SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Economic outlook for 2013-2015 Euro & talous (Bank...

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND

Economic outlook for 2013-2015

Euro & talous (Bank of Finland Bulletin) 3/2013

Governor

Erkki Liikanen

111.6.2013 Erkki Liikanen


International economy:market situation favourable,

real economy sluggish

2Erkki Liikanen11.6.2013


Share indices up

40

60

80

100

120

140

160

2010 2011 2012 2013

USA Germany Spain Italy Japan

4.1.2010 = 100

Source: Bloomberg.26339@Pörssi-indikaattoreita (3)EN

Erkki Liikanen11.6.2013 3


Government bond yield spreads narrowed

0

1

2

3

4

5

6

7

8

9

2010 2011 2012 2013

United States Japan Germany Italy Spain Finland

%, 10-year government bond yields

Source: [email protected]



Euro area progress in rebalancing

Current account General government deficit

-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 European Commission and calculations by the Bank of Finland.

-16

-14

-12

-10

-8

-6

-4

-2

0

2005 2007 2009 2011

High-rated countries* GIIPS** Euro area

% of GDP

* Germany, France, Netherlands, Belgium, Austria and Finland.** Greece, Ireland, Italy, Portugal and Spain.Source: European Commission and calculations by the Bank of Finland.



But financial crisis casts a long shadow

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 areaJapan FinlandChina (right-hand scale)

2008/I = 100 2008/I = 100

Sources: National statistical authorities and Eurostat.25200@BKT_taso_EA (2008)en



Finnish economy turned down again,growth and employment prospects weak for the

next few years



Finnish economy faced structural change and cyclical downturn at same time

85

90

95

100

105

110

115

2002 2004 2006 2008 2010 2012

Volume index, 2005 = 100

Seasonally adjusted dataSource: Statistics Finland. The figures for the first quarter of 2013 are based on Statistics Finland's flash estimate.



Restructuring of industry exceptional in international comparison

11.6.2013 Erkki Liikanen 9


Finland has lost export market shares

-30

-20

-10

0

10

20

30%

Source: Eurostat.

Share of world exports, cumulative change 2007-2011



Structural change in goods exports

0

10

20

30

40

50

60

70

2002 2004 2006 2008 2010 2012

Paper and board plus derivative products and pulp

Telephone, radio and TV equipment and other similar devices

Other goods

Value of Finland’s goods exports

EUR bn

Source: National Board of Customs.



0

1

2

3

4

5

6

1975 1980 1985 1990 1995 2000 2005 2010

Paper industry Electronics

Share of GDP, %

Source: Statistics Finland. 24877

Substantial contraction in key export industries’ share of GDP



Is the era of current account surpluses now over?

13

-8

-4

0

4

8

12

1980 1985 1990 1995 2000 2005 2010 2015

Current account Goods and services account*

* National Accounts figuresSources: Statistics Finland and Bank of Finland.

% of GDP

Erkki Liikanen11.6.2013


One worrying feature of structural change is the effect on unemployment among young men

Labour market situation on entering working life has a long-term influence on cohorts’ labour force participation rates.

The Great Depression of the 1990s lowered labour market participation of women born in the 1960s and 1970s.

Now under threat is the labour market attachment of men born in the 1980s.

Ongoing structural change in the economy could leave a long-lasting mark in the labour market position of men.

Previous assessments of future trends in the labour force could be overly optimistic.

Erkki Liikanen 1411.6.2013


Cyclical outlook weak



Economic recovery muted

-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.


Gross Domestic Product


Weak growth reflected in unemployment

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 %




2012* 2011 2012 2013f 2014f 2015f

EUR bn % change from previous year in real terms

GDP 194,5 2,8 -0,2 -0,8 0,7 1,4

December forecast 0,3 0,4 1,5

Change -0,5 -1,2 -0,8

Imports 78,4 6,1 -3,7 0,8 2,8 4,6

Exports 77,3 2,9 -1,4 1,2 3,5 4,7

Private consumption 109,5 2,3 1,6 -0,9 0,2 1,2

Public consumption 48,3 0,4 0,8 0,8 0,1 0,4

Private investment 32,7 7,7 -3,4 -3,6 2,0 3,9

Public investment 5,0 2,9 0,5 0,4 -0,1 0,0

Growth forecast weaker

* At current prices, EUR bn.



