Download Slides - Suomen Pankki

Seppo Honkapohja
Bank of Finland
The European Economy:
Prospects, Policies and
Problems
20.4.2016
1
From the financial crisis to the present
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
2
Global growth in 2015 slowest since the
financial crisis
Advanced economies
10
Emerging economies
World
Change in GDP, %
8
6
4
2
0
-2
-4
2005
2007
2009
2011
2013
2015
2017
Sources: Bank of Finland, IMF, OECD and Macrobond.
23428
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
3
Driving forces of development have
been
 Financial crisis and recovery
– United States, euro area; Japan
 Increased role of BRICS countries
– China, India, Russia, Brazil and South Africa
 Transformation of oil markets
– Commodity markets more widely
 Globalisation
– World trade
***
 Economic policy
– Monetary policy
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
4
Advanced main economic regions:
Recovery divergent and laborious
Euro area
120
United States
Japan
GDP, index, 100 = 2008
115
110
105
100
95
90
2008
2010
2012
2014
2016
Sources: National statistical authorities and Macrobond.
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
5
United States and euro area:
Growth structure pre- and post-crisis
Employment
Contributors to euro area GDP growth
Contributors to US GDP growth
Capital stock
Employed
Total factor productivity (TFP)
%
points
6
GDP growth
6
4
4
2
2
0
0
-2
-2
-4
-4
-6
Capital stock
Total factor productivity (TFP)
% points
Employed
GDP growth
-6
2005
2007
2009
2011
2013
2015
Sources: European Commission and Bank of Finland calculations.
2005
2007
2009
2011
2013
2015
Sources: European Commission and Bank of Finland calculations.
18 March 2016
bofbulletin.fi
32567@US_2005-2015
20.4.2016
Seppo Honkapohja
Capital stock
32567@Chart11(2)
Suomen Pankki – Finlands Bank – Bank of Finland
6
Current economic developments and outlook
for the European economy
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
7
World growth held back by structural
factors
%change on previous year
(previous forecast)
GDP
2015
2016f
2017f
2018f
EU22
1,5 (1,7) 1,4 (1,8) 1,7 (1,9) 1,7 (-)
United States
2,4 (2,6) 2,2 (3,0) 2,3 (2,8) 2,2 (-)
Japan
0,5 (0,6) 0,4 (1,1) 0,7 (1,0) 1,2 (-)
China
7 (7)
6 (6)
6 (6)
5
(-)
Russia
-4 (-4)
-3 (-2)
0 (1)
1
(-)
World
2,8 (3,0) 2,8 (3,2) 3,2 (3,5) 3,2 (-)
World trade
1,4 (1,8) 2,7 (3,7) 3,8 (4,5) 4,0 (-)
f = forecast
E22 = euro area, United Kingdom, Sweden and Denmark.
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
8
World growth held back by structural
factors
%change on previous year
(previous forecast)
Inflation
2015
2016f
2017f
2018f
EU22
0 (0)
0,2 (1,1) 1,2 (1,7) 1,6 (-)
United States
0,1 (0,2) 1 (1,6)
Japan
0,8 (0,4) 0,2 (1,1) 1,5 (1,6) 1,4 (-)
2,3 (2,0) 2,2 (-)
f = forecast
E22 = euro area, United Kingdom, Sweden and Denmark.
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
9
Forecast risks
 Risks external to the euro area
– A broad-based and strong slowdown in the global economy
– E.g. a sudden halt in Chinese growth and decline in oil prices
 Direct effects on demand
 Balance sheet effects, dollar-denominated debt and
exchange rates
 Risks internal to the euro area
– Euro area recovery still fragile
 Long-term effects from the financial crisis
– on individual euro area countries and banks
 Political uncertainties
– Brexit referendum on 23 June 2016
– Handling of the refugee crisis
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
10
GDP growing again in the euro area
GDP
Euro area
115
High-rated countries**
GIIPS*
Index, 2005 = 100
110
105
100
95
90
2008 2009 2010 2011 2012 2013 2014 2015 2016
Sources: Eurostat, Macrobond and Bank of Finland calculations.
