finland lags euro area in economic growth ‒ what needs to be done?

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Bank of Finland

Finland lags euro area in economic growth ‒ what needs to be done?

Euro & talous 3/2015

Erkki Liikanen

10.6.2015 1

Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted

Accommodative monetary policy boosts the outlook for the euro area economy

2Erkki Liikanen10.6.2015


Factors underlying the improved outlook for the euro area

Relaxed monetary policy reduces funding costs and improves access to finance

Euro depreciation Decline in oil prices in the latter part of 2014In addition: Progress in fiscal consolidation Structural reforms moving ahead Stronger banking sector Lower private sector debt levels



Purchases under the Eurosystem’s expanded asset purchase programme, EUR billion

0

200

400

600

800

1000

1200

03/2015 06/2015 09/2015 12/2015 03/2016 06/2016 09/2016

PSPP CBPP3 maaliskuusta 2015 ABSPP maaliskuusta 2015


CBPP3 since March 2015 ABSPP since March 2015


Recovery in market inflation expectations

-0,5

0

0,5

1

1,5

2

2,5

3

3,5

2007 2008 2009 2010 2011 2012 2013 2014 2015

2 vuoden inflaatioswap 5 vuoden inflaatioswap10 vuoden inflaatioswap

%

Lähde: Bloomberg. patu30199@swap

Osto-ohjelmanilmoitus 22/1


Source: Bloomberg

2 year inflation swap10 year inflation swap

5 year inflation swap

Decision on EAPP, 22 Jan


-1

0

1

2

3

4

5

01/2011 01/2012 01/2013 01/2014 01/2015

euroalue 10v. pl. Kreikka euroalue 2v. Pl. Kreikka

Lähde: Bloomberg.

Prosenttia

Government bond yields declined substantially; some reversal in long maturities in May


% 10 y, euro area excl. Greece 2 y, euro area excl. Greece

Source: Bloomberg


Expanded asset purchase programme will also impact Finland

Largest direct effects due to the decline in market interest rates and euro depreciation– 83% of corporate loans and 94% household loans in Finland

linked to Euribor rates

Model calculation: short-term contribution to GDP growth +0.3%– In addition, indirect effects from growth in Finnish exports to the

euro area

Effects taken into account in the forecast

Elisa Newby and Seppo Orjasniemi: Finland benefits from the Eurosystem’s securities purchases. Bank of Finland Bulletin 3/2015.



Forecasts: growth still below euro area average


90

95

100

105

2008 2010 2012 2014 2016

Finland Euro areaVolume, index, 2008Q1 = 100

Forecasts: Bank of Finland (Finland) and ECB (euro area).Sources: Eurostat, Bank of Finland, and ECB. 31729

GDP


When does the Bank of Finland take a stand on domestic economic policy?



Starting point: Objectives set for the Bank of Finland

Status of the Bank of Finland:– Operational independence; objectives set democratically

Objectives of Eurosystem and Bank of Finland:– Primary objective: price stability– Other objectives include balanced economic growth

Necessary conditions for achieving price stability:– Sustainability of public finances– Balance in domestic cost developments

It is the responsibility of the Bank of Finland to support domestic economic policies according to its status


Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted10.6.2015 Erkki Liikanen 11

When does the Bank of Finland take a stand?

Identification of problems

Setting objectives for economic policies

Impact assessments of policy options

Decision making (choosing among policy options)


How does the Bank of Finland take a stand?

Bank of Finland assesses scale of threats to economic stability, such as:– Need for fiscal consolidation and structural reforms– The level of cost competitiveness

Bank of Finland assesses impact of measures

Often not justified to recommend individual fiscal or structural policy measures– Value judgements belong to Parliament and Government

Statements and comments are based on research, international experience and other published analyses



Some characteristics of recent developments

Economic contraction has hurt especially those who have lost their jobs

Prices and rents have risen



Current transfers an increasingly significant source of household income

Helvi Kinnunen and Petri Mäki-Fränti: Private consumption increasingly dependent on income transfers. Bank of Finland Bulletin 3/2015.


10

12

14

16

18

20

22

24

26

28

2000 2005 2010 2015

Share of transfers in total incomeAll transfers Pensions

Sources: Statistics Finland and Bank of Finland. 31616

%


Economic contraction has constrained income growth most for wage and salary earners and the unemployed

Helvi Kinnunen and Petri Mäki-Fränti: Private consumption increasingly dependent on income transfers. Bank of Finland Bulletin 3/2015.


95

100

105

110

115

2007 2008 2009 2010 2011 2012 2013

Enterpreneurs and farmers Wage earnersPensioners Unemployed

Median income, index, 2007 = 100

Sources: Statistics Finland and Bank of Finland. 31616


Finnish prices and costs have risen faster than the euro area average


95

100

105

110

115

120

125

130

2007 2009 2011 2013 2015 2017

Finland, consumer prices Euro area, consumer pricesFinland, unit labour costs Euro area, unit labour costs

Index, 2007 = 100

Forecasts: Bank of Finland (Finland) and ECB (euro area).Sources: Eurostat, European Commission, ECB, and Bank of Finland. 27383


95

100

105

110

115

120

125

130

2007 2009 2011 2013 2015

Finland Euro areaIndex, 2007 = 100

Seasonally adjusted Harmonised index of consumer prices: Services.Source: European Central Bank. 31751

Services inflation higher than in the euro area

10 %



95

100

105

110

115

120

125

130

135

2007 2009 2011 2013 2015

Finland Euroa areaIndex, 2007 = 100

Harmonised index of consumer prices: Rents.Source: European Central Bank. 31751

Higher rents reflected in service prices

15%



How to overcome the difficulties

Shift growth in public debt to a downward trajectory Structural reforms Restoration of cost competitiveness



Size of the Government’s consolidation plan justified

Problems in the economy and public finances largely long-term and structural

Most of the impact of the necessary structural reform measures to be felt only after several years, and the size of impact is yet uncertain

– It is therefore necessary to continue the fiscal consolidation

The size of the consolidation plan of the new Government Programme is justified

Consolidation measures that would turn down the growth in the debt ratio in the next few years would not ensure long-term sustainability



Objectives of structural reforms must be set high and the related decisions must be implemented

The objectives of the spring 2014 Structural Policy Programme were well-founded, but implementation failed

Important policy objectives and statements in the new Government Programme

Significant decisions and swift implementation are needed now



Cost competitiveness: Need wage restraint and other measures

Need to improve cost competitiveness by 10% or more

Moderate pay settlements alone improve cost competitiveness very slowly– Wages are expected to rise at a slow pace also in several other

countries– Therefore, other measures in addition to wage moderation are

needed

Finnish price and cost level must adapt relative to the euro area average– Cost competiveness within the monetary union a prerequisite

for success– Avoiding deflation is an ECB monetary policy issue for the

whole monetary union


Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted 23Erkki Liikanen10.6.2015

The problems are grave, and a strong recovery is not imminent

The gravity of the problems is widely understood

Now, need to aim high and act resolutely

Summary


Thank you!


finland lags euro area in economic growth ‒ what needs to be done?

Economy & Finance

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erkki liikanen10

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