Economic outlook for 2013 2015 Euro & talous (Bank of Finland Bulletin) 5/2013 Governor Erkki Liikanen 12 December 2013 1
Positive signals from the international economy 12.12.2013 Governor Erkki Liikanen 2
Share indices up, but big differences between countries USA Germany Japan Finland Italy Spain 180 4 Jan 2010 = 100 160 140 120 100 80 60 40 2010 2011 2012 2013 Source: Bloomberg. 26339@Pörssi-indikaattoreita (3)EN 12.12.2013 Governor Erkki Liikanen 3
Narrowing of government bond yield spreads reflects improved expectations 18 Portugal Ireland Italy Spain Finland United States Germany Japan %, 10-year government bond yields 16 14 12 10 8 6 4 2 0 2010 2011 2012 2013 Source: Bloomberg. Bond maturities approx 10 years. 27391 12.12.2013 Governor Erkki Liikanen 4
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 6 4 1 2 0 0-1 -2-3 -2-4 -6-4 2003 2005 2007 2009 2011 2013 * 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. 26037@Rak.jäämä(en) -8 2005 2007 2009 2011 2013 * 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. 26295@Chart23(e) 12.12.2013 Governor Erkki Liikanen 5
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) 120 115 110 105 100 95 90 85 2008/I = 100 2008/I = 100 2008 2009 2010 2011 2012 2013 Sources: National statistical authorities and Eurostat. 25200@BKT_taso_EA (2008)en 180 160 140 120 100 80 60 40 12.12.2013 Governor Erkki Liikanen 6
Finland s growth outlook slowly improving 12.12.2013 Governor Erkki Liikanen 7
GDP stabilised during 2013 Real GDP 115 Index, 2005 = 100 110 105 100 95 90 85 2002 2004 2006 2008 2010 2012 Seasonally adjusted data. Source: Statistics Finland. 25525 12.12.2013 Governor Erkki Liikanen 8
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 % 10 160 5 140 0 120-5 100 2000 2002 2004 2006 2008 2010 2012 2014-10 Sources: Statistics Finland and Bank of Finland. 24078 12.12.2013 Governor Erkki Liikanen 9
Supply and demand 2012* 2011 2012 2013e 2014e 2015e EUR bn % change from previous year in real terms GDP 192.5 2.7-0.8-1.0 0.6 1.7 June forecast -0.8 0.7 1.4 Change -0.2-0.1 0.3 Imports 79.8 6.2-1.0-7.3 0.9 4.2 Exports 78.1 2.7-0.2-1.7 1.7 4.7 Private consumption 108.5 2.6 0.2-0.5-0.2 1.0 Public consumption 48.3 0.5 0.6 1.3 0.7 0.6 Private investment 32.7 6.2-1.3-1.8 0.3 4.3 Public investment 5.0 3.0 0.9 0.4-0.4 0.0 *At current prices, EUR bn. 12.12.2013 Governor Erkki Liikanen 10
Labour market conditions will not improve until 2015 12.12.2013 Governor Erkki Liikanen 11
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 2,500 10 2,400 8 2,300 6 2,200 2004 2006 2008 2010 2012 2014 4 Sources: Statistics Finland and Bank of Finland. 26516 12.12.2013 Governor Erkki Liikanen 12
Productivity to grow sluggishly Labour productivity growth GDP/hour worked GDP/person employed 6 % change on previous year 4 2 0-2 -4-6 1995 2000 2005 2010 2015 Sources: Statistics Finland and Bank of Finland. 24079 12.12.2013 Governor Erkki Liikanen 13
but unit labour costs will grow substantially slower 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. 20749 12.12.2013 Governor Erkki Liikanen 14
Deterioration of cost-competitiveness will halt Unit labour costs Finland Euro area Germany France Sweden 130 Index 2007 = 100 120 110 100 90 80 1999 2001 2003 2005 2007 2009 2011 2013 2015 Sources: Macrobond, Bank of Finland and European Commission. 27319 12.12.2013 Governor Erkki Liikanen 15
Recovery in exports boosts domestic demand 12.12.2013 Governor Erkki Liikanen 16
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 = 100 130 120 110 100 90 80 70 2007 2009 2011 2013 2015 Sources: Statistics Finland, Eurosystem and Bank of Finland. 21242 12.12.2013 Governor Erkki Liikanen 17
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 35 20 30 10 25 0 20-10 15-20 2006 2008 2010 2012 2014 Sources: Statistics Finland and Bank of Finland. 10 23231 12.12.2013 Governor Erkki Liikanen 18
Weak earnings development weighs down consumption Households' disposable income, consumption and savings 6 % Savings ratio Real disposable household income* Private consumption* 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. 19912 12.12.2013 Governor Erkki Liikanen 19
Current account in balance Current account, % of GDP 12 % 8 4 0-4 -8 1980 1990 2000 2010 Sources: Statistics Finland and Bank of Finland. 26152 12.12.2013 Governor Erkki Liikanen 20
Inflation slows 12.12.2013 Governor Erkki Liikanen 21
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 4 2 0-2 2007 2008 2009 2010 2011 2012 2013 HICP = Harmonised index of consumer prices Source: Statistics Finland. 20984 12.12.2013 Governor Erkki Liikanen 22
