Transcript Economic outlook for 2014–2016

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’
10.6.2014
Erkki Liikanen
2
Change in value added since 2007
Electrical engineering and electronics
Other metal industry
Forest industries
Chemicals industry
Other manufacturing
1
% of the value of GDP in 2007
Direct impact on
GDP of
decreased output
by electrical
engineering and
electronics
industry: -4%
BKT:hen –4 %
0
-1
-2
-3
-4
-5
-6
-7
2008
2009
2010
Source: Statistics Finland.
10.6.2014
Erkki Liikanen
2011
2012
2013
3
Prolonged decline in costcompetitiveness
140
Finland
Euro area
Index, 1999 = 100
Germany
France
Spain
Sweden
Finland
France
Spain
Euro area
Sweden*
130
120
Germany
110
100
90
1999
2001
2003
2005
2007
2009
* SEK-denominated. Sources: Eurostat and OECD.
10.6.2014
Erkki Liikanen
2011
2013
4
Developments in the international
economy
10.6.2014
Erkki Liikanen
5
Bull market flattens out
USA
180
Germany
Japan
Finland
Italy
Spain
4 Jan 2010 = 100
160
140
120
100
80
60
40
2010
2011
2012
2013
2014
Source: Bloomberg.
10.6.2014
Erkki Liikanen
6
Purchasing managers’ indices anticipate
recovery in euro area and United States
United States
65
Euro area
Japan
China
Index
60
55
50
45
40
35
30
25
2008
2009
2010
2011
2012
2013
Source: Bloomberg.
10.6.2014
Erkki Liikanen
7
Progress in bringing balance to
economies of crisis countries
Current account
General government structural primary balance
GIIPS**
High-rated countries*
4
Euro area
6
% of GDP
3
4
2
2
1
High-rated countries*
GIIPS**
Four-quarter moving average, % of GDP
Euro area
0
0
-2
-1
-2
-4
-3
-6
-4
2003
2005
2007
2009
2011
* 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.
10.6.2014
Erkki Liikanen
2013
-8
2008
2009
2010
2011
2012
2013
Sources: ECB, Eurostat, national central banks/statistical authorities and Bank
of Finland calculations.
8
Government bond yield differentials
continue to narrow
Portugal
Finland
Ireland
United States
Italy
Germany
Spain
Japan
18 %, 10-year government bond yields
16
14
12
10
8
6
4
2
0
2010
2011
2012
2013
2014
Source: Bloomberg.
Bond maturities approx 10 years.
10.6.2014
Erkki Liikanen
9
Russian growth outlook and share
prices weakened
Russian GDP, annual growth, %
Russian RTS share index (right-hand scale)
15
2500
10
2000
5
1500
0
1000
-5
500
-10
-15
0
2005
2007
Source: BOFIT.
10.6.2014
Erkki Liikanen
2009
2011
2013
10
Global economy grows – Finland lags
behind
GDP
United States
Japan
China (right-hand scale)
125
Euro area
Finland
2008/I = 100
2008/I = 100
200
120
180
115
160
110
140
105
120
100
100
95
80
90
60
85
40
2008
2009
2010
2011
2012
2013
2014
Sources: National statistical authorities and Eurostat.
10.6.2014
Erkki Liikanen
11
Policy interest rates historically low
2,5
%
Eurosystem key policy rate
Marginal lending rate
Overnight deposit rate
Eonia
12-month euribor
2
1,5
1
0,5
0
2010
2011
2012
Sources: ECB and Reuters.
10.6.2014
Erkki Liikanen
2013
2014
12
Finland’s business cycle conditions
remain weak
10.6.2014
Erkki Liikanen
14
GDP continues to contract
Trend Indicator of Output
115
GDP at market prices
Index, 2005 = 100
110
105
100
95
90
85
2002
2004
2006
2008
2010
2012
2014
Seasonally adjusted figures.
Source: Statistics Finland.
10.6.2014
Erkki Liikanen
15
First signs of recovery in industrial
sector
Industrial output, new orders and industrial confidence indicator
Volume index of industrial output (left-hand scale)
New orders in manufacturing (left-hand scale)
Industrial confidence indicator (right-hand scale)
160
Index, 2005 = 100
Balance
150
40
30
140
20
130
120
10
110
0
100
-10
90
-20
80
70
-30
60
-40
2005
2007
2009
2011
2013
Seasonally adjusted figures.
Source: Statistics Finland and European Commission.
10.6.2014
Erkki Liikanen
16
Domestic market cooling down:
consumers still cautious
Consumer confidence indicator and
retail sales volume
Consumer confidence indicator (left-hand scale)
Annual change in retail sales volume, 3-month moving average
25
%
Balance
10
20
8
15
6
10
4
5
2
0
0
-5
-2
-10
-4
-15
-6
2005
2007
2009
2011
2013
Source: Statistics Finland.
10.6.2014
Erkki Liikanen
17
ECONOMIC GROWTH BEGINS,
BUT REMAINS SLOW
10.6.2014
Erkki Liikanen
18
Economy takes turn for the better, but
growth remains slow
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
-10
2002
2007
Real GDP, %
2013: -1.4
2014f: 0.0
2015f: 1.4
2016f: 1.5
2012
f = forecast
Sources: Statistics Finland and Bank of Finland.
