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Economic outlook for 2014–2016 Governor Erkki Liikanen 10 June 2014 Bank of Finland 11 June 2013: ‘The Finnish economy has faced structural change and a cyclical recession at the same time’ 10.6.2014 Erkki Liikanen 2 Change in value added since 2007 Electrical engineering and electronics Other metal industry Forest industries Chemicals industry Other manufacturing 1 % of the value of GDP in 2007 Direct impact on GDP of decreased output by electrical engineering and electronics industry: -4% BKT:hen –4 % 0 -1 -2 -3 -4 -5 -6 -7 2008 2009 2010 Source: Statistics Finland. 10.6.2014 Erkki Liikanen 2011 2012 2013 3 Prolonged decline in costcompetitiveness 140 Finland Euro area Index, 1999 = 100 Germany France Spain Sweden Finland France Spain Euro area Sweden* 130 120 Germany 110 100 90 1999 2001 2003 2005 2007 2009 * SEK-denominated. Sources: Eurostat and OECD. 10.6.2014 Erkki Liikanen 2011 2013 4 Developments in the international economy 10.6.2014 Erkki Liikanen 5 Bull market flattens out USA 180 Germany Japan Finland Italy Spain 4 Jan 2010 = 100 160 140 120 100 80 60 40 2010 2011 2012 2013 2014 Source: Bloomberg. 10.6.2014 Erkki Liikanen 6 Purchasing managers’ indices anticipate recovery in euro area and United States United States 65 Euro area Japan China Index 60 55 50 45 40 35 30 25 2008 2009 2010 2011 2012 2013 Source: Bloomberg. 10.6.2014 Erkki Liikanen 7 Progress in bringing balance to economies of crisis countries Current account General government structural primary balance GIIPS** High-rated countries* 4 Euro area 6 % of GDP 3 4 2 2 1 High-rated countries* GIIPS** Four-quarter moving average, % of GDP Euro area 0 0 -2 -1 -2 -4 -3 -6 -4 2003 2005 2007 2009 2011 * Germany, France, Netherlands, Belgium, Austria and Finland. ** Greece, Ireland, Italy, Portugl and Spain. The figures for 2013 are based on the Commission's 2014 spring forecast. Sources: European Commission, ECB and calculations by the Bank of Finland. 10.6.2014 Erkki Liikanen 2013 -8 2008 2009 2010 2011 2012 2013 Sources: ECB, Eurostat, national central banks/statistical authorities and Bank of Finland calculations. 8 Government bond yield differentials continue to narrow Portugal Finland Ireland United States Italy Germany Spain Japan 18 %, 10-year government bond yields 16 14 12 10 8 6 4 2 0 2010 2011 2012 2013 2014 Source: Bloomberg. Bond maturities approx 10 years. 10.6.2014 Erkki Liikanen 9 Russian growth outlook and share prices weakened Russian GDP, annual growth, % Russian RTS share index (right-hand scale) 15 2500 10 2000 5 1500 0 1000 -5 500 -10 -15 0 2005 2007 Source: BOFIT. 10.6.2014 Erkki Liikanen 2009 2011 2013 10 Global economy grows – Finland lags behind GDP United States Japan China (right-hand scale) 125 Euro area Finland 2008/I = 100 2008/I = 100 200 120 180 115 160 110 140 105 120 100 100 95 80 90 60 85 40 2008 2009 2010 2011 2012 2013 2014 Sources: National statistical authorities and Eurostat. 10.6.2014 Erkki Liikanen 11 Policy interest rates historically low 2,5 % Eurosystem key policy rate Marginal lending rate Overnight deposit rate Eonia 12-month euribor 2 1,5 1 0,5 0 2010 2011 2012 Sources: ECB and Reuters. 10.6.2014 Erkki Liikanen 2013 2014 12 Finland’s business cycle conditions remain weak 10.6.2014 Erkki Liikanen 14 GDP continues to contract Trend Indicator of Output 115 GDP at market prices Index, 2005 = 100 110 105 100 95 90 85 2002 2004 2006 2008 2010 2012 2014 Seasonally adjusted figures. Source: Statistics Finland. 10.6.2014 Erkki Liikanen 15 First signs of recovery in industrial sector Industrial output, new orders and industrial confidence indicator Volume index of industrial output (left-hand scale) New orders in manufacturing (left-hand scale) Industrial confidence indicator (right-hand scale) 160 Index, 2005 = 100 Balance 150 40 30 140 20 130 120 10 110 0 100 -10 90 -20 80 70 -30 60 -40 2005 2007 2009 2011 2013 Seasonally adjusted figures. Source: Statistics Finland and European Commission. 