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The European Central Bank's governing council member Erkki Liikanen said as long as the output growth in countries remained modest and the output gap continued to grow, the risk of domestically generated inflation remains remote and the inflation outlook would be subdued.
"Consequently, there is no need to rush to exit from monetary stimulus", he said in a Bank of Finland press conference on Tuesday. Liikanen heads the Banks of Finland.
In its latest report, released on Tuesday, the bank lowered the 2009 growth forecast for Finland due to weaker than expected performance in the first half of the year. The central bank governor said although the downtrend could end in the third quarter, the recovery could be slow with a possibility of temporary setbacks.
The bank expects the Finnish economy to contract 7.2% this year, remain unchanged in 2010 and grow 1.6% in 2011. According to the latest estimates from Statistics Finland, the GDP contracted 2.6% sequentially in the second quarter, after a 3% fall in the first quarter.
The Finnish economy has been particularly hard hit as it is heavily dependent on exports for growth. The scale of the slump in the exports was due partly because Finland's export industry specializes in the production of capital goods and their components. The international demand for these goods would be slow to recover and could be the reason also for slower recovery in the economy, the bank said.
Further, government measures in other countries would support domestic demand and not imports, the bank noted. The country's exports and industrial output will, however, begin to grow gradually, provided the global economy recovers as expected.
Meanwhile, the Finnish central bank said the world GDP could contract by just under 2% this year, whereafter the global economy is expected to recover slowly in 2010 and 2011. "This means the strongest phase of decline in the global economy and world trade is now over", the bank said. World trade is forecast to decline by around 13% this year, and to be lacklustre next year and based primarily on growing demand in the developing countries.
On the labor market, the bank said there would a marked deterioration in employment in this year and the next, with the situation likely to improve in 2011. Finland's jobless rate is expected to climb above 10% during the 2009-11 period. Labor productivity would decline raidly this year, but would pick up and become positive in 2010 and 2011.
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