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Economic outlook for 2013−2015Euro & talous (Bank of Finland Bulletin) 5/2013
Governor Erkki Liikanen12 December 2013
Governor Erkki Liikanen 212.12.2013
Positive signals from the international economy
Governor Erkki Liikanen
Share indices up, butbig differences between countries
12.12.2013 3
40
60
80
100
120
140
160
180
2010 2011 2012 2013
USA Germany Japan Finland Italy Spain
4 Jan 2010 = 100
Source: Bloomberg.26339@Pörssi-indikaattoreita (3)EN
Governor Erkki Liikanen
Narrowing of government bond yield spreads reflects improved expectations
12.12.2013 4
27391
0
2
4
6
8
10
12
14
16
18
2010 2011 2012 2013
Portugal Ireland Italy SpainFinland United States Germany Japan
%, 10-year government bond yields
Source: Bloomberg.Bond maturities approx 10 years.
Governor Erkki Liikanen 5
Measures by stressed countries have boosted competitiveness and improved balance in the
economy
12.12.2013
26295@Chart23(e)
-4
-3
-2
-1
0
1
2
3
2003 2005 2007 2009 2011 2013
High-rated countries* GIIPS** Euro area
% of GDP
* Germany, France, Netherlands, Belgium, Austria and Finland.** Greece, Ireland, Italy, Portugl and Spain.The figures for 2013 are based on the Commission's 2013 autumn forecast.Sources: European Commission, ECB and calculations by the Bank of Finland.
General government structural primary balance
26037@Rak.jäämä(en)
-8
-6
-4
-2
0
2
4
6
2005 2007 2009 2011 2013
High-rated countries* GIIPS** Euro area
Four-quarter moving average, % of GDP
* Germany, France, Netherlands, Belgium, Austria and Finland.** Greece, Italy, Ireland, Portugal and Spain.Sources: ECB, Eurostat, national central banks/statistical authorities and Bank of Finland calculations.
Current account
Governor Erkki Liikanen
The signals from the international economy are encouraging, but the financial crisis casts
a long shadow
12.12.2013 6
40
60
80
100
120
140
160
180
85
90
95
100
105
110
115
120
2008 2009 2010 2011 2012 2013
United States Euro area Japan Finland China (right-hand scale)
2008/I = 100 2008/I = 100
Sources: National statistical authorities and Eurostat.25200@BKT_taso_EA (2008)en
GDP
Governor Erkki Liikanen 712.12.2013
Finland’s growth outlook slowly improving
Governor Erkki Liikanen 8
GDP stabilised during 2013
12.12.2013
25525
85
90
95
100
105
110
115
2002 2004 2006 2008 2010 2012
Real GDP
Index, 2005 = 100
Seasonally adjusted data.Source: Statistics Finland.
Governor Erkki Liikanen 9
Finnish economy begins slow growth
12.12.2013
24078
-10
-5
0
5
10
100
120
140
160
180
2000 2002 2004 2006 2008 2010 2012 2014
% change on previous year (right-hand scale)
At reference year (2000) prices (left-hand scale)
EUR billion %
Sources: Statistics Finland and Bank of Finland.
Real GDP
Governor Erkki Liikanen 10
Supply and demand
12.12.2013
2012* 2011 2012 2013e 2014e 2015e
EUR bn % change from previous year in real terms
GDP 192.5 2.7 -0.8 -1.0 0.6 1.7
June forecast -0.8 0.7 1.4
Change -0.2 -0.1 0.3
Imports 79.8 6.2 -1.0 -7.3 0.9 4.2
Exports 78.1 2.7 -0.2 -1.7 1.7 4.7
Private consumption 108.5 2.6 0.2 -0.5 -0.2 1.0
Public consumption 48.3 0.5 0.6 1.3 0.7 0.6
Private investment 32.7 6.2 -1.3 -1.8 0.3 4.3
Public investment 5.0 3.0 0.9 0.4 -0.4 0.0
*At current prices, EUR bn.
