UPDATE 1-Finland's economy set to shrink as exporters struggle

Wed Jun 19, 2013 5:01am EDT

By Ritsuko Ando and Jussi Rosendahl

HELSINKI, June 19 (Reuters) - Finland on Wednesday slashed the outlook for its economy, predicting it will shrink for the year, raising doubts about its reputation as one of the euro zone's healthiest economies.

The forecast added to concerns that traditional industries such as paper were losing global competitiveness.

The finance ministry said it now expects Finland's gross domestic product (GDP) to shrink 0.4 percent this year instead of growing 0.4 percent as it forecast in March. It also cut its 2014 growth forecast to 1.2 percent from a previous 1.6 percent.

The Nordic economy is one of only a handful in the euro zone still rated triple-A, but it slipped into recession early this year as weak European demand hit exports of paper, machines and ships.

The announcement follows a similar downgrading by the Bank of Finland, which last week abandoned its previous prediction of modest growth to forecast a 0.8 percent contraction this year.

The government acknowledged the slowdown wasn't caused by the euro zone's long-running debt crisis alone, but also by a struggle among traditional industries to respond to globalisation and technological change.

"Industrial manufacturing in particular will decline sharply due to both cyclical and structural reasons," it said in a statement.

Finnish mobile phone maker Nokia has struggled to catch up after falling behind Samsung and Apple in smartphones. Also the country's paper industry has been hit by a slump in demand from print media as consumers and advertisers have shifted to the Internet.

Stora Enso, Europe's second-biggest paper maker, said on Tuesday that it plans to cut 2,500 jobs in its latest round of consolidation to cope with shrinking paper demand.

The finance ministry also said the weaker outlook meant the government needs to take a closer look at its fiscal plans.

Weaker growth and the costs of caring for an increasingly ageing population are expected to weigh on Finland's public finances, which are currently among the euro zone's strongest.

The finance ministry forecast its debt-to-GDP ratio would rise to 59.9 percent in 2015 from an expected 57.1 percent in 2013.

"If the government wants to stick to its original target of a turnaround in debt-to-GDP ratio, there is need for further budget adjustment," Mika Kuismanen, a senior ministry official, told reporters.

Euro zone fiscal rules require countries to have debt at 60 percent of GDP or less but few countries currently meet this requirement.

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