Bank of Finland Bulletin 1/2013 Monetary policy and the global economy Governor Erkki Liikanen 14 March 2013 1
Monetary policy and the global economy Main article: Reducing private sector indebtedness, balance sheet adjustment Balance sheet adjustment will have long-term effects on growth prospects, monetary policy and fiscal policy Feature articles: The financial crisis sparked debate on the goals of monetary policy (Jarmo Kontulainen, Juha Kilponen and Antti Suvanto) A model of the international monetary and financial economy (Mika Kortelainen) Global energy markets at a turning point (Laura Solanko and Lauri Vilmi) 2
Themes of the presentation Near-term outlook for the global economy subdued Recession in Europe more protracted than earlier foreseen Signs of recovery particularly in the United States and China Monetary policy remains accommodative Uneven monetary policy transmission poses a problem in the euro area Low interest rates facilitate debt servicing, but cannot solve the balance sheet problem Deleveraging is a slow process In the United States, household debt adjustment took five years Debt adjustment only beginning in some crisis countries 3
Near-term outlook for the global economy subdued 4
Advanced economies released weak output data for late 2012 120 115 110 105 100 95 90 85 GDP United States Euro area Japan Finland China (right-hand scale) 2008/I = 100 2008/I = 100 2008 2009 2010 2011 2012 2013 Sources: National statistical authorities and Eurostat. 180 160 140 120 100 80 60 40 5
Stock prices rising since summer 2012, divergent performance since February 2013 United States Japan Germany Spain Italy 140 4 Jan 2010 = 100 120 100 80 60 40 2010 2011 2012 2013 Source: Bloomberg. 6
Government bond yields dropped in 2012, divergent performance in 2013 Ten-year government bond yields United States Japan Germany Italy Spain 8 % 7 6 5 4 3 2 1 0 2008 2009 2010 2011 2012 2013 Source: Bloomberg. 7
Market confidence in Ireland and Portugal strengthened in 2012 Ten-year government bond yield Germany Ireland Portugal Greece Finland 40 % 35 30 25 20 15 10 5 0 2008 2009 2010 2011 2012 2013 Source: Bloomberg. 8
Rising confidence in the engines of global trade Purchasing managers' indices: manufacturing USA Germany China 65 Balance 60 55 50 45 40 35 30 25 2008 2009 2010 2011 2012 2013 Source: Bloomberg. 9
but major regional differences remain Purchasing managers' indices: manufacturing USA Euro area Japan China Brazil 65 Balance 60 55 50 45 40 35 30 25 2008 2009 2010 2011 2012 2013 Source: Bloomberg. 10
Differences also reflected in position of households Consumer confidence Unemployment rates 100 United States Euro area (right-hand scale) Balance Japan Finland (right-hand scale) Balance 30 14 % Euro area United States Japan Finland 90 20 12 80 10 10 70 60 50 0-10 -20 8 6 40-30 4 30-40 2 20-50 2008 2009 2010 2011 2012 2013 Sources: European Commission, Statistics Finland and Bloomberg. 0 2007 2008 2009 2010 2011 2012 2013 Sources: BLS, Eurostat, Bloomberg and Statistics Finland. 11
Background to the Bank of Finland forecast Confidence increased in second half of 2012 OMT programme bolstered functioning of the markets EU-level decisions: ESM, single banking supervision and resolution Member States carried through their fiscal and structural policy programmes Forecast assumption: confidence will continue to improve Consolidation programmes progressing as planned Beginning to show in costs and intermediation of funding for crisis countries Deleveraging of high levels of debt will be a slow process Private sector balance sheet adjustment will subdue growth. Fiscal policy will remain fairly tight. 12
Bank of Finland forecast: GDP in main economic regions 120 United States EU20 Japan China (right-hand scale) 2008/I = 100 2008/I = 100 200 115 175 110 150 105 125 100 100 95 75 90 50 2008 2010 2012 2014 Dashed lines: Bank of Finland forecast. EU20: Euro area, United Kingdom, Sweden and Denmark. Sources: National statistical authorities, Eurostat and the Bank of Finland. 13
Bank of Finland forecast: Inflation in main advanced economic regions 6 5 4 3 2 1 0-1 -2 % EU20 United States Japan -3 2008 2010 2012 2014 Dashed lines: Bank of Finland forecast. EU20: Euro area, United Kingdom, Sweden and Denmark. Sources: National statistical authorities and the Bank of Finland calculations. 14
Forecast risks mainly on the downside Debt crisis still largest single risk to growth Successful completion of consolidation programmes important Loss of confidence pushes up market rates Risk calculation: domestic demand suffers, GDP and inflation ease back US growth could recover faster than forecast Private sector balance sheet adjustment progressing As confidence returns, activity could reactivate quickly Would bolster growth in Europe and Asia, push up commodity prices 15
Monetary policy remains accommodative 16
Monetary policy focus on non-standard measures Central bank balance sheets Federal Reserve System Eurosystem Bank of Japan Bank of England 40 % of GDP 35 30 25 20 15 10 5 0 2008 2009 2010 2011 2012 2013 Sources: National statistical authorities, Eurostat and Bloomberg. 17
Eurosystem policy rate and short market rates remain extremely low Eurosystem key policy rate 3-month euribor 1-month euribor 12-month euribor 6 % 5 4 3 2 1 0 2008 2009 2010 2011 2012 2013 Sources: ECB and Reuters. 18
