Finland's government must address a growing public deficit.

• Sweden's economy continues to build up

HELSINKI (AFP) - Finland's economy could get back to pre-recession levels in 2012, the central bank said Tuesday, raising its two-year outlook but warning the government must address a growing public deficit.

Gross domestic product will grow 2.6 percent this year, 3.0 percent in 2011 and 2.5 percent in 2012, the bank said.

In March, the Bank of Finland was considerably more pessimistic, forecasting growth of 1.6 percent in 2010 and 1.8 percent in 2011.

"Although Finland has recently seen large figures for output growth, the recovery as a whole is not forecast to be particularly strong," central bank governor Erkki Liikanen said in a statement.

Liikanen told reporters that growth of 2.6 percent also had to be viewed in the context that the economy contracted by nearly eight percent in 2009.

The bank's predictions mirrored upgraded forecasts of the government, which in August predicted growth of 2.0 percent this year and 3.0 percent in 2011.

Liikanen said that even though the economy is looking up, growth can hide long-term underlying problems, such as the fact that a budget surplus has become a deficit and government debt is growing.

The deficit will hit 3.2 percent of Gross Domestic Product (GDP) this year but then shrink by nearly one percentage point next year, according to the bank's predictions.

"When you have a deep crisis, debt increases rapidly but it decreases slowly afterwards," Liikanen said.

While some of this deficit will be corrected as the economy recovers, Liikanen said the government had to seek other means to tackle debt and to put in place medium- to long-term structural plans to address the issue.

With elections due in early 2011, it is difficult to predict what the budget will be in 2012, he added, which is why the bank has predicted that the deficit will remain steady that year.

Meanwhile, the bank said the unemployment rate had not gone up as much as previously expected.

"The news from the Finnish labour market has recently been more positive than expected," it said, putting employment at 8.4 percent in 2010, 8.0 percent in 2011 and 7.7 percent in 2012.

"However, a worrying feature from the perspective of labour market functionality is the increase in long-term unemployment," it added.