POHJOLA BANK PLC The cheaper oil has improved the global economic outlook, but many risks still remain. In this year and the next, global economic growth will mildly outpace the average for the past decades, at 3.8%. In 2012-14, the rate of global economic growth only reached 3.3%.
- The oil price drop nevertheless will not invigorate the global economy by as much as earlier. Oil has become less significant, and interest rates cannot be lowered in many countries even though inflation is waning. Accordingly, we have raised our growth projections notably less than our models would suggest, notes Reijo Heiskanen, Chief Economist at OP.
The euro zone economy in particular is still so fragile that any revival may easily lose its steam. The numerous risks also prompt caution. The acknowledged risks relate to Greece, the geopolitical situation, the growing financial markets volatility and other such factors.
The oil price fall slows inflation on a global scale. In the euro zone, prices will decline for the greater part of this year. The ECB is set to expand quantitative easing early in the year. The most immediate consequence of the ECB policy is the continued depreciation of the euro.
- The ECB may no longer say that the inflation expectations are in line with its target. For long-term inflation, the expectations are not only below the ECB target but also at a record low. Average inflation too may be in negative territory this year. The ECB has no other choice but to respond immediately to the changed outlook, Reijo Heiskanen estimates.
The Finnish economy is finally seeing some growth
The Finnish economy rebounded moderately during 2014 and the slow revival will continue this year. OP economists forecast 1.0% GDP growth for Finland for this year and 1.7% growth for 2016. Our earlier forecast for 2015 was 0.6%.
- It has been a while since we last revised up our growth projections. There have been several disappointments along the way. Risks still exist, but now they are to the upside as well as to the downside. The latest data indicate that the economy would have expanded by approximately one percentage point in October and November. In our economic forecast, we have made moderate assumptions about the contribution from the lower oil price, Heiskanen explains.
Finnish exporters will benefit from the more buoyant export market and the weaker currency, but will be hurt by Russia's slide into a clear recession and by the sanctions. Total exports will nevertheless continue to recover at a moderate pace.
Inflation will decelerate this year to 0.2%, and the risks in the inflation forecast are still to the downside. The inexistent inflation will support purchasing power in Finland, but as confidence will remain weak and the saving ratio will rise, consumption will only grow marginally. Investments pick up with a lag and will contract in 2015 still.
The cheaper oil also improves Finland's external balance, and the country's current account will balance out. Unemployment will head further up in 2015 before turning down slightly in 2016.
Despite the savings in public expenditures, the fiscal deficit will only shrink marginally this year, in part because the surplus of social security funds will decrease. Our 2016 forecast assumes a relatively neutral fiscal policy because the new government will have to balance between lowering expenditures and fostering growth, and it will have to find a way to consolidate different viewpoints.
- We could hope for much more courageous economic policy moves, but right now we are not seeing any indications that would justify basing our economic forecast on any other hypothesis but our reasonably neutral policy assumption, Reijo Heiskanen states.
For more information, please contact:
Reijo Heiskanen, Chief Economist, tel. +358 50 568 6623
Timo Hirvonen, Economist, tel. +358 40 549 2476
Maarit Lindström, Consumer Economist, tel. +358 40 531 8262
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Source: Pohjola Pankki Oyj via Globenewswire
