Economic outlook for 2013−2015 Euro & talous (Bank of Finland Bulletin) 5/2013 Governor Erkki...

1

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


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

[email protected]äämä(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


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


Finland’s growth outlook slowly improving


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.


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


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.


Labour market conditions will not improve until 2015


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 %


Unemployment and employed population, trend


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


Labour productivity growth


…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




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


Recovery in exports boosts domestic demand


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


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


Real investment


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


Current account in balance

12.12.2013

26152

-8

-4

0

4

8

12

1980 1990 2000 2010

Current account, % of GDP

%



Inflation slows


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


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


HICP = Harmonised index of consumer pricesSources: Statistics Finland and Bank of Finland.

HICP inflation and inflation excluding changesin indirect taxation


Subdued growth erodes public finances


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


EUR billion % of GDP


…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


Public sector primary and financial balances


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


Consolidation of public finances progressing – difficult decisions still ahead


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


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


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


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


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

Domestic banking sector

37

Banking system’s risk-bearing capacity has remained good


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


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


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


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)


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


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


Thank you!

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Economic outlook for 2013−2015 Euro & talous (Bank of Finland Bulletin) 5/2013 Governor Erkki...

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