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Finnish Economy to Contract This Year, Finance Ministry Projects

Finland’s economy will shrink this year as a recession in the euro area engulfs its northernmost member, keeping the government’s budget in deficit, the Finance Ministry said.

Gross domestic product will contract 0.1 percent this year, before growing 0.5 percent in 2013 and 1.7 percent in 2014, the Helsinki-based ministry said today in a report on its website. It had previously forecast growth of 1 percent for this year and next and a 2 percent expansion for 2014.

As Finland’s economy succumbs to the turmoil in the euro area, the government of Prime Minister Jyrki Katainen has argued in favor of further spending cuts and tax increases to help balance public finances. The economic projections unveiled today will be used by the government in March meetings intended to draw up spending plans for the next four years.

“The weakened growth outlook is directly reflected in public finances,” the ministry said in the statement. “Government debt growth won’t end during the forecast period.”

The budget deficit will narrow to 1.5 percent of GDP in 2013 from this year’s 1.6 percent, while debt will grow to 46 percent of GDP from 43.3 percent, the ministry said.

More than three years of debt crisis have plunged the 17-member single currency zone into a recession as governments’ austerity policies reduce investments. Weak international demand and shifting trade flows are eroding Finland’s sales abroad, the ministry said.

GDP Slump

Finland’s economy hasn’t fully recovered from its 8.5 percent slump in 2009, and GDP won’t reach its 2008 level even by the end of 2014, the ministry said. The Bank of Finland projected 0.3 percent economic growth in 2012 and 0.4 percent in 2013, on Dec. 13.

Inflation will slow to 2.8 percent in 2012, 2.2 percent in 2013 and 2.1 percent in 2014, the ministry said. Unemployment will significantly worsen next year to reach an average rate of 8.1 percent, the highest since 2010.

Bank of Finland Governor Erkki Liikanen said the government must rustle up another 1 billion euros ($1.3 billion) of measures to plug its fiscal gap or forsake the goal of ending debt growth by 2015.

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