bank of finland bulletin 1/2013 monetary policy and the global economy

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND

Bank of Finland Bulletin 1/2013Monetary policy and the global economy

Governor Erkki Liikanen

14 March 2013

Erkki Liikanen14.3.2013 1


Monetary policy and the global economy

Main article: – Reducing private sector indebtedness, balance sheet

adjustment– Balance sheet adjustment will have long-term effects on growth

prospects, monetary policy and fiscal policy

Feature articles:– The financial crisis sparked debate on the goals of monetary

policy (Jarmo Kontulainen, Juha Kilponen and Antti Suvanto)– A model of the international monetary and financial economy

(Mika Kortelainen)– Global energy markets at a turning point (Laura Solanko and

Lauri Vilmi)

14.3.2013 2Erkki Liikanen


Themes of the presentation

Near-term outlook for the global economy subdued– Recession in Europe more protracted than earlier foreseen– Signs of recovery particularly in the United States and China

Monetary policy remains accommodative– Uneven monetary policy transmission poses a problem in the

euro area– Low interest rates facilitate debt servicing, but cannot solve the

balance sheet problem

Deleveraging is a slow process– In the United States, household debt adjustment took five years– Debt adjustment only beginning in some crisis countries



Near-term outlook for the global economy subdued



40

60

80

100

120

140

160

180

85

90

95

100

105

110

115

120

2008 2009 2010 2011 2012 2013

United States Euro areaJapan FinlandChina (right-hand scale)

2008/I = 100 2008/I = 100

Sources: National statistical authorities and Eurostat.25200@BKT_taso_EA (2008)en

GDP

Advanced economies released weak output data for late 2012



40

60

80

100

120

140

2010 2011 2012 2013

United States Japan Germany Spain Italy

4 Jan 2010 = 100

Source: Bloomberg.

Stock markets up since summer 2012

Stock prices rising since summer 2012, divergent performance since February 2013

14.3.2013 Erkki Liikanen 6


0

1

2

3

4

5

6

7

8

2008 2009 2010 2011 2012 2013

United States Japan Germany Italy Spain

%

Source: Bloomberg.

Ten-year government bond yields

Government bond yields dropped in 2012, divergent performance in 2013



Market confidence in Ireland and Portugal strengthened in 2012


0

5

10

15

20

25

30

35

40

2008 2009 2010 2011 2012 2013

Germany Ireland Portugal Greece Finland

%

Source: Bloomberg.

Ten-year government bond yield


25

30

35

40

45

50

55

60

65

2008 2009 2010 2011 2012 2013

USA Germany China

Balance

Source: Bloomberg.

Purchasing managers' indices: manufacturing

Rising confidence in the engines of global trade…



25

30

35

40

45

50

55

60

65

2008 2009 2010 2011 2012 2013

USA Euro area Japan China Brazil

Balance

Source: Bloomberg.

Purchasing managers' indices: manufacturing

… but major regional differences remain



Differences also reflected in position of households

Consumer confidenceUnemployment rates


0

2

4

6

8

10

12

14

2007 2008 2009 2010 2011 2012 2013

Euro area United States Japan Finland

%

Sources: BLS, Eurostat, Bloomberg and Statistics Finland.23162@Työttömyys% (FI)

-50

-40

-30

-20

-10

0

10

20

30

20

30

40

50

60

70

80

90

100

2008 2009 2010 2011 2012 2013

United States Japan

Euro area (right-hand scale) Finland (right-hand scale)

Balance Balance

Sources: European Commission, Statistics Finland and Bloomberg.


Background to the Bank of Finland forecast

Confidence increased in second half of 2012– OMT programme bolstered functioning of the markets

– EU-level decisions: ESM, single banking supervision and resolution

– Member States carried through their fiscal and structural policy programmes

Forecast assumption: confidence will continue to improve– Consolidation programmes progressing as planned

– Beginning to show in costs and intermediation of funding for crisis countries

Deleveraging of high levels of debt will be a slow process– Private sector balance sheet adjustment will subdue growth.