10.6.2014
Erkki Liikanen
19
Export markets pick up
Finnish exports and export markets
Exports of goods and services
140
Finland's export markets
Index, 2007Q1 = 100
Exports, %
130
2013:
2014f:
2015f:
2016f:
120
110
0.3
2.1
4.8
5.0
100
90
80
70
2007
2009
2011
2013
2015
f = forecast
Sources: Statistics Finland, Eurosystem and Bank of Finland.
10.6.2014
Erkki Liikanen
22
Fixed investment takes off – housing
investment sluggish
Real investment
Private investment
Private investment excl. housing
Housing
140
Index, 2000 = 100
Private
investment, %
130
120
2013:
2014f:
2015f:
2016f:
110
100
-6.4
-4,7
5,2
6,0
90
80
2000
2005
2010
2015
f = forecast
Sources: Statistics Finland and Bank of Finland.
10.6.2014
Erkki Liikanen
23
Household purchasing power grows
slowly: consumption lacklustre
Household's disposable income, consumption and savings
Savings ratio
Housholds' real disposable income*
Private consumption*
6
%
Private
consumption, %
4
2013:
2014f:
2015f:
2016f:
2
0
- 0.8
- 0.7
0.8
1.0
-2
-4
2004
2009
2014
f = forecast
Households = households and non-profit institutions serving households
* % change from previous year
Sources: Statistics Finland and Bank of Finland.
10.6.2014
Erkki Liikanen
24
Inflation lower
Consumer prices
Harmonised index of consumer prices, Finland
Harmonised index of consumer prices, euro area
5
% change on previous year
Harmonised index of
consumer prices, %
4
2013:
2014f:
2015f:
2016f:
3
2
2.2
1.2
1.3
1.5
1
0
-1
2007
2009
2011
2013
2015
f = forecast
Sources: Statistics Finland, Eurostat, ECB and Bank of Finland.
10.6.2014
Erkki Liikanen
25
Employment improves only marginally
Unemployment and employed population, trend
Number of employed (left-hand scale)
Unemployment rate (right-hand scale)
2600
1,000 persons
%
12
2500
10
2400
8
2300
6
2200
4
2005
2007
2009
2011
2013
Unemployment
rate, %
2013:
2014f:
2015f:
2016f:
8.2
8.6
8.3
7.8
2015
forecast = f
Sources: Statistics Finland and Bank of Finland.
10.6.2014
Erkki Liikanen
26
Public finances consolidate slowly
General government net lending
Local government
Central government
6
Social security funds
Total general government
% of GDP
4
2
0
-2
-4
-6
-8
2005
2007
2009
2011
2013
2015
Sources: Statistics Finland and Bank of Finland.
10.6.2014
Erkki Liikanen
27
Public debt and total tax ratio remain
high
Public debt and total tax ratio,% of GDP
General government EDP debt (left-hand scale)
Total tax ratio (right-hand scale)
%
80 %
48
60
46
40
44
20
42
0
40
1995
2000
2005
2010
2015
Sources: Statistics Finland, State Treasury and Bank of Finland.
10.6.2014
Erkki Liikanen
28
Forecast summary
– Supply and demand –
% change of previous year
2013
2014f
2015f
2016f
Gross domestic product
-1,4
0,0
1,4
1,5
December forecast
-1,0
0,6
1,7
Private consumption
-0,8
-0,7
0,8
1,0
Private fixed investment
-6.4
-4.7
5.2
6,0
Imports
-1,8
1,0
4,1
5,0
Exports
0,3
2,1
4,8
5,0
Unit labour costs
2,2
0,4
0,4
1,0
Harmonised index of
consumer prices
2,2
1,2
1,3
1,5
Unemployment rate, %
8,2
8,6
8,3
7,8
-1,1
-0,6
-0,2
-0,3
Current account
balance, % of GDP
BKT:stä
f%
= forecast
Sources: Statistics Finland and Bank of Finland.
10.6.2014
Erkki Liikanen
29
Downside risks to growth
International 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).
10.6.2014
Erkki Liikanen
30
ON THE POLICY DECISIONS
10.6.2014
Erkki Liikanen
31
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
32
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
33
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
34
ALTERNATIVE SCENARIO
10.6.2014
Erkki Liikanen
35
Financial conditions may tighten again
• 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.
10.6.2014
Erkki Liikanen
36
Model
• 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.
10.6.2014
Erkki Liikanen
37
Tighter financial conditions would
depress GDP growth significantly
Vaihtoehtoislaskelma: luotontarjonnan vähentyminen
BKT**
Inflaatio**
Uudet lainat**
Asuntojen hinnat**
Osakkeiden hinnat**
Korkomarginaali*
2014 2015 2016
-0.2
-0.8
-0.8
0.1
-0.1
-0.4
-4.2
-5.0
-2.8
-1.0
-3.6
-3.5
-2.9 -11.0 -10.8
0.1
0.2
0.2
* * Muutos suhteessa ennusteen perusuran mukaiseen kasvuun, prosenttiyksikköä
* Muutos korkomarginaalissa, prosenttiyksikköä
10.6.2014
Erkki Liikanen
38
Thank You!
10.6.2014
Erkki Liikanen
39