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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