economic outlook for 2014–2016
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Economic outlook for 2014–2016. Governor Erkki Liikanen. 10 June 2014. Bank of Finland 11 June 2013 :. ‘The Finnish economy has faced structural change and a cyclical recession at the same time’. Change in value added since 2007. - PowerPoint PPT PresentationTRANSCRIPT
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
4Erkki Liikanen10.6.2014
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
Erkki Liikanen 510.6.2014
Bull market flattens out
Erkki Liikanen 610.6.2014
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
Erkki Liikanen 710.6.2014
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
Erkki Liikanen 810.6.2014
-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
Erkki Liikanen 910.6.2014
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
Erkki Liikanen 1110.6.2014
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
Erkki Liikanen 1210.6.2014
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
Erkki Liikanen 1410.6.2014
GDP continues to contract
Erkki Liikanen 1510.6.2014
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
Erkki Liikanen 1610.6.2014
-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
Erkki Liikanen 1710.6.2014
-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
Erkki Liikanen 1810.6.2014
19
Economy takes turn for the better, but growth remains slow
Real GDP, %
2013: -1.42014f: 0.02015f: 1.42016f: 1.5
Erkki Liikanen10.6.2014
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
Sources: Statistics Finland and Bank of Finland.
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
Erkki Liikanen 2510.6.2014
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 %
Sources: Statistics Finland and Bank of Finland.
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
Sources: Statistics Finland and Bank of Finland.
% 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
Erkki Liikanen 2910.6.2014
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).
30Erkki Liikanen10.6.2014
ON THE POLICY DECISIONS
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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
10.6.2014 Erkki Liikanen
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
10.6.2014 Erkki Liikanen
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.
10.6.2014 Erkki Liikanen
ALTERNATIVE SCENARIO
Erkki Liikanen 3510.6.2014
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.
Erkki Liikanen10.6.2014
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.
Erkki Liikanen10.6.2014
Tighter financial conditions would depress GDP growth significantly
38Erkki Liikanen10.6.2014
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!
Erkki Liikanen 3910.6.2014