June 11, 2013 / 10:56 AM / 6 years ago

UPDATE 1-Bank of Finland slashes outlook, sees deeper recession

HELSINKI, June 11 (Reuters) - Finland’s economy will sink deeper into recession in 2013, its central bank said on Tuesday, abandoning a previous prediction of modest growth in what has been one of the euro zone’s healthiest economies.

The downwards revision was expected but its forecast of a 0.8 percent contraction was more pessimistic than those of other institutions and economists, including the European Union, which said last month Finnish growth would be 0.3 percent this year.

“The performance of the Finnish economy in recent months has been more muted than expected and consumer confidence has weakened again,” the Bank of Finland said in a report.

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

The central bank, which in December had forecast a 0.4 percent expansion in gross domestic product this year, also cut its growth estimate for 2014.

Bank of Finland Governor Erkki Liikanen said a struggle by traditional Finnish industries to compete with foreign rivals had exacerbated a slowdown caused by the euro zone’s long-running debt crisis and the resultant recession in the bloc.

“The Finnish economy has faced two major changes at the same time: the restructuring of (its) industry and the recession in the wake of the financial crisis,” Liikanen said.

Data last week showed GDP shrank 0.1 percent in the first quarter from the previous three months and by 2.1 percent year-on-year. It was the second consecutive quarterly fall in output, signalling the economy is in recession.

The Bank of Finland forecast GDP would grow 0.7 percent in 2014, far slower than its earlier forecast of 1.5 percent, and saw growth picking up to 1.4 percent in 2015.

Nordea Bank on Tuesday forecast Finland’s GDP to contract 0.5 percent this year before growing 1.5 percent in 2014, in one of the more cautious views among private economists.

Finland’s public finances are among the euro zone’s strongest, but weaker growth will make it more difficult for the government to trim spending as planned in preparation for an expected rise in the costs of caring for an ageing population.

The central bank forecast public debt would rise to 61.8 percent of GDP by 2015 from 53 percent in 2012, and said maintaining financial markets’ trust in Finland’s ability to keep debt under control was a prime concern.

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

“The key risk to the forecast is, in fact, if the markets were to change their view on Finland’s ability to restore its debt to a sustainable trajectory,” the bank said. “In such a situation, central and local government debt-servicing costs could grow faster than forecast.”

Liikanen, who is also a member of the European Central Bank’s Governing Council, said the ECB would continue monitoring all data and “stands ready to act” if the economy needs it.

The Bank of Finland said the global economy had improved somewhat, so that although the risk of a revival of the financial and debt crises “still existed”, it was less likely to happen.

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