Structural change reduced exports,household consumption fading



Recovery in international trade will not remedy fall in exports

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.



Household consumption no longer supports economic growth

-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.



Important to improve cost-competitiveness



Cost-competitiveness declined

23

-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


% change on previous year



Cost-competitiveness also influenced by labour costs in the closed sector

24

90

100

110

120

130

140

1999 2001 2003 2005 2007 2009 2011

Finland Competitor countries

Index, 1999 = 100

* Sectors totalled with weightings according to the shares of their intermediate products used by industry.Sources: Eurostat and calculations by the Bank of Finland.


Unit labour costs in the closed economy sectors producingintermediate inputs to manufacturing industries*


Fading demand slows inflation



Inflation slowing despite tax rises

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.



Finnish inflation nevertheless faster than euro area as a whole


-4

-2

0

2

4

6

8

10

2006 2007 2008 2009 2010 2011 2012 2013

Finland Euro area


Source: Eurostat.

Food at fixed tax rates

0

1

2

3

4

5

2006 2007 2008 2009 2010 2011 2012 2013

Finland Euro area


Source: Eurostat.

Services at fixed tax rates


Slower growth weakens public finances



Substantial funding gap in public finances

29

30

35

40

45

50

55

60

1990 1995 2000 2005 2010 2015

Income Expenditure% of GDP


Public income and expenditure excl. pension funds



Slowdown in economic growth will keep public finances in deficit

30

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

1990 1995 2000 2005 2010 2015

Primary balance General government fiscal balance

% of GDP


Primary and financial balance of the public sector



Deficit and slow growth increase level of public debt

31

0

10

20

30

40

50

60

70

80

1990 1995 2000 2005 2010 2015

General government EDP debt (left-hand scale)

Central government on-budget debt (left-hand scale)

% of GDP




On policy options



Problems in economy mainly structural

Recovery in international economy will not remedy collapse in exports– Contraction of electronics and paper industry structural– Cost-competitiveness declined

Domestic demand funded increasingly with debt

– Cannot serve as sustainable driver of growth

Demographic trends slowing growth and burdening public finances

– Form a constraint on fiscal stimulus



How to support growth and employment?

Finnish economy’s basic strengths unchanged– Strong basic education, knowledgeable workforce, functioning

infrastructure, efficient administration and reliable justice system– Provide a good foundation for renewing the economy

Growth, employment and public finances can be successfully strengthened– But cost-competitiveness is needed

• Situation of the open sector must be taken into account in pay agreements

• Faster unit labour cost rises than in competitor countries in previous years require slower developments over next several years

– And real competitiveness is needed• Structural reforms that boost potential output and innovations



Areas of structural change that supportgrowth potential

Labour supply

Competition in the service and construction sectors

Supply of land and housing

Productivity in publicly funded services

Tax system

Innovation policy



Stronger growth outlook through structural reforms and competitiveness

Boosting growth potential would improve confidence in future– Employment and productivity outlook would improve

– Long-term sustainability of public finances would be strengthened

If growth outlook improves in a sustainable way, companies could take recruitment and investment decisions



Euro & talous (Bank of Finland bulletin) 3/2013Feature articles:

Työvoiman tarjonta ja kohortit: suhdanteiden vaikutus työmarkkinoille kiinnittymiseen (Cohort analysis of labour supply)

Helvi Kinnunen and Petri Mäki-Fränti

Toimialoittainen työkustannuskehitys teollisuuden kustannusrakenteen näkökulmasta (Sector-specific labour cost developments from the perspective of the industrial sector’s cost structure)

Jarkko Kivistö



Thank you!


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