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 4 3 2 1 0 2006 2008 2010 2012 2014 HICP = Harmonised index of consumer prices Sources: Statistics Finland and Bank of Finland. 12.12.2013 Governor Erkki Liikanen 23 25534
Subdued growth erodes public finances 12.12.2013 Governor Erkki Liikanen 24
Central and local government deficit remains sizable 50 48 46 44 42 40 38 36 34 32 30 28 26 24 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 2000 2002 2004 2006 2008 2010 2012 2014 18 16 14 12 10 8 6 4 2 0-2 -4-6 -8 Sources: Statistics Finland and Bank of Finland. 24903 12.12.2013 Governor Erkki Liikanen 25
also general government in substantial deficit Public sector primary and financial balances Primary balance Financial balance 12 10 8 6 4 2 0-2 -4-6 -8-10 % of GDP 1990 1995 2000 2005 2010 2015 Sources: Statistics Finland and Bank of Finland. 12.12.2013 Governor Erkki Liikanen 26 24903
Public debt to exceed 60% already in 2014 90 80 70 60 50 40 30 20 10 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 0 1995 2000 2005 2010 2015 Sources: Statistics Finland, State Treasury and Bank of Finland. 24903 12.12.2013 Governor Erkki Liikanen 27
Consolidation of public finances progressing difficult decisions still ahead 12.12.2013 Governor Erkki Liikanen 28
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%. 12.12.2013 Governor Erkki Liikanen 29
Longer working careers and public sector productivity play a key role in the 2020s General government debt ratio 2012 2030 Baseline scenario EUR 2 billion local government consolidation over period 2014-2017 120 In addition to local government consolidation: pension reform, higher public sector productivity and other parts of the programme implemented as planned % of GDP 110 100 90 80 70 60 50 2012 2016 2020 2024 2028 Source: Kinnunen, Mäki-Fränti and Railavo, Structural reforms and sustainability of public finances (Talouden rakenneuudistukset ja julkisen talouden kestävyys), Bank of Finland Bulletin 5/2013. 27344 12.12.2013 Governor Erkki Liikanen 30
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. 12.12.2013 Governor Erkki Liikanen 31
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. 12.12.2013 Governor Erkki Liikanen 32
Financial stability 12.12.2013 Governor Erkki Liikanen 33
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 12.12.2013 Governor Erkki Liikanen 34
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 12.12.2013 Governor Erkki Liikanen 35
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) 12.12.2013 Governor Erkki Liikanen 36
Domestic banking sector 12.12.2013 Governor Erkki Liikanen 37
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 16 12 8 4 0 2006 2007 2008 2009 2010 2011 2012 1 6/ 2013 * Income in 2006 2007 reflects certain extraordinary income items due to restructuring in the banking sector. Source: Financial Supervisory Authority. 12.12.2013 Governor Erkki Liikanen 38
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 6 5 4 3 2 1 0 1999 2001 2003 2005 2007 2009 2011 2013 Loans to and deposits from the public. Source: Bank of Finland. 12.12.2013 Governor Erkki Liikanen 39
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 = 100 115 120 110 100 105 80 100 60 95 40 90 20 85 0 2000 2002 2004 2006 2008 2010 2012 80 * Incl. households' estimated share of the debt of housing companies owned by households. Sources: Statistics Finland and Bank of Finland calculations. 12.12.2013 Governor Erkki Liikanen 40
Imputed margins on new corporate loans granted by banks have widened Imputed average margins on new corporate loans in Finland 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 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 2010 2011 2012 2013 Excluding account and repo agreements. Source: Bank of Finland calculations. Finnish non-financial corporations interestbearing debt 140 120 100 80 60 40 20 1 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 0 2007 2008 2009 2010 2011 2012 2013 Sources: Statistics Finland and Bank of Finland. 7 6 5 43 2 1 70 60 50 40 30 20 10 0 12.12.2013 Governor Erkki Liikanen 41
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 1 400 1 200 1 000 800 600 400 2013 2012 2011 2010 2009 2008 EUR million 100 80 60 40 Got everything Got part of it Refused to withdraw because cost too high Application rejected Don't know % 200 20 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Bank of Finland. 0 2009 2010 2011 * ** * October March. ** April September. Source: European Central Bank. 2012 * ** 2013 * ** 12.12.2013 Governor Erkki Liikanen 42
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 12.12.2013 Governor Erkki Liikanen 43
Thank you! 12.12.2013 Governor Erkki Liikanen 44