economic outlook for 2014–2016

Economic outlook for 2014–2016Governor Erkki Liikanen10 June 2014

Bank of Finland 11 June 2013:

‘The Finnish economy has faced structural change and a cyclical recession at the same time’

Erkki Liikanen 210.6.2014

Change in value added since 2007

Direct impact on GDP of

decreased output by electrical

engineering and electronics

industry: -4% BKT:hen –4 %

3Erkki Liikanen10.6.2014

-7

-6

-5

-4

-3

-2

-1

0

1

2008 2009 2010 2011 2012 2013

Electrical engineering and electronics Other metal industryForest industries Chemicals industryOther manufacturing% of the value of GDP in 2007

Source: Statistics Finland.

Prolonged decline in cost-competitiveness


90

100

110

120

130

140

1999 2001 2003 2005 2007 2009 2011 2013

Finland Euro area Germany France Spain SwedenIndex, 1999 = 100

* SEK-denominated. Sources: Eurostat and OECD.

Finland

FranceSpainEuro areaSweden*

Germany

Developments in the international economy


Bull market flattens out


40

60

80

100

120

140

160

180

2010 2011 2012 2013 2014

USA Germany Japan Finland Italy Spain

4 Jan 2010 = 100

Source: Bloomberg.

Purchasing managers’ indices anticipate recovery in euro area and United States


25

30

35

40

45

50

55

60

65

2008 2009 2010 2011 2012 2013

United States Euro area Japan China

Index

Source: Bloomberg.

Progress in bringing balance to economies of crisis countries


-4

-3

-2

-1

0

1

2

3

4

2003 2005 2007 2009 2011 2013

High-rated countries* GIIPS** Euro area

% 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 2014 spring forecast.Sources: European Commission, ECB and calculations by the Bank of Finland.

General government structural primary balance

-8

-6

-4

-2

0

2

4

6

2008 2009 2010 2011 2012 2013

High-rated countries* GIIPS** Euro areaFour-quarter moving average, % of GDP

Sources: ECB, Eurostat, national central banks/statistical authorities and Bank of Finland calculations.

Current account

Government bond yield differentials continue to narrow


0

2

4

6

8

10

12

14

16

18

2010 2011 2012 2013 2014

Portugal Ireland Italy SpainFinland United States Germany Japan

%, 10-year government bond yields

Source: Bloomberg.Bond maturities approx 10 years.

10

Russian growth outlook and share prices weakened

Erkki Liikanen10.6.2014

0

500

1000

1500

2000

2500

-15

-10

-5

0

5

10

15

2005 2007 2009 2011 2013

Russian GDP, annual growth, %

Russian RTS share index (right-hand scale)

Source: BOFIT.

Global economy grows – Finland lags behind


40

60

80

100

120

140

160

180

200

85

90

95

100

105

110

115

120

125

2008 2009 2010 2011 2012 2013 2014

United States Euro areaJapan FinlandChina (right-hand scale)

2008/I = 100 2008/I = 100

Sources: National statistical authorities and Eurostat.

GDP

Policy interest rates historically low


0

0,5

1

1,5

2

2,5

2010 2011 2012 2013 2014

Eurosystem key policy rate Marginal lending rate

Overnight deposit rate Eonia

12-month euribor%

Sources: ECB and Reuters.

Finland’s business cycle conditions remain weak


GDP continues to contract


85

90

95

100

105

110

115

2002 2004 2006 2008 2010 2012 2014

Trend Indicator of Output GDP at market prices

Index, 2005 = 100

Seasonally adjusted figures.Source: Statistics Finland.

First signs of recovery in industrial sector


-40

-30

-20

-10

0

10

20

30

40

60

70

80

90

100

110

120

130

140

150

160

2005 2007 2009 2011 2013

Volume index of industrial output (left-hand scale)New orders in manufacturing (left-hand scale)Industrial confidence indicator (right-hand scale)

Index, 2005 = 100 Balance

Seasonally adjusted figures.Source: Statistics Finland and European Commission.

Industrial output, new orders and industrial confidence indicator

Domestic market cooling down: consumers still cautious


-6

-4

-2

0

2

4

6

8

10

-15

-10

-5

0

5

10

15

20

25

2005 2007 2009 2011 2013

Consumer confidence indicator (left-hand scale)Annual change in retail sales volume, 3-month moving averageBalance %

Source: Statistics Finland.

Consumer confidence indicator andretail sales volume

ECONOMIC GROWTH BEGINS, BUT REMAINS SLOW


19

Economy takes turn for the better, but growth remains slow

Real GDP, %

2013: -1.42014f: 0.02015f: 1.42016f: 1.5


f = forecast

-10

-5

0

5

10

100

120

140

160

180

2002 2007 2012

% change on previous year (right-hand scale)

At reference year (2000) prices (left-hand scale)

EUR billion %

Sources: Statistics Finland and Bank of Finland.

Real GDP

22

Export markets pick up

Erkki Liikanen

Exports, %

2013: 0.32014f: 2.12015f: 4.82016f: 5.0

10.6.2014

f = forecast

70

80

90

100

110

120

130

140

2007 2009 2011 2013 2015

Exports of goods and services Finland's export markets

Index, 2007Q1 = 100

Sources: Statistics Finland, Eurosystem and Bank of Finland.

Finnish exports and export markets

Fixed investment takes off – housing investment sluggish

Erkki Liikanen 23

Private investment, %

2013: -6.42014f: -4,72015f: 5,22016f: 6,0

10.6.2014

f = forecast

80

90

100

110

120

130

140

2000 2005 2010 2015

Private investment

Private investment excl. housing

Housing

Index, 2000 = 100


Real investment

24

Household purchasing power grows slowly: consumption lacklustre

Erkki Liikanen

Private consumption, %

2013: - 0.82014f: - 0.72015f: 0.82016f: 1.0

10.6.2014

-4

-2

0

2

4

6

2004 2009 2014

%

Savings ratio

Housholds' real disposable income*

Private consumption*

f = forecastHouseholds = households and non-profit institutions serving households* % change from previous yearSources: Statistics Finland and Bank of Finland.