*Greece, Ireland, Italy, Portugal and Spain.
**Austria, Belgium, Finland, France, Germany and the Netherlands.
20.4.2016
patu32425@BKTGiips
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
11
Still considerable differences among
GIIPS countries
GDP GIIPS
Ireland
Greece
Italy
Portugal
Spain
130 Index, 2005 = 100
120
110
100
90
80
70
2008
2009
2010
2011
2012
2013
2014
2015
2016
Sources: Eurostat and Macrobond.
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
12
Unemployment declining but still very
high in GIIPS countries
Unemployment rates
Euro Area
GIIPS*
High-rated countries**
19 %
17
15
13
11
9
7
5
2008
2009
2010
2011
2012
2013
2014
2015
2016
*Greece, Ireland, Italy, Portugal and Spain.
32424@Työttömyyskolmijako(ENG)
**Austria, Finland, France, Germany and the Netherlands.
Sources: OECD, Macrobond and Bank of Finland calculations.
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
13
Inflation very low in the euro area
Harmonised Consumer Price Index
High-rated countries*
5
GIIPS**
Euro area
%
4
3
2
1
0
-1
-2
2006
2008
2010
2012
2014
2016
Sources: Eurostat, Macrobond and Bank of Finland calculations.
*Austria, Belgium, Finland, France, Germany and the Netherlands.
** Greece, Ireland, Italy, Portugal and Spain.
patu32426@hicpgiips
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
14
Government debt projected to decrease
in 2015 for the first time since 2007
Public Debt
Euroalue
High-rated countries*
GIIPS**
130 % of GDP
110
90
70
50
2005
2010
2015
* Austria, Finland, France, Germany and the Netherlands.
32424@Julk.
** Greece, Ireland, Italy, Portugal and Spain.
The figures for 2015-2017 are based on the European Commission's forecast.
velka kolmijako(ENG)
Sources: European Commission, Macrobond and Bank of Finland calculations.
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
15
Government stabilizing even in GIIPS
countries
Public Debt
Greece
Ireland
Italy
Portugal
Spain
200 % of GDP
180
160
140
120
100
80
60
40
20
2005
2007
2009
2011
2013
2015
2017
The figures for 2015-2017 are based on the European Commission's forecast.
Sources: European Commission and Macrobond.
20.4.2016
[email protected] GIIPS (en)
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
16
Stock markets have been very volatile
Euro area: STOXX (broad)
Japan: Nikkei 225
Euro area: Eurofirst
Germany: DAX
160 Index, 1 Jan 2008 = 100
United States: S&P 500
China: Shanghai composite
MSCI EM
140
120
100
80
60
40
20
2008
2010
2012
2014
2016
Lähde: Macrobond.
patu32422@pörssi(ENG)
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
17
Euro and yen have been appreciating
this year
160
Euro
Chinese renminbi
Japanese yen
Indian rupee
US dollar
Index, 1 Jan 2009 = 100
140
120
100
80
60
40
2010
2011
2012
2013
2014
2015
2016
Nominal Effective Exchange Rate
Sources: JP Morgan and Macrobond.
patu32422@NEER(ENG)
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
18
Monetary policy was eased on 10 March
2016 with the adoption of a
comprehensive monetary policy
package.
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
19
Refinancing operations and asset
purchases
Credit operations and asset purchases
Securities held for monetary policy purposes
Targeted and other monetary policy refinancing operations of at least 12 months
Regular and other short-term monetary policy operations
1 800 EUR billion
1 600
1 400
1 200
1 000
800
600
400
200
0
2007
2009
Sources: ECB and Macrobond.
