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Ukrainian crisis hits Finnish economic growth

10.10.2014 15:15
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The negative impact of the Ukraine crisis on Finland’s economic growth is turning out to be greater than projected.

Helsinki (09.10.2014 - Heikki Jokinen)

The conflict affects the economy through sanctions, cutting Finland’s GDP by about one and a half per cent.

This is according to the Labour Institute for Economic Research in their latest economic forecast. It is lowering this year's economic growth forecast to the negative -0.3 per cent. In March they predicted this year's growth is set at 0.9 per cent.

Next year's growth the Institute sets to one per cent. In March it had forecast 2.2 per cent.

The effects of the European Union sanctions against Russia – and the Russian counter-sanctions to these – are set to increase towards the end of the year.

Finnish exports to Russia will contract this year by about 20 per cent from last year. Even if the Ukrainian conflict subsides, sanctions will be removed only very gradually, the Institute believes.

The figures for employment are not looking too bright either. The number of unemployed will rise this year by 14,000 people and by 8,000 people next year.

Unemployment is expected to rise to 8.7 percent instead of the current 8.2 per cent. Next year the figure will be 9.0 per cent.

At the beginning of this year the average inflation rate was 1.1 per cent and it is expected to be 0.9 in 2014 for whole. The forecast for 2015 inflation is 1.3 per cent.

Together with stagnated incomes this means that the real disposable income of households will be cut this year by 0.4 per cent. For 2015 the Institute forecast a modest growth of 0.4 per cent.

The central government financial deficit will this year be 7.1 billion Euro. This amounts to 3.5 per cent of Finnish GDP.

The Ministry of Finance estimates that the sustainability gap in Finland’s public finances is 3-4.5 per cent of GDP. To narrow this gap labour market organisations recently agreed – with the support of government – to major employment pension reform.

With working careers becoming longer the sustainablity gap is expected to be less than the earlier estimates. But ”in order to really promote longer working careers, working life should be developed in a way that continuing in work is appealing”, the Institute sums up.

The Labour Institute for Economic Research forecast is available here in English (Pdf)

Read also: Forecast: Finnish export will recover, but slowly (29.09.2013)