10.6.2014 Erkki Liikanen 16 Domestic market cooling down: consumers still cautious Consumer confidence indicator and retail sales volume Consumer confidence indicator (left-hand scale) Annual change in retail sales volume, 3-month moving average 25 % Balance 10 20 8 15 6 10 4 5 2 0 0 -5 -2 -10 -4 -15 -6 2005 2007 2009 2011 2013 Source: Statistics Finland. 10.6.2014 Erkki Liikanen 17 ECONOMIC GROWTH BEGINS, BUT REMAINS SLOW 10.6.2014 Erkki Liikanen 18 Economy takes turn for the better, but growth remains slow Real GDP % change on previous year (right-hand scale) At reference year (2000) prices (left-hand scale) 180 % EUR billion 10 160 5 140 0 120 -5 100 -10 2002 2007 Real GDP, % 2013: -1.4 2014f: 0.0 2015f: 1.4 2016f: 1.5 2012 f = forecast Sources: Statistics Finland and Bank of Finland. 10.6.2014 Erkki Liikanen 19 Export markets pick up Finnish exports and export markets Exports of goods and services 140 Finland's export markets Index, 2007Q1 = 100 Exports, % 130 2013: 2014f: 2015f: 2016f: 120 110 0.3 2.1 4.8 5.0 100 90 80 70 2007 2009 2011 2013 2015 f = forecast Sources: Statistics Finland, Eurosystem and Bank of Finland. 10.6.2014 Erkki Liikanen 22 Fixed investment takes off – housing investment sluggish Real investment Private investment Private investment excl. housing Housing 140 Index, 2000 = 100 Private investment, % 130 120 2013: 2014f: 2015f: 2016f: 110 100 -6.4 -4,7 5,2 6,0 90 80 2000 2005 2010 2015 f = forecast Sources: Statistics Finland and Bank of Finland. 10.6.2014 Erkki Liikanen 23 Household purchasing power grows slowly: consumption lacklustre Household's disposable income, consumption and savings Savings ratio Housholds' real disposable income* Private consumption* 6 % Private consumption, % 4 2013: 2014f: 2015f: 2016f: 2 0 - 0.8 - 0.7 0.8 1.0 -2 -4 2004 2009 2014 f = forecast Households = households and non-profit institutions serving households * % change from previous year Sources: Statistics Finland and Bank of Finland. 10.6.2014 Erkki Liikanen 24 Inflation lower Consumer prices Harmonised index of consumer prices, Finland Harmonised index of consumer prices, euro area 5 % change on previous year Harmonised index of consumer prices, % 4 2013: 2014f: 2015f: 2016f: 3 2 2.2 1.2 1.3 1.5 1 0 -1 2007 2009 2011 2013 2015 f = forecast Sources: Statistics Finland, Eurostat, ECB and Bank of Finland. 10.6.2014 Erkki Liikanen 25 Employment improves only marginally Unemployment and employed population, trend Number of employed (left-hand scale) Unemployment rate (right-hand scale) 2600 1,000 persons % 12 2500 10 2400 8 2300 6 2200 4 2005 2007 2009 2011 2013 Unemployment rate, % 2013: 2014f: 2015f: 2016f: 8.2 8.6 8.3 7.8 2015 forecast = f Sources: Statistics Finland and Bank of Finland. 10.6.2014 Erkki Liikanen 26 Public finances consolidate slowly General government net lending Local government Central government 6 Social security funds Total general government % of GDP 4 2 0 -2 -4 -6 -8 2005 2007 2009 2011 2013 2015 Sources: Statistics Finland and Bank of Finland. 10.6.2014 Erkki Liikanen 27 Public debt and total tax ratio remain high Public debt and total tax ratio,% of GDP General government EDP debt (left-hand scale) Total tax ratio (right-hand scale) % 80 % 48 60 46 40 44 20 42 0 40 1995 2000 2005 2010 2015 Sources: Statistics Finland, State Treasury and Bank of Finland. 10.6.2014 Erkki Liikanen 28 Forecast summary – Supply and demand – % change of previous year 2013 2014f 2015f 2016f Gross domestic product -1,4 0,0 1,4 1,5 December forecast -1,0 0,6 1,7 Private consumption -0,8 -0,7 0,8 1,0 Private fixed investment -6.4 -4.7 5.2 6,0 Imports -1,8 1,0 4,1 5,0 Exports 0,3 2,1 4,8 5,0 Unit labour costs 2,2 0,4 0,4 1,0 Harmonised index of consumer prices 2,2 1,2 1,3 1,5 Unemployment rate, % 8,2 8,6 8,3 7,8 -1,1 -0,6 -0,2 -0,3 Current account balance, % of GDP BKT:stä f% = forecast Sources: Statistics Finland and Bank of Finland. 