SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Economic outlook 2011–2013 Euro & talous (Bank of Finland Bulletin) 5/2011 Governor Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Marked slowdown in Finnish economic growth

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Economic recovery stalls

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Supply and demand * At current prices, EUR billion 2010 * f2012f2013f % change in volume on the previous year GDP180,3-8,23,62,80,41,8 June 2011 forecast3,82,62,4 Change-1,0-2,2-0,6 Imports70,3-16,17,4-0,70,05,6 Exports72,6-21,58,6-3,20,46,0 Private consumption98,5-3,12,73,71,21,4 Public consumption44,30,90,60,10,40,7 Private investment29,3-15,93,96,61,84,8 Public investment4,64,7-3,82,9-0,4-1,7

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Drop in unemployment comes to a halt

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND No improvement in employment in immediate years ahead

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Youth unemployment high

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Labour productivity growth slows

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Slowing productivity development pushes up unit labour costs

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Demand outlook weakens

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Household consumption growth becoming subdued

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Finnish export growth sluggish

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Current account surplus melting

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Inflation slowing gradually

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Energy and food prices have driven inflation

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Forecast: Inflation will gradually slow

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Public finances facing challenges

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Central government deficit sizeable

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Public debt will continue to grow without new measures

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND General government adjustment need in terms of the tax ratio

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Finland’s public finances:  Expenditures and tax rates have been set according to faster economic growth than currently envisaged.  The public finances will already hit the debt ceiling in the next few years.  Public finance sustainability problems are increasing the pressure for structural reforms.  The threat of a rapid deterioration in the Finnish economy and budgetary position is real

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Alternative scenario: debt crisis leads to global recession

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Alternative scenario: debt crisis leads to global recession

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Finnish economy would enter a deep recession Real GDP, % change 2,5-2,00,7 Change relative to the forecast -0,3-2,4-1,1 Unemployment rate, % 7,99,010,1 Change relative to the forecast 0,11,12,2 Private consumption deflator, % change 2,60,3-0,3 Change relative to the forecast -0,2-2,2-1,9 General government net lending, % of GDP -1,5-2,8-4,5 Change relative to the forecast -0,2-1,6-3,

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Financial stability

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Sovereign debt crisis significantly impairs the functioning of the European financial system

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND An increasing number of euro area banks tighten their lending

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Strengthening of the European banking system necessary for safeguarding banks’ lending capacity  European banking system needs more capital –October 2011 summit decisions on bank recapitalisation  High borrowing relative to total assets (high ”leverage”) makes banks vulnerable to wholesale bank runs

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Finnish banks’ profitability and capital adequacy have remained stable

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Finnish banks dependent on money and capital markets

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Stable bank loan growth Euro-denominated MFI loans to euro area non-financial corporations (incl. housing corporations), annual growth of stock