11/06/2013 09:14:00

Bank of Finland Warns of Structural Weaknesses, Aging Population

By Juhana Rossi

HELSINKI--Anemic economic growth caused by structural weaknesses combined with an aging population threaten to push Finland into a spiral of rising unemployment and public debt, the Bank of Finland warned Tuesday.

In a starkly worded biannual economic outlook, Finland's central bank said the Nordic country's public debt will continue to rise at least until 2015 as increasing unemployment and weak private consumption curtail tax revenue.

It forecast Finland's gross domestic product would shrink 0.8% this year, marking a second straight annual contraction. The outlook projects only a muted recovery as GDP is predicted to expand 0.7% in 2014 and 1.4% in 2015, highlighting gradually intensifying structural weaknesses in the economy.

"Problems in the economy that were previously thought to be temporary, cyclical phenomena have now been shown as more permanent and structural in nature," said Erkki Liikanen, governor of the Bank of Finland, in a preface to the outlook.

The unemployment rate is forecast to rise to 8.5% in 2013 and to 8.6% in 2014. Last year, the unemployment rate was 7.7%.

Elevated unemployment and nearly stagnant economic growth will put a strain on Finland's public finances despite the considerable budget consolidation measures carried out by the government in recent years, Mr. Liikanen said.

The Bank of Finland projects the country's public debt in relation to GDP will rise to 61.8% in 2015, exceeding the 60% debt-to-GDP ratio limit set for members of the European Monetary Union. Finland's debt-to-GDP ratio is expected to be 56.9% this year, up from 49.0% in 2011.

Along with rising public debt, the proportion of elderly people in Finland's population will expand, creating a "risk that Finland will drift onto a path of fading economic growth, persistently high unemployment and deteriorating public finances," Mr. Liikanen said.

The annual change in Finland's general price level is expected to trend downward. Finland's annual inflation rate will be 1.9% in 2014 and 1.7% in 2015, according to the Bank of Finland's projections. Inflation is forecast to be 2.3% in 2013, easing from 3.2% in 2012.

Mr. Liikanen is also a member of the European Central Bank's Governing Council. The council "will continue monitoring all incoming data very closely and stands ready to act," he said.

Write to Juhana Rossi at juhana.rossi@dowjones.com

(END) Dow Jones Newswires

June 11, 2013 04:14 ET (08:14 GMT)

Copyright (c) 2013 Dow Jones & Company, Inc.

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