Bank funding getting easier since last autumn 50 40 30 20 10 0-10 -20-30 -40-50 Net %* Bank funding in the euro area 2011/IV 2012/I 2012/II 2012/III 2012/IV 2013/I** Retail deposits Interbank Bond issues Securitisation and risk transfers Source: European Central Bank * Of respondents; + = funding becomes more difficult; the figure for each main category is the average value for the sub-categories reported in the BLS. ** During the subsequent quarter 19
Interest rates on new housing loans declined 7 % High-rated countries* Euro area Finland GIIPS countries** 3-month euribor ESCB minimum bid rate 6 5 4 3 2 1 0 2008 2009 2010 2011 2012 2013 New housing loan contracts with an original interest-fixing period of at most 1 year. * Germany, France, Netherlands, Belgium, Austria and Finland. ** Greece, Italy, Ireland, Portugal and Spain. Sources: ECB and calculations by the Bank of Finland. 20
but interest on corporate loans in GIIPS countries still high 7 % High-rated countries* 3-month euribor Finland GIIPS countries** Euro area ESCB minimum bid rate 6 5 4 3 2 1 0 2008 2009 2010 2011 2012 2013 New corporate loan contracts with an original interest-fixing period of at most 1 year. *Germany, France, Netherlands, Belgium, Austria and Finland. **Greece, Italy, Ireland, Portugal and Spain. Sources: ECB and calculations by Bank of Finland. 21
Deleveraging is a slow process 22
High aggregate indebtedness hampers growth in several EU countries Ireland Portugal UK Spain Greece Sweden Italy France Finland Germany Aggregate debt in the 3rd quarter of 2012 Public debt Household debt Corporate debt 0 50 100 150 200 250 300 350 400 450 % of GDP (excl. MFIs) Source: OECD. 23
Vicious circle of weak economic activity and tight financing conditions in the euro area Prerequisites for economic growth Healthier banking sector Reversal of housing market trend in a number of countries Essential adjustment of private sector indebtedness to a lower level in several countries Limited ways to speed up deleveraging in the private sector Households residential loans will only grow smaller gradually. Bank recapitalisations can enhance balance sheet adjustment in the corporate sector. 24
Deleveraging still at an early stage 200 180 160 140 120 100 80 60 % of GDP High-rated countries (private sector) GIIPS countries (private sector) High-rated countries (public sector) GIIPS coutries (public sector) 40 2001 2003 2005 2007 2009 2011 High-rated countries: Germany, France, Netherlands, Belgium, Finland and Austria. GIIPS countries: Greece, Italy, Ireland, Portugal and Spain. Source: European Central Bank. 25
Current account deficits being reduced High-rated countries* GIIPS** Euro area 6 % of GDP, 4 quarter moving average 4 2 0-2 -4-6 -8 2003 2005 2007 2009 2011 * Germany, France, the Netherlands, Belgium, Austria and Finland. ** Greece, Italy, Ireland, Portugal and Spain. Sources: Eurostat, ECB and the Bank of Finland calculations. 26
Structural unemployment cannot be tackled with monetary policy; large regional differences Spain Germany Unemployment rate Structural unemployment rate (OECD) Unemployment rate Structural unemployment rate (OECD) 30 % 14 % 25 Cyclical unemployment 12 20 10 15 10 5 Structural unemployment 8 6 4 2 Unemployment rate below estimated structural unemployment rate 0 2000 2005 2010 0 2000 2005 2010 Sources: OECD and Eurostat. Sources: OECD and Eurostat. 27
Housing markets key to household finances Germany France Italy Spain Netherlands UK Finland 200 2001 = 100 180 160 140 120 100 80 60 2001 2003 2005 2007 2009 2011 Real housing prices (HICP deflated) Source: OECD. 28
Many GIIPS countries show improvements in competitiveness Germany Italy Spain Greece Ireland Portugal 130 2005/1 = 100 120 110 100 90 80 70 60 2005 2006 2007 2008 2009 2010 2011 2012 Real effective exchange rate (based on unit labour costs) Source: IFS-online. 29
with higher exports than in 2008 Exports of goods and services Germany Italy Spain Greece Ireland Portugal Finland 130 2008/I = 100 120 110 100 90 80 70 2008 2009 2010 2011 2012 Source: Eurostat. 30
Public debt no longer available as engine for growth G7 Emerging economies Finland 140 Public debt, % of GDP 120 100 80 60 40 20 0 1950 1960 1970 1980 1990 2000 2010 Source: IMF. 31
Fiscal multipliers and economic policy What are fiscal multipliers? Impact of fiscal policy on GDP Today: how much will GDP contract with fiscal tightening? How are they estimated? Methods: statistics or macroeconomic models Time span: how far into the future do we follow the impact? Economic environment: single-country problem or global crisis? Lively exchange on fiscal multipliers IMF opened the discussion in October 2012. Contributors: IMF, Commission, ECB; Krugman, De Grauwe 32
Fiscal multipliers and economic policy Key results of the discussion Short-term impact can be aggravated by financial crises. Confidence effects can lower interest rates and lead to smaller fiscal multipliers. Policy makers must consider a broad range of issues beyond short-term fiscal multipliers. Accommodative policies must be financed a paradox of economic policy Countries with large fiscal multipliers usually cannot afford accommodative policies. Countries that can often have smaller fiscal multipliers. 33
In conclusion 34
Summary Euro area monetary policy remains accommodative Shortest rates still exceptionally low OMT programme is important pillar in calming the situation Real economy needs real economy solutions Monetary policy has its limitations Government measures vital for sustaining confidence Deleveraging is a slow process Will subdue euro area growth in immediate years ahead, risk of a balance sheet recession Reducing public debt a challenge that must be met 35
Thank you! 36