Governor Erkki Liikanen 1112.12.2013
Labour market conditions will not improve until 2015
Governor Erkki Liikanen 12
Employment will improve as output growth strengthens
12.12.2013
26516
4
6
8
10
12
2,200
2,300
2,400
2,500
2,600
2004 2006 2008 2010 2012 2014
Employed (left-hand scale)
Unemployment rate (right-hand scale)
1,000 persons %
Sources: Statistics Finland and Bank of Finland.
Unemployment and employed population, trend
Governor Erkki Liikanen 13
Productivity to grow sluggishly…
12.12.2013
24079
-6
-4
-2
0
2
4
6
1995 2000 2005 2010 2015
GDP/hour worked
GDP/person employed
% change on previous year
Sources: Statistics Finland and Bank of Finland.
Labour productivity growth
Governor Erkki Liikanen 14
…but unit labour costs will growsubstantially slower
12.12.2013
20749
-6
-4
-2
0
2
4
6
8
10
2004 2006 2008 2010 2012 2014
Compensation per employee
Unit labour costs
Productivity per person employed
Sources: Statistics Finland and Bank of Finland.
% change on previous year
Governor Erkki Liikanen 15
Deterioration of cost-competitivenesswill halt
12.12.2013
80
90
100
110
120
130
1999 2001 2003 2005 2007 2009 2011 2013 2015
Finland Euro area Germany France Sweden
Index 2007 = 100
Sources: Macrobond, Bank of Finland and European Commission.27319
Unit labour costs
Governor Erkki Liikanen 1612.12.2013
Recovery in exports boosts domestic demand
Governor Erkki Liikanen 17
A pick up in international trade spurs Finnish exports
12.12.2013
21242
70
80
90
100
110
120
130
140
2007 2009 2011 2013 2015
Exports of goods and services Finland's export markets
Index, 2007Q1 = 100
Sources: Statistics Finland, Eurosystem and Bank of Finland.
Finnish exports and export markets
Governor Erkki Liikanen 18
Investment activity remains muted
12.12.2013
23231
10
15
20
25
30
35
-20
-10
0
10
20
30
2006 2008 2010 2012 2014
Private investment (left-hand scale)Private investment excl. housing (left-hand scale)Housing (left-hand scale)Private investment at reference year (2000) prices (right-hand scale)
% change on previous year EUR billion
Sources: Statistics Finland and Bank of Finland.
Real investment
Governor Erkki Liikanen 19
Weak earnings development weighs down consumption
12.12.2013
19912
-4
-2
0
2
4
6
2004 2006 2008 2010 2012 2014
%
Savings ratio
Real disposable household income*
Private consumption*
Households = households and non-profit institutions serving households* % change on previous yearSources: Statistics Finland and Bank of Finland.
Households' disposable income, consumption and savings
Governor Erkki Liikanen 20
Current account in balance
12.12.2013
26152
-8
-4
0
4
8
12
1980 1990 2000 2010
Current account, % of GDP
%
Sources: Statistics Finland and Bank of Finland.
Governor Erkki Liikanen 2112.12.2013
Inflation slows
Governor Erkki Liikanen 22
Inflation has slowed down despite tax increases
12.12.2013
20984
-2
0
2
4
6
2007 2008 2009 2010 2011 2012 2013
Services Non-energy industrial goods
Processed food Unprocessed food
Energy Total index
HICP = Harmonised index of consumer pricesSource: Statistics Finland.
Contribution to HICP inflation, % points
Inflation contributions of commodity groups
Governor Erkki Liikanen 23
Weak demand keeps price pressuresin check
12.12.2013
25534
0
1
2
3
4
5
2006 2008 2010 2012 2014
HICP HICP at constant tax rates
% change on previous year
HICP = Harmonised index of consumer pricesSources: Statistics Finland and Bank of Finland.
