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Economic outlook for 2012–2014 Euro & talous (Bank of Finland Bulletin) 5/2012 Governor Erkki Liikanen 13.12.2012 Erkki Liikanen SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 1 Signals from international economy point in two directions 13.12.2012 Erkki Liikanen SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 2 Financial market situation improved since the summer... Stock prices USA (S&P500) 140 Germany Spain Italy 4 Jan 2010 = 100 130 120 110 100 90 80 70 60 50 40 2010 2011 2012 Source: Bloomberg. 13.12.2012 Erkki Liikanen SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 3 …but growth forecasts revised downwards during the course of the year GDP forecasts for 2013 World 3.5 USA Inflation forecasts for 2013 Euro area % World 3.5 3 3 2.5 2.5 2 2 1.5 1.5 1 1 0.5 0.5 0 0 2012 Euro area % 2012 Source: Consensus Economics. 13.12.2012 USA Erkki Liikanen Source: Consensus Economics. SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 4 Growth outlook for Finland also weakened 13.12.2012 Erkki Liikanen SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 5 Finland’s economic growth very weak GDP: % change on previous year (right-hand scale) GDP at reference year (2000) prices (left-hand scale) 180 % EUR billion 10 160 5 140 0 120 -5 100 -10 2000 2002 2004 2006 2008 2010 2012 2014 Sources: Statistics Finland and Bank of Finland. 13.12.2012 Erkki Liikanen SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 6 Supply and demand 2011* 2010 2011 2012e 2013e 2014e EUR billion Volume, % change on previous year GDP 189,4 3,3 June forecast Change 2,7 0,3 0,4 1,5 2,9 1,5 1,2 1,6 -0,2 -1,2 -0,8 -0,1 Imports 78,3 6,9 5,7 -1,2 1,0 4,2 Exports 77,1 7,5 2,6 -1,9 1,3 4,3 Private consumption 105,2 3,3 2,5 0,7 -0,1 1,2 Public consumption 46,0 -0,3 0,4 -0,3 1,0 0,6 Private investment 32,4 3,5 7,7 -0,9 0,4 3,5 Public investment 4,6 -7,7 0,6 0,4 0,5 1,3 * At current prices, EUR billion. 13.12.2012 Erkki Liikanen SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 7 Labour markets deteriorating 13.12.2012 Erkki Liikanen SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 8 Slow growth will push up unemployment Employed (left-hand scale) Unemployment rate (right-hand scale) 2,600 1,000 persons % 12 2,500 10 2,400 8 2,300 6 2,200 4 2004 2006 2008 2010 2012 2014 Sources: Statistics Finland and Bank of Finland. 13.12.2012 Erkki Liikanen SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 9 Labour costs have risen Compensation per employee Unit labour costs Productivity per person employed 10 % change on previous year 8 6 4 2 0 -2 -4 -6 2004 2006 2008 2010 2012 2014 Sources: Statistics Finland and Bank of Finland. 13.12.2012 Erkki Liikanen SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 10 Competitiveness weaker than manufacturing unit labour costs suggest Manufacturing Change 1999Q1-2012Q2, % Volume of production Value of production Finland Euro area Unit labor costs Labor costs per value of production -10 0 10 20 30 40 26313 Source: Eurostat. Production is gross value added. 13.12.2012 Erkki Liikanen SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 11 Domestic demand fading, export outlook weak 13.12.2012 Erkki Liikanen SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 12 Household consumption fading Savings ratio Real disposable household income* Private consumption* 6 % 4 2 0 -2 -4 2004 2006 2008 2010 2012 2014 Households = households and non-profit institutions serving households * % change on previous year Sources: Statistics Finland and Bank of Finland. 13.12.2012 Erkki Liikanen SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 13 Export growth weak Exports of goods and services 140 Finland's export markets Index, 2007Q1 = 100 130 120 110 100 90 80 70 2007 2008 2009 2010 2011 2012 2013 2014 Sources: Statistics Finland, Eurosystem and Bank of Finland. 13.12.2012 Erkki Liikanen SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 14 Current account remains in deficit Current account 12 Goods and services account* % of GDP 8 4 0 -4 -8 1980 1985 1990 1995 2000 2005 2010 * National Accounts Sources: Statistics Finland and Bank of Finland. 13.12.2012 Erkki Liikanen SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 15 Situation of the open sector must be taken into account in pay agreements Exports developed weakly, outlook still weak. Background: – Sluggish international growth – Special problems of electronics and paper industries – Growth in labour costs Export success, open sector employment and the foreign trade balance all require that the competitiveness of the open sector is strengthened. 13.12.2012 Erkki Liikanen SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 16 Inflation will gradually slow 13.12.2012 Erkki Liikanen SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 17 Food and service prices risen rapidly 6 Services Non-energy industrial goods Processed food Unprocessed food Energy Total index Contribution to HICP inflation, % points 4 2 0 -2 2006 2007 2008 2009 2010 2011 2012 HICP = Harmonised index of consumer prices Source: Statistics Finland. 13.12.2012 Erkki Liikanen SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 18 Inflation will slow despite increases in indirect taxation HICP 5 HICP at constant tax rates % change on previous year 4 3 2 1 0 2006 2008 2010 2012 2014 HICP = Harmonised index of consumer prices Sources: Statistics Finland and Bank of Finland. 13.12.2012 Erkki Liikanen SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 19 It is vital to strengthen the public finances 13.12.2012 Erkki Liikanen SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 20 Central and local government deficit to contract slightly Financial balance (right-hand scale) Central government financial balance (right-hand scale) Revenue (left-hand scale) Expenditure (left-hand scale) % of GDP % of GDP 50 48 46 44 42 40 38 36 34 32 30 28 26 24 2000 2002 2004 2006 2008 2010 2012 18 16 14 12 10 8 6 4 2 0 -2 -4 -6 -8 2014 Sources: Statistics Finland and Bank of Finland. 