Household's disposable income, consumption and savings

Inflation lower


Harmonised index of consumer prices, %

2013: 2.22014f: 1.22015f: 1.32016f: 1.5

-1

0

1

2

3

4

5

2007 2009 2011 2013 2015

Harmonised index of consumer prices, FinlandHarmonised index of consumer prices, euro area

% change on previous year

Sources: Statistics Finland, Eurostat, ECB and Bank of Finland.

Consumer prices

f = forecast

26

Employment improves only marginally

Erkki Liikanen

Unemployment rate, %

2013: 8.22014f: 8.62015f: 8.32016f: 7.8

10.6.2014

forecast = f

4

6

8

10

12

2200

2300

2400

2500

2600

2005 2007 2009 2011 2013 2015

Number of employed (left-hand scale)

Unemployment rate (right-hand scale)

1,000 persons %


Unemployment and employed population, trend

Public finances consolidate slowly

Erkki Liikanen 27

-8

-6

-4

-2

0

2

4

6

2005 2007 2009 2011 2013 2015

Local government Social security fundsCentral government Total general government

General government net lending


% of GDP

10.6.2014

Public debt and total tax ratio remain high

Erkki Liikanen 28

40

42

44

46

48

0

20

40

60

80

1995 2000 2005 2010 2015

General government EDP debt (left-hand scale)Total tax ratio (right-hand scale)

%

Sources: Statistics Finland, State Treasury and Bank of Finland.

Public debt and total tax ratio,% of GDP

%

10.6.2014

Forecast summary– Supply and demand –

% change of previous year

2013 2014f 2015f 2016f

Gross domestic product -1,4 0,0 1,4 1,5December forecast -1,0 0,6 1,7Private consumption -0,8 -0,7 0,8 1,0Private fixed investment -6.4 -4.7 5.2 6,0Imports -1,8 1,0 4,1 5,0Exports 0,3 2,1 4,8 5,0Unit labour costs 2,2 0,4 0,4 1,0Harmonised index of consumer prices 2,2 1,2 1,3 1,5

Unemployment rate, % 8,2 8,6 8,3 7,8Current account balance, % of GDP% BKT:stä -1,1 -0,6 -0,2 -0,3


f = forecast Sources: Statistics Finland and Bank of Finland.

Downside risks to growthInternational risks• Ukraine crisis and developments in Russian economy generate

uncertainty

• Euro area structural reforms still unfinished and financial system still vulnerable

• Instability in China’s financial sector

Domestic risks• Growth recovery could dry up if export markets do not pull hard

enough and competitiveness problems continue.

• Market confidence in Finland could be endangered if economic policy grip is insufficiently firm (alternative scenario).


ON THE POLICY DECISIONS

3110.6.2014 Erkki Liikanen

32

Restoration of competitiveness necessary for export and employment

• Unit labour costs must rise more slowly than in trading partners for several years ahead

• Fostering arrangements at company level– Employees may secure their jobs and employers the

profitability of their output when conditions get tougher

• Removal of obstacles to competition; supply of housing in growth centres


33

Structural reforms needed to address economic problems

• Ambitious implementation of government structural policy programme

• Pension reform key– In the absence of a reform, there will be high upward

pressure on the tax rate, while pension contributions are higher than before

• Accumulation of general government debt must be stopped– Increases the risks and does not solve the structural

problems


34

Challenging decisions taken, implementation lies ahead

• Given the restrained economic situation, capacity to take corrective action is key.

• Confidence in economic policy is slowly built and quickly lost.

• Decisions on, on one hand, structural reforms and, on the other hand, on general government consolidation measures have been vitally important.

• If uncertainty were to arise regarding implementation of the decisions taken, the rebuilding of confidence could in the future require much more extensive measures than those currently posed.


ALTERNATIVE SCENARIO


Financial conditions may tighten again

36

• Slow economic growth, in combination with little room for manoeuvre in the public sector, heighten the risk that market confidence in Finland’s solvency will shake.

• Costs of financing general government debt may grow and overall financial conditions may tighten.

• Banks’ access to funding will become more expensive, the supply of credit decline and the interest rate premium grow. The increase in uncertainty may also cause a fall in share and housing prices

• This alternative calculation aims to illustrate the macroeconomic effects of the scenario.


Model

37

• The alternative scenario is based on a model that illustrates the combined effect of the macro economy and financial factors

• In the calculation, demand and supply shocks, as well as shocks originating in financial markets, such as credit supply and asset price shocks, will be isolated from each other to be able to assess their impact on GDP growth and other model variables.

• The model is discussed in greater detail in one of the feature articles of the Bulletin.


Tighter financial conditions would depress GDP growth significantly


Vaihtoehtoislaskelma: luotontarjonnan vähentyminen 2014 2015 2016

BKT** -0.2 -0.8 -0.8Inflaatio** 0.1 -0.1 -0.4Uudet lainat** -4.2 -5.0 -2.8Asuntojen hinnat** -1.0 -3.6 -3.5Osakkeiden hinnat** -2.9 -11.0 -10.8Korkomarginaali* 0.1 0.2 0.2

* * Muutos suhteessa ennusteen perusuran mukaiseen kasvuun, prosenttiyksikköä* Muutos korkomarginaalissa, prosenttiyksikköä

Thank You!


economic outlook for 2014–2016

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