HICP inflation and inflation excluding changesin indirect taxation
Governor Erkki Liikanen 2412.12.2013
Subdued growth erodes public finances
Governor Erkki Liikanen 25
Central and local government deficit remains sizable…
12.12.2013
24903
-8-6-4-2024681012141618
2426283032343638404244464850
2000 2002 2004 2006 2008 2010 2012 2014
Overall fiscal balance (right-hand scale)Central government fiscal balance (right-hand scale)Central and local government income (left-hand scale)Central and local government expenditure (left-hand scale)
Central and local government fiscal balance
Sources: Statistics Finland and Bank of Finland.
EUR billion % of GDP
Governor Erkki Liikanen 26
…also general government in substantial deficit
12.12.2013
24903
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
1990 1995 2000 2005 2010 2015
Primary balance Financial balance
% of GDP
Sources: Statistics Finland and Bank of Finland.
Public sector primary and financial balances
Governor Erkki Liikanen 27
Public debt to exceed 60% already in 2014
12.12.2013
24903
0
10
20
30
40
50
60
70
80
90
1995 2000 2005 2010 2015
General government EDP debt Central and local government debtCentral government debt
% of GDP
Sources: Statistics Finland, State Treasury and Bank of Finland.
General government EDP debt, central and local government debt and central government debt
Governor Erkki Liikanen 2812.12.2013
Consolidation of public finances progressing – difficult decisions still ahead
Governor Erkki Liikanen 29
Local government consolidation clearly slows down growth in public debt
• General government has accumulated an excessive structural deficit.
• The debt ratio will not be brought down to 60% without additional measures.
• Local government consolidation measures decided in the government’s structural program • will balance the municipal finances and bring the
general government structural deficit close to the target level.
• will reduce the risk of over-indebtedness, but the debt ratio will remain above 60%.
12.12.2013
Governor Erkki Liikanen 30
Longer working careers and public sector productivity play a key role in the 2020s
12.12.2013
50
60
70
80
90
100
110
120
2012 2016 2020 2024 2028
Baseline scenario
EUR 2 billion local government consolidation over period 2014-2017
In addition to local government consolidation: pension reform, higher public sector productivity and other parts of the programme implemented as planned
% of GDP
Source: Kinnunen, Mäki-Fränti and Railavo, Structural reforms and sustainability of publicfinances (Talouden rakenneuudistukset ja julkisen talouden kestävyys), Bank of Finland Bulletin 5/2013.
General government debt ratio 2012 – 2030
27344
Governor Erkki Liikanen 31
Fiscal policy steering needs strengthening
• The framework of central government spending limits needs to be reformed.– If the slowdown of economic growth is structural, spending
limits ought to be adjusted accordingly.
• The project to reform the system of financial steering for local government sector is important.
12.12.2013
Governor Erkki Liikanen 32
Structural reforms essential to close the fiscal sustainability gap
• If all the planned structural policy measures will be applied in practice, they would be sufficient to close the sustainability gap.
• Determined progress is necessary to achieve the objectives of the government’s structural policy programme.– Pension reform is essential.
• Finland’s ability to make decisions is crucially important.
12.12.2013
12.12.2013 Governor Erkki Liikanen
Financial stability
33
Banking union going forward
• Comprehensive assessment of banks before the European Central Bank assumes responsibility for supervisory tasks
• Ensuring viability of banks before single supervision
• Banks to be recapitalised, if required by results of comprehensive assessment
12.12.2013 Governor Erkki Liikanen 34
Single resolution mechanism is the key
• Orderly winding-down of unviable banks requires a resolution mechanism
• Resolution mechanism is based on principle of bail-in
• Implementation of bail-in a prerequisite for effective resolution
12.12.2013 Governor Erkki Liikanen 35
Macroprudential tools to be introduced in Finland
• The need for national macroprudential tools is more compelling within monetary union– special challenge: country-specific housing market risks
• Systemic risks have to be addressed by several tools: – countercyclical capital buffer (excessive lending growth)– loan-to-value limit (housing market risks)– capital buffer for systemically important banks and
systemic risk buffer (concentrated banking sector)
12.12.2013 Governor Erkki Liikanen 36
12.12.2013 Governor Erkki Liikanen
Domestic banking sector
37
Banking system’s risk-bearing capacity has remained good
12.12.2013 Governor Erkki Liikanen 38
0
4
8
12
16
20
2006 2007 2008 2009 2010 2011 2012 1–6/2013
Return on equity (ROE)* Capital adequacy ratio
Common Equity Tier 1 ratio (CET1)
* Income in 2006–2007 reflects certain extraordinary income items due to restructuring in the banking sector.Source: Financial Supervisory Authority.
