Economic Outlook for Europe and Finland Finnish-British Chamber of Commerce 15 March 213 Seppo Honkapohja Member of the Board Bank of Finland 1
World economy: World industrial output improved, but international trade decreased slightly in the end of 212 World trade World industrial output (excl. construction) 125 Index, 27 = 1 The Bank of Finland forecast for the world gdp: 12 115 11 213: 3,2 % 214: 3,7 % 215: 3,8% 15 1 The Bank of Finland forecast for the world trade: 95 213: 4 % 9 85 214: 5,7 % 215: 6,3 % 8 27 28 29 21 211 212 Source: CPB. The volume of world trade decreased,5% in December 212, following a revised increase of,7% in November (CPB World Trade Monitor) 2
Bank of Finland forecast: GDP and world trade growth (% change from previous year) 211 212f 213f 214f 215f USA 1,8 2,2 1,8 2,4 2,8 EU2 1,4 -,4 -,4 1,1 1,5 Japan -,5 1,9 1,1 1,7 1, China 9,2 7,8 8, 7, 7, Russia 4,3 3,4 3,4 3,4 3, World 3,8 3,1 3,2 3,6 3,8 World trade 6,2 3,3 3,8 5,7 6,3 EU2 = Euroarea, Sweden, Denmark and UK f = forecast 3
Industrial production weak in main advanced economies Industrial production United States Japan European Union United Kingdom 4 Percentage change from previous year 3 2 1-1 -2-3 -4 28 29 21 211 212 213 Sources: ECB and Bloomberg. 2675@Chart2 4
Purchasing managers index in manufacturing PMI manufacturing United States Japan Euro area United Kingdom 65 Index, 5 = no change on previous month 6 55 5 45 4 35 3 25 2 28 29 21 211 212 213 Sources: Markit and ISM. 2675@Chart3 5
Price of crude oil coming down USD/barrel EUR/barrel 16 USD, EUR 14 12 1 8 6 4 2 28 29 21 211 212 213 Brent, spot prices Source: Bloomberg. 6
Consumer confidence United States Japan European union United Kingdom 6 Index 28=1 5 4 3 2 1 28 29 21 211 212 213 Source: European Commision, Conference Board and OECD. 2675@Chart4_index 7
Monetary policy: low interest rates and widely used quantitative easing 6 US fed funds target rate Uncollateralized overnight call rate, Japan United Kingdom: repo rate Sweden: Repo rate Eurosystem: minimun bid rate in the main refinancing operations % 5 4 3 2 1 28 29 21 211 212 213 Source: Bloomberg. 8
Exchange rates: depreciation of Yen has been the main change recently 1,6 1,5 1,4 1,3 1,2 1,1 1,9,8,7,6 Euro exhange rate against USD Euro exhange rate against GBP Euro exhange rate against JPY (right scale) 29 21 211 212 213 Source: ECB. 252@Euro per USD, JPY, GBP 16 15 14 13 12 11 1 9 8 7 6 9
Structure of growth in China changing from investment to consumption China gdp growth and growth contributions Net exports Investments Consumption GDP 14 12 1 8 6 4 2-2 -4-6 % Forecasts Bank of Finland forecast for China s gdp growth rates are: 213: 8 % 214: 7 % 215: 7 % 28 21 212 214 Sources: CEIC, BOFIT. 1
China s current account surplus is diminishing 12 % of GDP Forecasts 1 8 6 4 2 2 25 21 215 Lähde: Macrobond. 11
Finnish economy at a standstill 12
Finland: GDP growth halted GDP at market prices 115 Index, 25 = 1 11 15 1 95 9 85 22 24 26 28 21 212 Source: Statistics Finland. 25192 13
Finland: Domestic demand weakened Manufacturing output and exports of goods New building construction and retail trade 14 Manufacturing output Volume index, 25 = 1 Exports of goods, volume 4 New-build construction, all buildings (left-hand scale) Real retail trade* (right-hand scale) % change on previous year 8 % 13 3 6 12 2 4 11 1 1-1 2-2 9-2 -4 8-3 -6 7 26 28 21 212-4 26 28 21 212-8 Figures are seasonally adjusted. Sources: Statistics Finland and National Board of Customs. Seasonally adjusted data *3-month moving average. Sources: Statistics Finland and Bank of Finland. 14
Finnish GDP growth: estimate at -.2% in 212, growth outlook very weak GDP: % change on previous year (right-hand scale) GDP at reference year (2) prices (left-hand scale) 18 EUR billion % 1 16 5 14 12-5 1 2 22 24 26 28 21 212 214-1 Sources: Statistics Finland and Bank of Finland. 15
Slow growth will push up unemployment in Finland Employed (left-hand scale) 2,6 Unemployment rate (right-hand scale) 1, persons % 12 2,5 1 2,4 8 2,3 6 2,2 24 26 28 21 212 214 4 16 Sources: Statistics Finland and Bank of Finland.
