Reasserting growth after the crisis CEEI Conference 2010 Seppo Honkapohja Bank of Finland Views expressed do not necessarily reflect those of the Bank of Finland 1
I. Introduction Two aspects in the movement from crisis to growth Recession has created large output gaps in most countries. This gap needs to be closed. The growth processes must be restarted. Growth of potential output has slowed. Lessons from earlier financial crises Crisis in Nordic countries in 1990s Finland, Norway and Sweden Prospects and challenges for CEEI countries 2
II. The 1990 s Nordic crises Background: financial liberalization created a boom and overheating large increases in asset prices current account problems Classic crises Combined banking and currency crisis recession/depression Significant period of negative growth (except in Norway) big increase in unemployment public debt shot up, but was gradually controlled 6.4.2010 3
Figure 1. Real GDP growth Finland Sweden Norway 8 % 6 4 2 0-2 -4-6 -8 1980 1985 1990 1995 2000 2005 Sources: Eurostat and IMF. 4
Figure 2. Current account Finland Sweden Norway 20 % of GDP 15 10 5 0-5 -10 1980 1985 1990 1995 2000 2005 Source: European Commission. 5
9 8 7 6 5 4 3 2 1 0-1 Loan losses/lending in the Nordic countries' banking sector 1985-1999, % 1985 1987 1989 1991 1993 1995 1997 1999 1 Norway 2 Sweden 3 Finland Source: Central banks. 2 3 1 6
General government gross debt of Finland 1980 2009 70 % of GDP 60 50 40 30 20 10 0 1980 1985 1990 1995 2000 2005 Source: Statistics Finland.
III. Why did Finland and Sweden recover so well? Closing the output gap correcting the competitiveness problem Nordic countries floated their currencies re-establishing credibility of monetary policy Inflation targeting (Finland later joined the euro area) clear fiscal strategy Gradual consolidation after initial deficits Reattaining rapid growth Focus on labor productivity growth Capital intensity and TFP Roles of human capital and R&D ICT revolution as an example of successful structural change 6.4.2010 8
Reattaining growth I: TFP more important over time (labor productivity in Finland) 6.4.2010 9
Reattaining growth II: education, R&D and ICT Nordics had scope to improve quality of labor as older age cohorts were significantly less educated. Sweden is an exception here. Nordics had high rates of R&D and significantly increased these rates after the crisis. Norway is an exception here. Role of ICT was and is hugely important in Finland and also Sweden. Growth accounting with ICT capital 6.4.2010 10
Education by age group 6.4.2010 11
R&D spending in international comparison Portugal Spain Japan USA Germany Sweden Finland 1980 1990 2000 1980 1990 2000 1980 1990 2000 1980 1990 2000 1980 1990 2000 1980 1990 2000 1980 1990 2000 Business Govenment Source: OECD % of GDP 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.11.2010 12
Growth accounting for selected countries GDP growth Contributions to GDP growth by ICT capital growth Non-ICT capital growth Labour growth TFP growth FINLAND 1995-2000 4.9 0.7 0.1 1.0 3.0 2000-2004 2.3 0.6 0.3-0.3 1.7 SWEDEN 1995-2000 3.5 0.8 0.4 0.7 1.7 2000-2004 2.1 0.4 0.2-0.4 1.9 THE US 1995-2000 4.2 0.9 0.6 1.3 1.5 2000-2004 2.4 0.6 0.4-0.3 1.7 8.11.2010 13
IV. Restarting growth in CESEE countries: recession was deep but short-lived 15 Estonia Latvia Lithuania Bulgaria Poland Czech Republic Hungary Romania Slovenia Percentage change from previous year 10 5 0-5 -10-15 -20 2000 2002 2004 2006 2008 2010 Source: Eurostat. 21292@Chart50(en) 5.11.2010 14
Economic environment Future domestic environment challenging: Risk perceptions remain high, finance is more difficult. Deleveraging and higher saving in household sector. Fiscal positions worsened, consolidation process will take a long time. Future international environment: Trend growth will be slower in Western Europe and globally. Reforms of financial architecture may improve CESEE financial systems. Current tensions in the international financial system. For CESEE economies: Flexible exchange rate vs. Euro membership objectives 6.4.2010 15
Restart I: closing the output gap Modest recovery in capital imports is likely Higher domestic saving helps in narrowing S-I gaps Domestic finance of investment more important Challenges in the public sector Focus on high-quality of public spending in view of fiscal sustainability concerns Political stability and credibility are crucial for success Tackle unemployment to avoid decline in labor skills 6.4.2010 16
Restart II: growth in potential output Relatively high human capital is a strength. EU membership continues to be central. Some CESEE countries have weak tradable sectors. Maintaining competitiveness is key to success cost control productivity growth Continuing processes of structural change is vital Crises provide good timing for reform Recessions are condusive to innovation Important to find new comparative advantages 6.4.2010 17
Competitiveness in CEE countries Cumulative % 2004-2008 and % change 2008-2009 Source: Ameco 6.4.2010 18
Thank you