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OP-Pohjola's economists: Minor growth and fragi...

OP-Pohjola's economists: Minor growth and fragile recovery

The first half saw a slight recovery in the world economy although the growth remained weak and uneven. According to economic surveys, the world economy is gradually picking up speed. OP-Pohjola's economists predict that the global economy will see sluggish growth and the growth rate will remain below the long-term average next year too.

­- However, the global economic landscape will look slightly different. Economic growth will pick up, driven mainly by industrialised countries. Emerging economies will continue to grow at somewhat their current pace, says Reijo Heiskanen, Chief Economist.

The euro-area economy showed a slight recovery in the spring and, according to OP-Pohjola's economists, should grow at a rate of one per cent next year. This projection has not changed from the year start. German is forecast to remain the euro zone's growth engine but the problem countries should also begin their slow recovery. The inflation rate will remain below the ECB's target.

The ECB has announced that it will keep its key rates low in the euro area for an extended period. LTRO repayments will gradually drain liquidity, which tends to raise Euribor rates.

- If the ECB wants to prevent a minor rise in Euribor rates during the next 18 months, it will have to cut its key interest rate or provide additional liquidity. We expect the ECB to keep its key rate unchanged and, if necessary, inject liquidity, says Heiskanen.

Economists expect that economic risks will continue to remain much higher than usual but the risk outlook has gradually changed. The risk of panic driven by market disruptions in the euro area has decreased substantially but the worst of the debt crisis is anything but over. Uncertainty may rear its ugly head again for several reasons. Next year, the US monetary policy will remain a major concern. An economic slowdown has begun to reveal the vulnerability of a number of emerging economies. Moreover, the situation in the Middle East will remain worrisome.

Finland has potential for a well-balanced recovery

The Finnish economy returned to a slow-growth path during the first half.

- We expect that the growth will remain slow towards the end of 2013 and in 2014. Because of the negative carry-over effect, GDP will not increase on average this year but is anticipated to grow at a rate of 1.7% next year. Our economic growth forecast for 2014 is the same as in early 2013, says Heiskanen.  

According to Heiskanen, the forecast is based on highly moderate pay settlements that will support Finland's export recovery. A slower rise in wages will also reduce inflationary pressures and consumer prices are expected to increase by 1.3% next year and by 1.6% during the current year. Due to low inflation, real wages will not virtually decrease next year.

The gradual recovery of the Finnish economy will come from exports. Consumer spending and capital expenditure will show sluggish growth compared with prior years. The growth will also increasingly be based on higher productivity and employment. The unemployment rate is expected to remain on average at this year's level, 8.2%.

The Finnish current account has improved rapidly during the current year, as a result of a reduction in imports and an improvement in terms of trade. The current account is anticipated to improve further in the wake of a gradual recovery in export markets. Moreover, a corporate tax reform will contribute favourably to the current account. Finland's current account is actually expected to show a slight surplus next year.

The Finnish fiscal deficit should improve slightly next year but the public debt/GDP ratio is expected to rise close to the ceiling of 60% imposed by the EU. The debt is projected to grow relatively fast because the combined deficit run by the government and municipalities will remain almost 4% relative to GDP.

­- The surplus of the authorised pension providers in Finland will keep the public deficit within the limits of the Maastricht criteria but will not slow down growth in government debt because only a small proportion of pension assets have been invested in Finnish government bonds. If positive surprises do not come from the Finnish economy, additional spending cuts will be required in 2015 to meet the criteria set for the public debt/GDP ratio, points out Heiskanen.

For more information, please contact:
Reijo Heiskanen, Chief Economist, tel. +358 10 252 8354

Reijo Heiskanen, Chief Economist, and Maarit Lindström, Vice President and Economist, will discuss economic prospects in OP-Pohjola Nyt (OP-Pohjola Now) broadcast on 26 August 2013, 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.






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Source: Pohjola Pankki Oyj via Thomson Reuters ONE

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