Labour costs have risen in Finland Compensation per employee Unit labour costs 1 Productivity per person employed % change on previous year 8 6 4 2-2 -4-6 24 26 28 21 212 214 Sources: Statistics Finland and Bank of Finland. 17
Inflation will slow down in Finland despite increases in indirect taxation HICP HICP at constant tax rates 5 % change on previous year 4 3 2 1 26 28 21 212 214 HICP = Harmonised index of consumer prices Sources: Statistics Finland and Bank of Finland. 18
In Finland weak outlook for exports and domestic demand 19
Finland: Key export industries in decline 6 Paper industry Share of GDP, % Electronics industry 5 4 3 2 1 1975 198 1985 199 1995 2 25 21 Source: Statistics Finland. 24877 2
Competitiveness in Finland weaker than manufacturing unit labour costs suggest Manufacturing Change 1999Q1-212Q2, % Volume of production Value of production Finland Euro area Unit labor costs Labor costs per value of production -1 1 2 3 4 26313 Source: Eurostat. Production is gross value added. 21
Finland: Export growth weak Exports of goods and services Finland's export markets 14 Index, 27Q1 = 1 13 12 11 1 9 8 7 27 28 29 21 211 212 213 214 Sources: Statistics Finland, Eurosystem and Bank of Finland. 22
Finland: Investments at a standstill 3 Private investment (left-hand scale) Private investment excl. housing (left-hand scale) Housing (left-hand scale) Private investment at reference year (2) prices (right-hand scale) % change on previous year EUR billion 35 2 3 1 25 2-1 15-2 26 27 28 29 21 211 212 213 214 Sources: Statistics Finland and Bank of Finland. 1 23
Weak consumption growth in Finland, savings rate lower than forecast (-.3%) in 212 6 % Savings ratio Real disposable household income* Private consumption* 4 2-2 -4 24 26 28 21 212 214 Households = households and non-profit institutions serving households * % change on previous year Sources: Statistics Finland and Bank of Finland. 24
Current account remains in deficit Current account Goods and services account* 12 % of GDP 8 4-4 -8 198 1985 199 1995 2 25 21 * National Accounts Sources: Statistics Finland and Bank of Finland. 25
Situation of the open sector must be taken into account in pay agreements of the Finnish labour market Exports developed weakly, outlook still weak. Background: Sluggish international growth Special problems of electronics and paper industries Growth in labour costs Export success, open sector employment and the foreign trade balance all require that the competitiveness of the open sector is strengthened. 26
Finnish public finances 27
Central and local government deficit to contract slightly 5 48 46 44 42 4 38 36 34 32 3 28 26 24 Financial balance (right-hand scale) Central government financial balance (right-hand scale) Revenue (left-hand scale) Expenditure (left-hand scale) % of GDP % of GDP 2 22 24 26 28 21 212 214 Sources: Statistics Finland and Bank of Finland. 18 16 14 12 1 8 6 4 2-2 -4-6 -8 28
Trend in the public debt ratio will not reverse in Finland without additional measures General government EDP debt Central government debt Central and local government debt 9 % BKT:stä 8 7 6 5 4 3 2 1 1995 2 25 21 215 Sources: Statistics Finland, State Treasury and Bank of Finland. 29
Sustainability problem in Finland is substantial Need for public finance adjustment measured in terms of total tax rate Increased immigration Improved productivity Baseline 52 % of GDP 5 48 46 44 42 4 21 215 22 225 23 235 24 245 25 255 26 Sources: Statistics Finland and Bank of Finland. 3
Finnish fiscal situation: Summary The need for adjustment in the public finances is already substantial in the present decade. Long-term sustainability of public finances cannot be achieved without structural measures. 31