Finnish pensions to fall as bank predicts 5% GDP drop

FINLAND - Suomen Pankki, the Bank of Finland, has warned economic recovery has been delayed until 2010 and the value of pension funds will fall, as the predicted 5% growth in real GDP between 2008-10 is now expected to be a 5% decline.

In a forecast for 2009-11, the bank said the growth outlook for the Finnish economy had "deteriorated sharply in a very short period of time", despite international measures to stabilise global banking, as financial institutions have been forced to reduce lending, tighten credit terms and sell investments on unfavourable terms.

The Bank of Finland said in its forecast it "does not envisage [the world economy] recovering until the first half of 2010" although Erkki Liikanen, governor of the Bank of Finland warned: "If the recession becomes further prolonged and the downside risks to price stability increase, it will be necessary for the European Central Bank (ECB) to broaden its arsenal of non-standard measures and extend the duration of the measures".

Suomen Pankki admitted although its forecast in September 2008 estimated "cumulative growth in real GDP of a full 5% in the years 2008-2010", the current estimate is "a decline by the same amount" as a result of the global recession.

It added: "More than half of this change in the forecast can be attributed to recent adverse developments. The Bank of Finland estimates that GDP will contract 5% in 2009."

Among the consequences of the contraction of the economy, the bank stated the current account surplus will be eroded and "general government finances will sink into a sizeable deficit. At the same time, central and local government will move deeper into debt, and the size of the pension funds will decline".

The Bank also claimed even if the forecast is correct and the recession is short-lived, "its depth will have a negative long-term impact on the economy. The room for manoeuvre in public finances has been substantially reduced".

The Bank also stated an "expansionary fiscal policy and a related increase in government debt are justifiable under the present circumstances" but admitted because Finland will face "major public expenditure pressures from population ageing in the years ahead", further measures to "stabilise the public finances over the medium and long-term will enhance the credibility of expansionary measures and make it easier to fund them".

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com