal deficit will not decrease, unlike previously forecast. As economic growth will be slower than predicted by the Ministry of Finance in June, the deficit will increase by EUR 1-2 in 2015. Finland's public finances will fulfil EU criteria in 2015 despite the weaker situation. Public debt will be higher than 60%, but less than Finland's share of European Financial Stability Facility (EFSF) loans. Moreover, the situation must be considered exceptional owing to the sanctions, so the criteria cannot be interpreted in the usual way.

According to Chief Economic Heiskanen, there is no reason to take further savings measures, and especially to increase taxes, in 2015.

"Whatever recovery measures may be taken, they must not exacerbate the sustainability gap. The gap, which will be wider next year, must be compensated through structural means and by way of making savings that will be felt in later years. This is important also because the current account deficit is beginning to appear more and more like a structural problem.

The economic outlook risks are exceptional. The geopolitical situation may also improve suddenly, meaning that the risks will not be realised as suspected. On the other hand, we may underestimate risks. The euro area finance is still fragile, and the balance may be upset if the economy starts going down again. The stagnation that has been going on in Finland for some time increases the risk of a longer poor period and weaker growth prospects.

For more information, please contact: Reijo Heiskanen, Chief Economist, tel. +358 (0)50 568 6623

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Source: Pohjola Pankki Oyj via Globenewswire



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