For release on December 8, 2004 at 1:30 p.m.

PRESS RELEASE: ETLA’S DECEMBER 2004 FORECAST FOR THE

WORLD AND FINNISH ECONOMIES

World economic risks have increased – Finnish economic

growth set to decelerate

• Wide U.S. economic imbalances, the weak dollar and high oil prices have
exacerbated the risks surrounding the world economic outlook

• Economic growth in the Euro Area will remain at just under two percent

• Finnish GDP growth will reach three percent in 2005, but should slow
thereafter

• A moderate wage agreement was reached, but growth in purchasing

power will ease

• Income tax cuts will not suffice in bringing down overall earned income
taxation

World economic growth will be
somewhat slower over the next few
years than that forecast last autumn.
Growth should reach almost five
percent this year, before slowing next
year to around four percent. Growth will
be dampened by the wide U.S. current-
account deficit and high debt levels,
measures to cool the overheated
Chinese economy and persistently high
oil prices.
Despite some decline in recent weeks,
crude oil prices are still considerably
higher than expected earlier. If oil prices
remain high over a more sustained
period of time, then growth will slow
further despite the fact that world oil
dependency has fallen to half the level
prevailing around three decades ago.
Prices will likely remain volatile in the
future, too. In addition, the U.S. dollar
has weakened more than expected
earlier. The euro appreciation will
continue to partly offset rising oil prices in
Europe. On the other hand, a stronger
euro will curb export growth at a difficult
time; the Euro Area did not participate
fully in the world economic upturn, and
this upturn is already losing much of its
momentum. There is a risk that Finland's
largest export market will not even enjoy
a robust upturn.
Our forecast assumes the price of Brent
crude oil will average USD 41 per barrel
in 2005 and USD 36 in 2006. The euro
should continue to appreciate against
the U.S. dollar owing to America's steep
twin deficits. The dollar-euro exchange
rate is expected to average USD 1.32 in
2005 and 1.33 in 2006.
Forecast for Finland Lowered
ETLA's forecast for the Finnish economy
points to GDP growth of 3 percent next
year and 2.3 percent in 2006. These
figures reflect downward revisions of 0.5
percentage points each year. Higher oil
prices and a stronger euro will dampen
Finland's growth prospects both directly
and indirectly. The indirect effect, where
the euro appreciation curbs economic
activity and demand growth in Finland's
main export market, could be
unexpectedly large. The likelihood of
slower growth has therefore increased.
Finland's growth cycle appears to have
peaked this year and will lose some
steam moving forward. Indeed, the
November business survey released by
the Confederation of Finnish Industries
showed a weakening in industrial
expectations of future business
conditions compared to the August
results.
Finnish Exports To Gather Momentum
Our forecast for export growth in 2005
has been lowered from 6 percent to 5.5
percent owing to the weaker outlook for
demand. Exports of electronic
equipment will expand strongly, though
much of the 14-percent pace forecast is
due to base effects. Falling ship exports
will depress exports of transport
equipment by around 20 percent,
thereby imparting a considerable
negative impact on overall export
growth. Merchandise exports excluding
electronic equipment are projected to
increase by only 1.5 percent, but
excluding transport equipment as well
merchandise exports should increase by
a healthier 3.5 percent. In 2006
merchandise exports should increase by
around 3.5 percent.
Investment Increasing
Fixed investment is forecast to increase
at a rate of almost 4 percent per annum
during the forecast period.
Infrastructure-related investments, such
as the Vuosaari Harbor and the new
nuclear power plant, play an important
role in the investment outlook. Civil
engineering activity will expand by
around 5 percent per annum, as will
machinery and equipment investment
thanks to purchases of equipment for
the new nuclear power plant. Industry
will not invest heavily to raise production
capacity. The gradual rise in interest
rates will dampen growth in residential
building investment to a pace of 3
percent, but nonresidential activity will
gather momentum to a rate of 4
percent in 2006 fueled by expanded
construction work on the nuclear power
plant. Investment activity in the
construction and private service sectors
will increase faster than in
manufacturing. Public investment should
increase at an annual pace of 3
percent, when road projects already
approved are started.
Relatively Moderate Wage
Agreement Reached
The two-and-a-half-year-long wage
agreement and the three-year tax
package is, in principle, a good
combination which reduces the
uncertainty that has long persisted
regarding future developments in
spending power. The outcome will allow
firms to better assess their investment
and recruitment needs. The recent
wage bargaining round led to a rather
moderate outcome, which will lead to
average earnings growth of 3.4 percent
in 2005 and 2.8 percent in 2006. These
figures include so-called pay legacy
and wage drift. Unions still have to
accept the agreement.
Growth in Household Purchasing
Power Set To Slow Considerably
Real household purchasing power will
grow by only 1.2 percent in 2005 and 2.2
percent in 2006. Growth next year will be
stemmed by rising inflation and the
temporary decline in capital income. In
addition, the tax cuts outlined by the
government will not suffice to prevent a
tightening in earned income taxation in
2005 and 2006, because municipal tax
rates and social insurance contributions
are heading upwards. Excluding the
impact of capital income changes,
growth in real purchasing power will fall
during the forecast period to half the
pace seen in recent years. Private
consumption is forecast to increase by
around 2.5 percent per annum.
Consumer price inflation is projected to
rise from 0.2 percent this year to 1.5
percent in 2005, boosted by rising
energy prices and gradually increasing
interest rates. Inflation is forecast at 1.6
percent in 2006.
Employment To Increase Slowly
Our forecast shows the number of jobs
increasing by around 23 000 during 2005
and 2006. Most of the job growth will
occur in sectors that rely on domestic
demand, such as construction and
private services. The number of industrial
jobs will continue to decline, although at
a slower pace than before. Public sector
employment is projected to increase by
around 10 000 persons, particularly in the
healthcare and local government
segments, raising the public sector's
share of total employment to almost 28
percent in 2006. The unemployment rate
is forecast to decline to 8.5 percent in
2006.
Public Expenditure Continues To
Increase Rapidly
Public expenditure (excluding interest
payments) will increase at around the
same pace as nominal GDP, namely 4.5
percent per annum. Public consumption
and pension benefit expenditures will
increase the fastest. Expenditures will
also be boosted by many government
programs, such as the national health
program. The tax-to-GDP ratio will
remain unchanged during the forecast
period. Earned income taxation will
increase slightly, and the fiscal policy
stance will shift from expansionary to
neutral. In 2006, the central government
budget deficit should stand at around
0.9 percent and the general
government budget surplus at 2 percent
of GDP.
The globalization report prepared by a
working group appointed by Prime
Minister Vanhanen offers many
recommendations for enhancing
competitiveness and growth potential.
Similar conclusions have been reached
in various other reports as well. For long,
the problem has not been one of not
knowing what to do, but rather one of
lack of initiative by economic
policymakers to implement the needed
reforms. Policymakers may find it
unattractive to implement reforms
aimed at boosting growth.
There are many avenues for
improvement. For example, providing
quality public services without wasting
taxpayers money would provide a
benefit to all. Raising the efficacy of
service provision does not mean
foregoing services or service quality, nor
does it require longer or busier work
days.
Finnish Gross Domestic Product and Components of Expenditure

