Economic outlook for Euro & talous (Bank of Finland Bulletin) 5/2013 Governor Erkki Liikanen 12 December 2013

Transcription

1 Economic outlook for Euro & talous (Bank of Finland Bulletin) 5/2013 Governor Erkki Liikanen 12 December

2 Positive signals from the international economy Governor Erkki Liikanen 2

3 Share indices up, but big differences between countries USA Germany Japan Finland Italy Spain Jan 2010 = Source: Bloomberg @Pörssi-indikaattoreita (3)EN Governor Erkki Liikanen 3

4 Narrowing of government bond yield spreads reflects improved expectations 18 Portugal Ireland Italy Spain Finland United States Germany Japan %, 10-year government bond yields Source: Bloomberg. Bond maturities approx 10 years Governor Erkki Liikanen 4

5 Measures by stressed countries have boosted competitiveness and improved balance in the economy 3 2 General government structural primary balance High-rated countries* GIIPS** Euro area % of GDP Current account High-rated countries* GIIPS** Euro area Four-quarter moving average, % of GDP * Germany, France, Netherlands, Belgium, Austria and Finland. ** Greece, Ireland, Italy, Portugl and Spain. The figures for 2013 are based on the Commission's 2013 autumn forecast. Sources: European Commission, ECB and calculations by the Bank of Finland @Rak.jäämä(en) * Germany, France, Netherlands, Belgium, Austria and Finland. ** Greece, Italy, Ireland, Portugal and Spain. Sources: ECB, Eurostat, national central banks/statistical authorities and Bank of Finland calculations @Chart23(e) Governor Erkki Liikanen 5

6 The signals from the international economy are encouraging, but the financial crisis casts a long shadow GDP United States Euro area Japan Finland China (right-hand scale) /I = /I = Sources: National statistical authorities and Eurostat @BKT_taso_EA (2008)en Governor Erkki Liikanen 6

7 Finland s growth outlook slowly improving Governor Erkki Liikanen 7

8 GDP stabilised during 2013 Real GDP 115 Index, 2005 = Seasonally adjusted data. Source: Statistics Finland Governor Erkki Liikanen 8

9 Finnish economy begins slow growth Real GDP % change on previous year (right-hand scale) At reference year (2000) prices (left-hand scale) 180 EUR billion % Sources: Statistics Finland and Bank of Finland Governor Erkki Liikanen 9

10 Supply and demand 2012* e 2014e 2015e EUR bn % change from previous year in real terms GDP June forecast Change Imports Exports Private consumption Public consumption Private investment Public investment *At current prices, EUR bn Governor Erkki Liikanen 10

11 Labour market conditions will not improve until Governor Erkki Liikanen 11

12 Employment will improve as output growth strengthens Unemployment and employed population, trend Employed (left-hand scale) 2,600 Unemployment rate (right-hand scale) 1,000 persons % 12 2, , , , Sources: Statistics Finland and Bank of Finland Governor Erkki Liikanen 12

13 Productivity to grow sluggishly Labour productivity growth GDP/hour worked GDP/person employed 6 % change on previous year Sources: Statistics Finland and Bank of Finland Governor Erkki Liikanen 13

14 but unit labour costs will grow substantially slower Compensation per employee Unit labour costs Productivity per person employed 10 % change on previous year Sources: Statistics Finland and Bank of Finland Governor Erkki Liikanen 14

15 Deterioration of cost-competitiveness will halt Unit labour costs Finland Euro area Germany France Sweden 130 Index 2007 = Sources: Macrobond, Bank of Finland and European Commission Governor Erkki Liikanen 15

16 Recovery in exports boosts domestic demand Governor Erkki Liikanen 16

17 A pick up in international trade spurs Finnish exports Finnish exports and export markets Exports of goods and services Finland's export markets 140 Index, 2007Q1 = Sources: Statistics Finland, Eurosystem and Bank of Finland Governor Erkki Liikanen 17

18 Investment activity remains muted 30 Real investment Private investment (left-hand scale) Private investment excl. housing (left-hand scale) Housing (left-hand scale) Private investment at reference year (2000) prices (right-hand scale) % change on previous year EUR billion Sources: Statistics Finland and Bank of Finland Governor Erkki Liikanen 18

19 Weak earnings development weighs down consumption Households' disposable income, consumption and savings 6 % Savings ratio Real disposable household income* Private consumption* Households = households and non-profit institutions serving households * % change on previous year Sources: Statistics Finland and Bank of Finland Governor Erkki Liikanen 19

20 Current account in balance Current account, % of GDP 12 % Sources: Statistics Finland and Bank of Finland Governor Erkki Liikanen 20

21 Inflation slows Governor Erkki Liikanen 21

22 Inflation has slowed down despite tax increases Inflation contributions of commodity groups Services Processed food Energy Non-energy industrial goods Unprocessed food Total index 6 Contribution to HICP inflation, % points HICP = Harmonised index of consumer prices Source: Statistics Finland Governor Erkki Liikanen 22

23 Weak demand keeps price pressures in check HICP inflation and inflation excluding changes in indirect taxation HICP HICP at constant tax rates 5 % change on previous year HICP = Harmonised index of consumer prices Sources: Statistics Finland and Bank of Finland Governor Erkki Liikanen

24 Subdued growth erodes public finances Governor Erkki Liikanen 24

25 Central and local government deficit remains sizable Central and local government fiscal balance Overall fiscal balance (right-hand scale) Central government fiscal balance (right-hand scale) Central and local government income (left-hand scale) Central and local government expenditure (left-hand scale) EUR billion % of GDP Sources: Statistics Finland and Bank of Finland Governor Erkki Liikanen 25