– Fiscal policy will remain fairly tight.



Bank of Finland forecast:GDP in main economic regions


50

75

100

125

150

175

200

90

95

100

105

110

115

120

2008 2010 2012 2014

United States EU20 Japan China (right-hand scale)

2008/I = 100 2008/I = 100

Dashed lines: Bank of Finland forecast.EU20: Euro area, United Kingdom, Sweden and Denmark.Sources: National statistical authorities, Eurostat and the Bank of Finland.

EU20 will not exceed pre-crisis GDP until 2015GDP


Bank of Finland forecast:Inflation in main advanced economic regions


-3

-2

-1

0

1

2

3

4

5

6

2008 2010 2012 2014

EU20 United States Japan

%

Dashed lines: Bank of Finland forecast.EU20: Euro area, United Kingdom, Sweden and Denmark.Sources: National statistical authorities and the Bank of Finland calculations.

Inflation outlook stable


Forecast risks mainly on the downside

Debt crisis still largest single risk to growth– Successful completion of consolidation programmes important– Loss of confidence pushes up market rates– Risk calculation: domestic demand suffers, GDP and inflation ease

back

US growth could recover faster than forecast– Private sector balance sheet adjustment progressing– As confidence returns, activity could reactivate quickly– Would bolster growth in Europe and Asia, push up commodity prices



Monetary policy remains accommodative



0

5

10

15

20

25

30

35

40

2008 2009 2010 2011 2012 2013

Federal Reserve System Bank of Japan

Eurosystem Bank of England

% of GDP

Sources: National statistical authorities, Eurostat and Bloomberg.

Central bank balance sheets

Monetary policy focus on non-standard measures



Eurosystem policy rate and short market rates remain extremely low


0

1

2

3

4

5

6

2008 2009 2010 2011 2012 2013

Eurosystem key policy rate 1-month euribor

3-month euribor 12-month euribor

%

Sources: ECB and Reuters.


Bank funding getting easier since last autumn


-50

-40

-30

-20

-10

0

10

20

30

40

50

Retail deposits Interbank Bond issues Securitisation and risk transfers

Net %*

Source: European Central Bank* Of respondents; + = funding becomes more difficult; the figure for each main category is the average value for the sub-categories reported in the BLS.** During the subsequent quarter

2011/IV 2012/I 2012/II 2012/III 2012/IV 2013/I**

Bank funding in the euro area


0

1

2

3

4

5

6

7

2008 2009 2010 2011 2012 2013

%

New housing loan contracts with an original interest-fixing period of at most 1 year.* Germany, France, Netherlands, Belgium, Austria and Finland.** Greece, Italy, Ireland, Portugal and Spain.Sources: ECB and calculations by the Bank of Finland.

High-rated countries* GIIPS countries**Euro area 3-month euriborFinland ESCB minimum bid rate

Interest rates on new housing loans declined…



0

1

2

3

4

5

6

7

2008 2009 2010 2011 2012 2013

%

New corporate loan contracts with an original interest-fixing period of at most 1 year.*Germany, France, Netherlands, Belgium, Austria and Finland.**Greece, Italy, Ireland, Portugal and Spain.Sources: ECB and calculations by Bank of Finland.

High-rated countries* GIIPS countries**3-month euribor Euro areaFinland ESCB minimum bid rate

… but interest on corporate loans in GIIPS countries still high



Deleveraging is a slow process



High aggregate indebtedness hampers growth in several EU countries


0 50 100 150 200 250 300 350 400 450

Germany

Finland

France

Italy

Sweden

Greece

Spain

UK

Portugal

Ireland

Public debt Household debt Corporate debt

Aggregate debt in the 3rd quarter of 2012

Source: OECD. % of GDP (excl. MFIs)


Vicious circle of weak economic activity and tight financing conditions in the euro area

Prerequisites for economic growth– Healthier banking sector– Reversal of housing market trend in a number of countries– Essential adjustment of private sector indebtedness to a lower

level in several countries

Limited ways to speed up deleveraging in the private sector– Households’ residential loans will only grow smaller gradually.– Bank recapitalisations can enhance balance sheet adjustment in

the corporate sector.