13.12.2012 Erkki Liikanen SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 21 Trend in the public debt ratio will not turn downwards without additional measures General government EDP debt Central and local government debt Central government debt 90 % BKT:stä 80 70 60 50 40 30 20 10 0 1995 2000 2005 2010 2015 Sources: Statistics Finland, State Treasury and Bank of Finland. 13.12.2012 Erkki Liikanen SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 22 Sustainability problem is substantial Need for public finance adjustment measured in terms of total tax rate Increased immigration 52 Improved productivity Baseline % of GDP 50 48 46 44 42 40 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 Sources: Statistics Finland and Bank of Finland. 13.12.2012 Erkki Liikanen SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 23 Need for public finance adjustment is substantial The decisions of spring 2012 were important, but economic developments are proving weaker than then expected. The government’s objective of turning the trend in the central government debt ratio downwards will not be achieved without additional measures. More substantial measures are required to achieve a sufficient level of surplus in the general government balance. A decade-long adjustment programme is required. – The key in policy choices is the impact on growth. – In central government, the expenditure ceiling should be gradually lowered to better match the funding base. 13.12.2012 Erkki Liikanen SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 24 Sustainable public finances cannot be achieved without structural measures With early fiscal policy measures, the sudden and hasty policy action at the beginning of the next decade can be avoided. But sustainability cannot be secured without an increase in labour supply. Labour input needs to be increased in all phases of working life. This would even out the costs between the different age groups. – Earlier entry to working life – Raising the effective retirement age – Labour supply incentives In local government, it is vital to improve productivity. 13.12.2012 Erkki Liikanen SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 25 Financial stability SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND International operating environment remains challenging, financial markets show early signs of stabilisation Despite the improvement in the sentiment of the financial markets, the European economy remains vulnerable. Weak developments in the real economy would expose the European banking sector to a decline in asset prices and increase credit risks. Rapid implementation of decisions and measures that promote financial stability is important. SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Banking union to be implemented Banking union would stabilise the financial markets and reduce the probability of banking crises. First the Single Supervisory Mechanism. In addition, a common crisis resolution system is essential. The aim is to reduce the costs to governments and tax payers and make creditors bear more responsibility. A centralised system for crisis resolution will facilitate the controlled closure of even large banks without government support. Creditors’ responsibility can be realised without banks being forced into bankruptcy. SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Confidence in European banks should be enhanced by improving transparency It is difficult for markets to get an overall picture of – asset encumbrance – forbearance There are doubts about the comparability of the methods used in capital adequacy calculation. – Risk weightings in loans differ considerably, depending on the method of capital adequacy calculation. Use of smaller risk weightings than competitors may distort competition. SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Makrotalous Finnish financial system stable – challenges relate to indebtedness, the weak outlook for the real economy and low interest rates Macroeconomy n kestävyys Asuntojen hinnat Banks’ resiliency Housing prices Riskipreemiot Risk premia IV/2009 I/2012 Velkaantuneisuus Indebtedness III/2012 Sources: NASDAQ OMX Helsinki, banks, Statistics Finland and Bank of Finland. SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND t: NASDAQ OMX Helsinki, pankit, Tilastokeskus ja Suomen Pankki. Growing level of household indebtedness contains risks Growing indebtedness increases households’ vulnerability in weak economic environment. Household indebtedness should be reined in as follows: Households should be prepared against a possible rise in interest rates. Banks should comply with the Financial Supervisory Authority’s recommendations on assessing the debtservicing capacity of housing loan applicants and maximum loan-to-value ratios (LTVs). The authorities should be provided with adequate macroprudential tools. SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Euro & talous (Bank of Finland Bulletin) 5/2012 Feature articles: Rahoitusjärjestelmän vakaus (Financial stability in Finland) Suomen julkisen talouden kestävyystarkasteluja (Fiscal sustainability projections for Finland) Helvi Kinnunen, Petri Mäki-Fränti and Hannu Viertola Suomen kilpailukyky ja sen mittaaminen (Finland’s competitiveness and its measurement) Lauri Kajanoja 13.12.2012 Erkki Liikanen SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 32 Summary The need for adjustment in the public finances is already substantial in the present decade. Long-term sustainability of public finances cannot be achieved without structural measures. Pay settlements must take account of competitiveness in the open sector. 13.12.2012 Erkki Liikanen SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 33 Thank you! 13.12.2012 Erkki Liikanen SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 34