26 also general government in substantial deficit Public sector primary and financial balances Primary balance Financial balance % of GDP Sources: Statistics Finland and Bank of Finland Governor Erkki Liikanen

27 Public debt to exceed 60% already in General government EDP debt, central and local government debt and central government debt General government EDP debt Central government debt % of GDP Central and local government debt Sources: Statistics Finland, State Treasury and Bank of Finland Governor Erkki Liikanen 27

28 Consolidation of public finances progressing difficult decisions still ahead Governor Erkki Liikanen 28

29 Local government consolidation clearly slows down growth in public debt General government has accumulated an excessive structural deficit. The debt ratio will not be brought down to 60% without additional measures. Local government consolidation measures decided in the government s structural program will balance the municipal finances and bring the general government structural deficit close to the target level. will reduce the risk of over-indebtedness, but the debt ratio will remain above 60% Governor Erkki Liikanen 29

30 Longer working careers and public sector productivity play a key role in the 2020s General government debt ratio Baseline scenario EUR 2 billion local government consolidation over period In addition to local government consolidation: pension reform, higher public sector productivity and other parts of the programme implemented as planned % of GDP Source: Kinnunen, Mäki-Fränti and Railavo, Structural reforms and sustainability of public finances (Talouden rakenneuudistukset ja julkisen talouden kestävyys), Bank of Finland Bulletin 5/ Governor Erkki Liikanen 30

31 Fiscal policy steering needs strengthening The framework of central government spending limits needs to be reformed. If the slowdown of economic growth is structural, spending limits ought to be adjusted accordingly. The project to reform the system of financial steering for local government sector is important Governor Erkki Liikanen 31

32 Structural reforms essential to close the fiscal sustainability gap If all the planned structural policy measures will be applied in practice, they would be sufficient to close the sustainability gap. Determined progress is necessary to achieve the objectives of the government s structural policy programme. Pension reform is essential. Finland s ability to make decisions is crucially important Governor Erkki Liikanen 32

33 Financial stability Governor Erkki Liikanen 33

34 Banking union going forward Comprehensive assessment of banks before the European Central Bank assumes responsibility for supervisory tasks Ensuring viability of banks before single supervision Banks to be recapitalised, if required by results of comprehensive assessment Governor Erkki Liikanen 34

35 Single resolution mechanism is the key Orderly winding-down of unviable banks requires a resolution mechanism Resolution mechanism is based on principle of bail-in Implementation of bail-in a prerequisite for effective resolution Governor Erkki Liikanen 35

36 Macroprudential tools to be introduced in Finland The need for national macroprudential tools is more compelling within monetary union special challenge: country-specific housing market risks Systemic risks have to be addressed by several tools: countercyclical capital buffer (excessive lending growth) loan-to-value limit (housing market risks) capital buffer for systemically important banks and systemic risk buffer (concentrated banking sector) Governor Erkki Liikanen 36

37 Domestic banking sector Governor Erkki Liikanen 37

38 Banking system s risk-bearing capacity has remained good Profitability and capital adequacy of Finnish deposit banks 20 % Return on equity (ROE)* Common Equity Tier 1 ratio (CET1) Capital adequacy ratio / 2013 * Income in reflects certain extraordinary income items due to restructuring in the banking sector. Source: Financial Supervisory Authority Governor Erkki Liikanen 38

39 Profitability of deposit banking under strain 7 Average interest rates on loans and deposits and the overall margin % Average interest rate on MFI loan stock Average interest rate on MFI deposit stock MFIs' overall margin Loans to and deposits from the public. Source: Bank of Finland Governor Erkki Liikanen 39

40 Household indebtedness levelling off Household debt ratio and housing prices in Finland Household debt*, % of disposable income (left-hand scale) Housing prices relative to wage and salary earnings (right-hand scale) 140 % Index, 2000/I = * Incl. households' estimated share of the debt of housing companies owned by households. Sources: Statistics Finland and Bank of Finland calculations Governor Erkki Liikanen 40

41 Imputed margins on new corporate loans granted by banks have widened Imputed average margins on new corporate loans in Finland New drawdowns of up to EUR 50,000 New drawdowns of up to EUR 250,000 New drawdowns of over EUR 50,000 and up to EUR 250,000 New drawdowns of over EUR 250,000 and up to EUR 1 million New drawdowns of over EUR 1 million Percentage points Excluding account and repo agreements. Source: Bank of Finland calculations. Finnish non-financial corporations interestbearing debt Loans from MFIs 2 Loans from abroad (excl. direct investments) 3 Loans from OFIs 4 Loans from employment pension institutions 5 Loans from other general government entities 6 Short-term debt securites 7 Long-term debt securities 8 Debt, % of GDP (right-hand scale) EUR billion 8 % of annual GDP Sources: Statistics Finland and Bank of Finland Governor Erkki Liikanen 41

42 No significant changes in access to finance for SMEs, but company-specific risk assessments tighter New corporate loan agreements of up to EUR 1 million in Finland Access to bank finance of Finnish SMEs EUR million Got everything Got part of it Refused to withdraw because cost too high Application rejected Don't know % Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Bank of Finland * ** * October March. ** April September. Source: European Central Bank * ** 2013 * ** Governor Erkki Liikanen 42

43 Euro & talous (Bank of Finland bulletin) 5/2013 Feature articles: Rahoitusjärjestelmän vakaus (Financial stability in Finland) Talouden rakenneuudistukset ja julkisen talouden kestävyys (Structural reforms and sustainability of public finances) Helvi Kinnunen, Petri Mäki-Fränti and Jukka Railavo Governor Erkki Liikanen 43

44 Thank you! Governor Erkki Liikanen 44