SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Growth rates high, but GDP not yet at its 2008 level 1Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Finnish economy in the process of recovery 2Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Consumption to account for a larger share of the economy 3Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Supply and demand 4Erkki Liikanen 2010* f2012f2013f % change in volume on the previous year GDP180,3-8,23,13,82,62,4 Imports65,2-17,62,65,16,9 Exports70,2-20,15,18,07,07,2 Private consumption97,3-2,12,62,72,01,8 Public consumption44,21,00,41,20,70,9 Private investment28,5-17,40,96,36,45,5 Public investment4,96,20,10,80,20,1 * At current prices, EUR billion

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Labour markets to recover gradually 5Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Unemployment to decline, albeit slowly 6Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Labour market mismatch problems have not worsened 7Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Labour supply to decline 8Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Productivity growth to slow below 2% 9Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Rise in labour costs to accelerate 10Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Export demand strong, investments to recover gradually 11Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Households to save more than before 12Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Investments to recover gradually 13Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND World trade growth to increase Finnish exports 14Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Current account to remain in surplus 15Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Inflation in Finland faster than in the euro area 16Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Energy and food prices have accelerated inflation 17Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Forecast: Inflation to ease back to close to 2% 18Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Food and services prices to rise faster in Finland 19Erkki Liikanen HICP inflation April 2011 FinlandEuro area Energy1,21,3 Services1,10,8 Food incl. alcohol and tobacco0,90,4 Non-energy industrial goods0,20,3 Total3,42,

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Public finances to face sizeable challenges 20Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Long-term implications of the recession to be reflected in public finances 21Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Public debt accumulation to continue 22Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Central government indebtedness to remain on a sharp uptrend 23Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Fiscal consolidation  Predictable and credible fiscal policy is needed –A long-term plan for fiscal consolidation –Rules-based approaches, such as limits for appropriations in budget policy, ensure a long-term perspective –Targets coordinated at EU level and internationally agreed procedures are of key importance  Both structural reforms and reassessment of expenditure and revenue are necessary 24Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Decisions are always made under uncertainty Uncertainty argues for prompt decisions If prompt action is taken  Positive surprises → Public debt will decline, with room for manoeuvre to react to future crises  No positive surprises → Possible to avoid emergency measures to restore public finances Prompt action makes it possible to avoid the risk of emergency 25Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Alternative scenario: Domestic wage and price pressures to strengthen 26Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Wage/price spiral to dampen economic growth 27Erkki Liikanen Compensation per employee, % change 3,44,14,3 Change relative to the forecast 0,40,91,1 Private consumption deflator, % change 3,42,92,5 Change relative to the forecast 0,20,80,5 Real GDP, % change 3,72,01,8 Change relative to the forecast -0,1-0,6 Unemployment rate, % 7,97,8 Change relative to the forecast 0,00,40,

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Threatening spiral of wages and prices  The round of wage negotiations before the recession led to a clearly higher rise in wage costs than the euro area average –Unit labour costs rose in Finland by 5% relative to the euro area average, from 2007 to 2010  Inflation in Finland has risen faster than in the euro area  A new spiral of rising wages and prices would increase the threat of a painful process of adjustment in the years ahead  Wage formation needs flexibility at corporate and workplace level and coordination at macro level Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Thank you ! 29Erkki Liikanen