Value Annual Percent Change in Volume

Bill. EUR From Previous Year Period Average
2003* F F F F
2003* 2004 2005 2006 98-03 03-08
Gross domestic product 142.5 2.0 3.3 3.0 2.3 2.8 2.8
Imports 43.8 2.6 1.7 5.2 4.2 4.9 3.5
- goods 35.2 3.7 2.2 5.6 4.3 5.5 3.7
- services 8.6 -2.1 -0.5 3.1 3.5 2.3 2.6
Total resources 186.3 2.2 2.9 3.5 2.8 3.3 3.0
Exports 53.1 1.1 2.3 5.3 3.4 6.0 3.8
- goods 46.6 2.0 2.4 5.6 3.4 6.9 3.9
- services 6.5 -5.4 1.1 2.7 3.1 0.1 3.0
Investment 25.9 -2.1 4.0 3.7 3.5 1.0 3.5
- private 21.8 -3.0 4.8 3.9 3.7 0.8 3.7
- public 4.1 2.7 0.0 3.0 3.1 2.0 2.2
Consumption 106.4 3.5 2.9 2.4 2.3 2.5 2.4
- private 74.6 4.3 3.3 2.6 2.4 2.8 2.6
- public 31.8 1.6 2.0 1.9 1.9 1.8 1.8
1) 0.1 0.3 0.1 0.0 0.0 .. ..
Stockbuilding
Total demand 186.3 2.2 2.9 3.5 2.8 3.3 3.0
Domestic demand 133.2 2.7 3.2 2.7 2.5 2.1 2.6
Public demand 35.9 1.8 1.8 2.0 2.0 1.9 1.9
1) Including statistical discrepancy. Percentage point contribution to domestic demand.

Key Forecasts
F F F
2002 2003* 2004 2005 2006
Consumer price index, % change 1.6 0.9 0.2 1.5 1.6
Average earnings, % change 3.3 4.0 3.5 3.4 2.8
Unemployment rate, % 9.1 9.0 8.9 8.7 8.5
Current account surplus / GDP, % 7.4 5.2 5.2 5.1 5.0
Industrial production, % change 2.1 0.9 4.7 4.1 2.5
Three-month EURIBOR, % 3.3 2.3 2.1 2.2 2.5
EU real GDP, % change 1.1 0.9 2.3 2.0 2.1
Euro Area 0.9 0.6 2.0 1.8 2.0
EU consumer price inflation, % 2.1 2.2 2.2 2.1 1.8
1) 2.3 2.1 2.1 1.9 1.7
Euro Area
Finland's general govt. surplus, % of GDP 4.3 2.3 2.4 2.0 1.9
Finland's general govt. debt, % of GDP 42.6 45.6 44.1 43.6 43.4