Deleveraging still at an early stage


40

60

80

100

120

140

160

180

200

2001 2003 2005 2007 2009 2011

High-rated countries (private sector)GIIPS countries (private sector)High-rated countries (public sector)GIIPS coutries (public sector)

% of GDP

High-rated countries: Germany, France, Netherlands, Belgium, Finland and Austria.GIIPS countries: Greece, Italy, Ireland, Portugal and Spain.Source: European Central Bank.

Deleveraging only about to begin


Current account deficits being reduced


-8

-6

-4

-2

0

2

4

6

2003 2005 2007 2009 2011

High-rated countries* GIIPS** Euro area

% of GDP, 4 quarter moving average

* Germany, France, the Netherlands, Belgium, Austria and Finland.** Greece, Italy, Ireland, Portugal and Spain.Sources: Eurostat, ECB and the Bank of Finland calculations.

Current account


0

2

4

6

8

10

12

14

2000 2005 2010

Unemployment rate Structural unemployment rate (OECD)

%

Sources: OECD and Eurostat.

Germany

0

5

10

15

20

25

30

2000 2005 2010

Unemployment rate Structural unemployment rate (OECD)

%

Sources: OECD and Eurostat.

Spain

Structural unemployment cannot be tackled with monetary policy; large regional differences

Structural unemployment

Unemployment rate below estimated

structural unemployment rate

Cyclical unemployment



Housing markets key to household finances


60

80

100

120

140

160

180

200

2001 2003 2005 2007 2009 2011

Germany France Italy Spain Netherlands UK Finland

2001 = 100

Real housing prices (HICP deflated)Source: OECD.


Many GIIPS countries show improvements in competitiveness…


60

70

80

90

100

110

120

130

2005 2006 2007 2008 2009 2010 2011 2012

Germany Italy Spain Greece Ireland Portugal

2005/1 = 100

Real effective exchange rate (based on unit labour costs)Source: IFS-online.


… with higher exports than in 2008


70

80

90

100

110

120

130

2008 2009 2010 2011 2012

Germany Italy Spain Greece Ireland Portugal Finland

2008/I = 100

Source: Eurostat.

Exports of goods and services


Public debt no longer available as engine for growth


0

20

40

60

80

100

120

140

1950 1960 1970 1980 1990 2000 2010

G7 Emerging economies Finland

Public debt, % of GDP

Source: IMF.


Fiscal multipliers and economic policy

What are fiscal multipliers?– Impact of fiscal policy on GDP– Today: how much will GDP contract with fiscal tightening?

How are they estimated?– Methods: statistics or macroeconomic models– Time span: how far into the future do we follow the impact?– Economic environment: single-country problem or global crisis?

Lively exchange on fiscal multipliers– IMF opened the discussion in October 2012.– Contributors: IMF, Commission, ECB; Krugman, De Grauwe…



Fiscal multipliers and economic policy

Key results of the discussion– Short-term impact can be aggravated by financial crises.– Confidence effects can lower interest rates and lead to smaller

fiscal multipliers.– Policy makers must consider a broad range of issues beyond

short-term fiscal multipliers.

Accommodative policies must be financed – a paradox of economic policy– Countries with large fiscal multipliers usually cannot afford

accommodative policies.– Countries that can often have smaller fiscal multipliers.



In conclusion



Summary

Euro area monetary policy remains accommodative– Shortest rates still exceptionally low– OMT programme is important pillar in calming the situation

Real economy needs real economy solutions– Monetary policy has its limitations– Government measures vital for sustaining confidence

Deleveraging is a slow process– Will subdue euro area growth in immediate years ahead, risk of a

balance sheet recession– Reducing public debt a challenge that must be met



Thank you!


bank of finland bulletin 1/2013 monetary policy and the global economy

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