20.4.2016
patu32422@ekp_tase2
Seppo Honkapohja
2011
2013
Suomen Pankki – Finlands Bank – Bank of Finland
2015
20
Expanded asset purchase programme
(EAPP)
Monthly purchase volumes increased from EUR
60 billion to EUR 80 billion
Asset-backed securities
Public sector debt securities
2 000 EUR billion
Covered bonds
1 800
1 600
1 400
1 200
1 000
800
600
400
200
0
2015
2016
2017
Sources: ECB and Macrobond.
The dashed line illustrates the target level announced in March, while the dotted line marks the
previous target level as announced in December 2015.
20.4.2016
18 March 2016
bofbulletin.fi
Seppo Honkapohja
patu32422@EAPP2(2)
Suomen Pankki – Finlands Bank – Bank of Finland
21
Objectives of the March monetary policy
decisions:
 To further ease financing conditions in euro area
countries
 To foster increased lending
BACKGROUND:
 Weakened outlook for global economy
 Tightening of financing conditions in early year
 Subdued inflation outlook
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
22
Inflation outlook weakened and
expectations subdued
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
23
Still weak consumer price inflation
Euro area consumer price inflation (HICP)
Inflation
Underlying inflation*
5 %
4
3
2
1
0
-1
1999
2004
2009
2014
* Underlying inflation = inflation excluding energy, food, alcohol and tobacco.
Sources: ECB and Bank of Finland.
32120@Chart8(EN)
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
24
Oil price strongly depressing short-term
inflation expectations
1-year inflation-linked swap rate
5-year inflation rate 5 years ahead
10-year inflation-linked swap rate
Oil price (Brent) (right-hand scale)
USD/barrel
2.5 %
22/10
140
3/12
2
120
1.5
100
1
80
0.5
60
0
-0.5
40
-1
20
2014
2015
2016
Sources: Bloomberg, Macrobond and calculations by the Bank of Finland.
patu32426@odot3(2)
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
25
Long-term inflation expectations have
weakened again in euro area and USA
Market expectations, euro area
SPF survey, euro area
Market expectations, USA
SPF survey, USA
4 %
3.5
3
2.5
2
1.5
1
2009
2010
2011
2012
2013
2014
2015
2016
Sources: Bloomberg, ECB, Fed of Philadelphia and Macrobond.
Market expectations are based on 5-year and 10-year inflation-linked swap
rates. The SPF survey horizon extends five years ahead.
20.4.2016
patu32422@infoodotus (ENG)
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
26
What monetary policy decisions were
taken on 10 March?
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
27
Governing Council decisions in March
2016
 Monetary policy rates were lowered
– Key interest rate (MRO) to 0.0% (change -5 bp)
– Deposit facility rate to -0.40% (-10 bp)
 Monthly purchase volumes in the expanded asset purchase
programme (EAPP) were expanded (by €20 bn) to €80 bn as of
1 April 2016
– Investment-grade bonds issued by non-banking-sector corporations
were included on list of assets eligible for purchase

A second series of targeted longer-term refinancing
operations (TLTRO 2) will be launched in June 2016.
– These will enhance the transmission of monetary policy measures
to the economy by encouraging banks to increase lending to the
real economy.
– Each operation will have a 4-year maturity, and the interest rate can
be as low as the rate on the deposit facility.
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
28
Forward guidance on monetary policy
 Purchases are intended to run until at least
the end of March 2017, or beyond, if
necessary, until inflation is on a sustained
path towards a level below, but close to,
2%.
 In view of the current outlook for price
stability, the Governing Council expects
the key ECB interest rates to remain at
present or lower levels for an extended
period of time, and well beyond the horizon
of the asset purchases.
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
29
Transmission of monetary policy:
The historically accommodative stance
of monetary policy supports economic
recovery and price stability through
several transmission channels.
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
30
Euro area sovereign bond yields at low
levels
Germany
Euro area average sovereign bond yield
6 %
5
4
3
2
1
0
2008
2009
2010
2011
2012
2013
2014
2015
2016
10-year sovereign bond yield.
