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The Ukraine crisis will slow economic growth in Finland - decisions made in the framework budget debate will have a smaller effect on economic growth

March 27, 2014 - London

OP-Pohjola Group's economists expect the Finnish economy to recover and to outperform the euro area during the current year. However, the economy will recover more slowly than previously predicted because of the weaker-than-expected economic growth in Russia and its repercussions. Decisions based on the framework budget debate will slow growth slightly next year but an increase in fixed investments should cushion the effects of spending cuts and tax hikes.

Finnish GDP is expected to grow by 1.0% in 2014 (January 2014 forecast: 1.7%) and by 2.0% next year as against the previous forecast of 2.5%.

- Economic outlook in Russia already was weak before the Ukraine crisis but the crisis is expected to slow Russia's economic growth further. The growth rate should remain one per cent this year and two per cent in 2015. In addition, the rouble is expected to remain markedly weaker, says Reijo Heiskanen, Chief Economist, OP-Pohjola.

Economic slowdown in our Eastern neighbour will be reflected in the Finnish economy through exports and also partly through a decrease in the number of tourists from Russia.

Slower export growth will also be felt in domestic demand. Consumer spending and capital spending are expected to show weaker growth. Unemployment is expected to increase slightly.

- Economic slowdown in Russia and its repercussions are anticipated to slow Finnish GDP growth by 0.7 percentage points this year. However, the negative effect should next year be only a tenth of a few percentage points, points out Heiskanen.

Fiscal position to improve

Decisions based on the framework budget debate of the Katainen administration are expected to decrease Finnish economy by 0.2-0.3 percentage points next year. Increases in indirect taxes and administrative charges are anticipated to accelerate the inflation rate slightly in 2015 by 0.1-0.2 percentage points.

- Decisions based on the framework budget debate will slow down growth. Tax hikes and benefit cuts will cut purchasing power and consumer spending. In addition, government spending cuts will slightly retard economic growth. However, an increase in fixed investments by selling government holdings should dampen the effect of spending cuts and tax hikes, explains Heiskanen.

Fiscal adjustments and the sale of government holdings will reduce the government and fiscal deficits in 2015. The government debt-to-GDP ratio is expected to remain below the critical level of 60% but the ratio will not, however, stop rising until 2016.

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

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Source: Pohjola Pankki Oyj via Globenewswire



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