%
Profitability and capital adequacy of Finnish deposit banks
Profitability of deposit banking under strain
12.12.2013 Governor Erkki Liikanen 39
0
1
2
3
4
5
6
7
1999 2001 2003 2005 2007 2009 2011 2013
Average interest rate on MFI loan stockAverage interest rate on MFI deposit stockMFIs' overall margin
%
Loans to and deposits from the public.Source: Bank of Finland.
Average interest rates on loans and deposits and the overall margin
Household indebtedness levelling off
12.12.2013 Governor Erkki Liikanen 40
80
85
90
95
100
105
110
115
0
20
40
60
80
100
120
140
2000 2002 2004 2006 2008 2010 2012
Household debt*, % of disposable income (left-hand scale)Housing prices relative to wage and salary earnings (right-hand scale)
%
* Incl. households' estimated share of the debt of housing companies owned by households.Sources: Statistics Finland and Bank of Finland calculations.
Household debt ratio and housing prices in Finland
Index, 2000/I = 100
Imputed average margins on new corporate loans in Finland
Finnish non-financial corporations’ interest-bearing debt
Imputed margins on new corporate loans granted by banks have widened
12.12.2013 Governor Erkki Liikanen 41
0
10
20
30
40
50
60
70
0
20
40
60
80
100
120
140
2007 2008 2009 2010 2011 2012 2013
1 Loans from MFIs2 Loans from abroad (excl. direct investments)3 Loans from OFIs4 Loans from employment pension institutions5 Loans from other general government entities6 Short-term debt securites7 Long-term debt securities8 Debt, % of GDP (right-hand scale)
Sources: Statistics Finland and Bank of Finland.
EUR billion % of annual GDP
87
65
432
1
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2010 2011 2012 2013
New drawdowns of up to EUR 50,000New drawdowns of up to EUR 250,000New drawdowns of over EUR 50,000 and up to EUR 250,000New drawdowns of over EUR 250,000 and up to EUR 1 millionNew drawdowns of over EUR 1 million
Percentage points
Excluding account and repo agreements.Source: Bank of Finland calculations.
New corporate loan agreements of up to EUR 1 million in Finland
Access to bank finance of Finnish SMEs
No significant changes in access to finance for SMEs, but company-specific risk
assessments tighter
12.12.2013 Governor Erkki Liikanen 42
0
20
40
60
80
100
2009 2010 2011* **
2012* **
2013* **
Got everythingGot part of itRefused to withdraw because cost too highApplication rejectedDon't know
* October–March.** April–September.Source: European Central Bank.
%
0
200
400
600
800
1 000
1 200
1 400
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2013 2012 2011 2010 2009 2008
EUR million
Source: Bank of Finland.
Euro & talous (Bank of Finland bulletin) 5/2013Feature articles:
• Rahoitusjärjestelmän vakaus (Financial stability in Finland)
• Talouden rakenneuudistukset ja julkisen talouden kestävyys (Structural reforms and sustainability of public finances)
Helvi Kinnunen, Petri Mäki-Fränti and
Jukka Railavo
12.12.2013 43Governor Erkki Liikanen
Governor Erkki Liikanen 4412.12.2013
Thank you!
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