Source: Macrobond.
patu32422@pitkätkorot
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
31
Bank lending rates on household and
corporate loans have decreased
3-month Euribor
Average interest rate on new household loans
Average interest rate on new corporate loans
7 %
6
5
4
3
2
1
0
-1
2003
2006
2009
2012
2015
Sources: ECB and Macrobond.
32422@antolainakorot (sv)
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
32
Growth in bank loans has accelerated
Annual growth in loan stocks
Corporate loan stock
3
Household loan stock
% change from previous year
2
1
0
-1
-2
-3
-4
2010
2011
2012
2013
2014
2015
2016
Loan stocks adjusted for balance sheet transfers and securitisation.
Sources: ECB and Macrobond.
20.4.2016
patu32422@lainakannat(s v)
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
33
Condition of European banks
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
34
Banking Union: main elements
Banking Union: Euro area & opt-ins
Single Supervisory
Mechanism (SSM)
Single Resolution
Mechanism (SRM)
• Efficient, effective supranational supervision with
the ECB at the centre
• Clear separation of
monetary policy and
supervision
• Harmonised tools
• Investor/debtor
responsibility (bail-in)
• Industry responsibility
(resolution fund)
• No bail-out
European Deposit
Insurance Scheme
(EDIS)
• Commission proposal
• Three sequential stages
• National schemes would
co-exist alongside EDIS
Single Rulebook (all EU)
Bail-out of banks
• Expensive, politically
loaded
• Case-by-case
decisions (ESM)
20.4.2016
Seppo Honkapohja
When this is properly done …
…the likelihood of this is significantly
reduced.
Suomen Pankki – Finlands Bank – Bank of Finland
!
35
European Deposit Insurance Scheme
(EDIS), proposal
 At present there is some harmonization but not yet a
common framework.
 Member states differ in their position towards EDIS.
 According to the Commission proposal, EDIS would be
developed over time in three stages:
 PHASE 1: RE-INSURANCE (2017 - 2019)
– National Deposit Guarantee Schemes (DGS) could access EDIS funds
only after exhausting its own resources.
– EDIS funds will provide extra funds only up to a certain level.
 PHASE 2: CO-INSURANCE (2020 - 2023)
– EDIS contributes from first euro of loss. The share contributed by EDIS
would start at a low level and progressively increase.
 PHASE 3: FULL INSURANCE National DGS (2024>)
– By gradually stepping up the share of risk that EDIS covers to 100%,
EDIS will fully insure national DGS as of 2024.
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
36
Evolution of large banks’ share prices at
the beginning of the year
Japan
United States
Europe
Nordic countries
Index, 2016 = 100
110
100
90
80
70
60
1.1.2016
1.2.2016
1.3.2016
1.4.2016
Source: Bloomberg.
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
37
Euro area banks increased their capital
Tier 1 ratio
Total capital adequacy ratio
Common Equity Tier 1 ratio
18
%
15.5
16
14
13.5
13.1
2010
2011
15.6
16.2
14.3
13.7
13.1
12
10
8
6
2012
2013
2014
2015Q3
Source: European Central Bank.
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
38
The differential between bank lending
and deposit rates has decreased
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
39
Non-performing loans weigh on banks
 The problem of non-performing loans particularly
affects mid-sized banks in countries hit by the
crisis.
 The amount of non-performing loans has
decreased in some countries, but progress is
uneven and takes time.
 A swift reduction in non-performing loans is
essential for banks’ ability to grant new loans.
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
40
Tax-payers’ or creditors’ responsibility?
 The crisis resolution framework that entered into
force at the beginning of the year emphasises
creditor involvement in situations where a bank
runs into trouble.
 Functions critical to society can be preserved
and problems dealt with in an orderly manner.
 The transition to the new resolution framework
will not be easy, but it is important to complete it.
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
41
Banks’ position in a nutshell
 Banks are already in better shape, but challenges
remain.