10.6.2014 Erkki Liikanen 29 Downside risks to growth International risks • Ukraine crisis and developments in Russian economy generate uncertainty • Euro area structural reforms still unfinished and financial system still vulnerable • Instability in China’s financial sector Domestic risks • Growth recovery could dry up if export markets do not pull hard enough and competitiveness problems continue. • Market confidence in Finland could be endangered if economic policy grip is insufficiently firm (alternative scenario). 10.6.2014 Erkki Liikanen 30 ON THE POLICY DECISIONS 10.6.2014 Erkki Liikanen 31 Restoration of competitiveness necessary for export and employment • Unit labour costs must rise more slowly than in trading partners for several years ahead • Fostering arrangements at company level – Employees may secure their jobs and employers the profitability of their output when conditions get tougher • Removal of obstacles to competition; supply of housing in growth centres 10.6.2014 Erkki Liikanen 32 Structural reforms needed to address economic problems • Ambitious implementation of government structural policy programme • Pension reform key – In the absence of a reform, there will be high upward pressure on the tax rate, while pension contributions are higher than before • Accumulation of general government debt must be stopped – Increases the risks and does not solve the structural problems 10.6.2014 Erkki Liikanen 33 Challenging decisions taken, implementation lies ahead • Given the restrained economic situation, capacity to take corrective action is key. • Confidence in economic policy is slowly built and quickly lost. • Decisions on, on one hand, structural reforms and, on the other hand, on general government consolidation measures have been vitally important. • If uncertainty were to arise regarding implementation of the decisions taken, the rebuilding of confidence could in the future require much more extensive measures than those currently posed. 10.6.2014 Erkki Liikanen 34 ALTERNATIVE SCENARIO 10.6.2014 Erkki Liikanen 35 Financial conditions may tighten again • Slow economic growth, in combination with little room for manoeuvre in the public sector, heighten the risk that market confidence in Finland’s solvency will shake. • Costs of financing general government debt may grow and overall financial conditions may tighten. • Banks’ access to funding will become more expensive, the supply of credit decline and the interest rate premium grow. The increase in uncertainty may also cause a fall in share and housing prices • This alternative calculation aims to illustrate the macroeconomic effects of the scenario. 10.6.2014 Erkki Liikanen 36 Model • The alternative scenario is based on a model that illustrates the combined effect of the macro economy and financial factors • In the calculation, demand and supply shocks, as well as shocks originating in financial markets, such as credit supply and asset price shocks, will be isolated from each other to be able to assess their impact on GDP growth and other model variables. • The model is discussed in greater detail in one of the feature articles of the Bulletin. 10.6.2014 Erkki Liikanen 37 Tighter financial conditions would depress GDP growth significantly Vaihtoehtoislaskelma: luotontarjonnan vähentyminen BKT** Inflaatio** Uudet lainat** Asuntojen hinnat** Osakkeiden hinnat** Korkomarginaali* 2014 2015 2016 -0.2 -0.8 -0.8 0.1 -0.1 -0.4 -4.2 -5.0 -2.8 -1.0 -3.6 -3.5 -2.9 -11.0 -10.8 0.1 0.2 0.2 * * Muutos suhteessa ennusteen perusuran mukaiseen kasvuun, prosenttiyksikköä * Muutos korkomarginaalissa, prosenttiyksikköä 10.6.2014 Erkki Liikanen 38 Thank You! 10.6.2014 Erkki Liikanen 39