UPDATE 2-Finland sees economy contracting in 2009

By Sakari Suoninen

HELSINKI, Dec 18 (Reuters) - Finland's economy will contract next year for the first time since 1993 as the global financial crisis hits exports and consumer confidence, the finance ministry said on Thursday.

The economy would also grow slower than expected this year, the ministry said, downgrading expectations for 2008 gross domestic product (GDP) growth to 1.7 percent from the 2.8 percent given in its last official forecast in late August.

Even with the downgraded growth estimate for this year, Finland, one of the smaller euro zone countries, is set to beat the common currency area's GDP growth average for the tenth year running, or throughout its history.

Central government finances would fall into a deficit next year for the first time this decade, the government said.

The 2009 forecast confirms grim comments made to Reuters last week by Finance Minister Jyrki Katainen, who said the economy would likely contract next year and it was "very much possible" Finland would enter a recession.

The ministry said the economy could turn for the better at the earliest in late 2009, but did not give any numeric estimate as uncertainties are especially large.

"Finnish economic development in 2009 depends crucially on when exports and industrial production will start to pick up," the ministry said in a statement.

"If that begins in the second half of next year, the Finnish economy would start to improve by the end of the year."

Inflation would slow next year to just over 1 percent from 4 percent this year, the ministry said.

Consumer consumption would rise next year as buying power would grow about 3.5 percent due to slower inflation, tax cuts and pay rises, the ministry said.

Next year, the state budget would drop into deficit for the first time this decade, the ministry forecast, but added public finances would still be in surplus due to pension fund contributions.

"The balance in general government finances is estimated to become much weaker but to still stay in surplus in coming years," the government said in a separate financial stability report.

"The general government surplus will hinge entirely on the employment pension funds from next year onwards."

The report also said the government would have to cut spending to reach its target of a 1 percent central government surplus by 2011, when its term ends.

"In the absence of any new measures, the target ... will not be reached," the report said.

Finland has one of the lowest debt ratios in the EU, with state debt estimated at 29.1 percent of GDP at end-2008.

(Reporting by Sakari Suoninen, editing by Mike Peacock and Andy Bruce) Keywords: FINLAND/ECONOMY

(sakari.suoninen@reuters.com; +358 9 6805 0240; Reuters Messaging: sakari.suoninen.reuters.com@reuters.net)

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