 Strong economic growth will improve profitability
and help reduce the amount of non-performing
loans.
 Reducing the amount of non-performing loans is
a precondition for improving banks’ ability to
function.
 Well capitalised banks are key to an effective
transmission of monetary policy.
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
42
Prospects for EU and Euro area
 EU and Euro area: continuing ”projects”; the financial
crisis is not over.
 Many acute problems have receded and major
changes to the system have made:
– Banking union (except common deposit insurance)
– Plans for capital market union
– Improvements in economic policy coordination
 There is also an active discussion about future
development of EMU and EU.
 Alternative visions
1) EMU with Centralized Steering
2) EMU with Market Discipline
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
43
EMU with Centralized Steering
 Strengthening of control over member countriesin
fiscal and economic policies and increasing joint
responsibility of risk and stability of member
countries.
 This requires ability to effective control of fiscal and
economic ´policies of member countries.
 Critical issues: can this kind of arrangement be
organized so that it has sufficient demotratic
legitimacy.
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
44
EMU with Market Discipline
 Starting point: member countries have responsibility





20.4.2016
Seppo Honkapohja
of their economic policies and their consequences.
Issues of legitimacy of decision making is resolved
through national decision processes.
Market discipline and national fiscal policy institutions
support responsbilities over fiscal policies.
Policies to mitigate cyclical developments can have
tools at EU/Euro area level.
Joint responsibilities are not between member
countries but through common institutions and thus
joint responsibilities between firms and people.
Market discipline requires a credible mechanism for
dealing with debt restructuring of a problem country.
Suomen Pankki – Finlands Bank – Bank of Finland
45
Two special topics, comments
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
46
Brexit
 Referendum on Brexit is organized on June 23th, 2016.
 News on the referendum are closely followed by the





20.4.2016
Seppo Honkapohja
financial markets.
According to the treaty of Lisbon, relations with the EU
have to be renegotiated in two years in case of Brexit.
EU is an important trading partner for the UK.
The financial services sector in the UK benefits from the
entry of foreign entities into the common market through
the UK.
According to research results (Ottaviano, Pessoa,
Sampson and Van Reenen, 2014), Brexit would be
negative to UK growth.
BoE: Brexit uncertainty a negative risk to UK growth.
Suomen Pankki – Finlands Bank – Bank of Finland
47
EU share of UK goods exports has been
on an declining trend since 2003
Services
70
Goods
Total
UK exports to the EU as a percentage of total UK exports, %
65
60
55
50
48 %
45
44 %
40
39 %
35
30
25
20
2000
2002
2004
2006
2008
2010
2012
2014
2016
Source: ONS Database, Macrobond.
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
48
UK runs a trade deficit in goods but
surplus in services
UK trade vis-à-vis EU and the rest of the world
to/from EU
40
to/from rest of the world
% of GDP as of Q3 2015
Exports
Imports
Trade balance
Goods Services Total
Goods Services Total
Goods Services Total
35
30
25
20
15
10
5
0
-5
-10
Source: ONS Database, Macrobond.
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
49
EU Refugee Crisis
 In 2015 the number of asylym seekers in the EU




doubled from 2014 and reached close to 1.3 million.
35 % seeked asylym in Germany.
Of first time asylym seekers, 29 % came from Syria, 14
% from Afghanistan and 10 % from Iraq.
The number of asylym seekers started rising rapidly in
June and attained the highest level in September and
October.
In December and at the beginning of this year the
number of asylym seekers was clearly lower in the EU
but still very high in Germany.
Source: Eurostat.
 It has been difficult to decide on a common policy: in
response, individual countries have tightened their
immigration policies.
– The recent EU-Turkey deal is focused on immigrants arriving at
Greece.
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
50
Thank you!
20.4.2016
Seppo Honkapohja
Suomen Pankki – Finlands Bank – Bank of Finland
51