Economic outlook for 2013−2015 Euro & talous (Bank of Finland Bulletin) 5/2013 Governor Erkki Liikanen 12 December

Governor Erkki Liikanen 2 Positive signals from the international economy

Share indices up, but big differences between countries Governor Erkki Liikanen 3

Narrowing of government bond yield spreads reflects improved expectations Governor Erkki Liikanen

Measures by stressed countries have boosted competitiveness and improved balance in the economy Governor Erkki Liikanen 5

The signals from the international economy are encouraging, but the financial crisis casts a long shadow Governor Erkki Liikanen 6

Governor Erkki Liikanen 7 Finland’s growth outlook slowly improving

GDP stabilised during Governor Erkki Liikanen

Finnish economy begins slow growth Governor Erkki Liikanen

Supply and demand Governor Erkki Liikanen * e2014e2015e EUR bn% change from previous year in real terms GDP June forecast Change Imports Exports Private consumption Public consumption Private investment Public investment *At current prices, EUR bn.

Governor Erkki Liikanen 11 Labour market conditions will not improve until 2015

Employment will improve as output growth strengthens Governor Erkki Liikanen

Productivity to grow sluggishly… Governor Erkki Liikanen

…but unit labour costs will grow substantially slower Governor Erkki Liikanen

Deterioration of cost-competitiveness will halt Governor Erkki Liikanen 15

Governor Erkki Liikanen 16 Recovery in exports boosts domestic demand

A pick up in international trade spurs Finnish exports Governor Erkki Liikanen

Investment activity remains muted Governor Erkki Liikanen

Weak earnings development weighs down consumption Governor Erkki Liikanen

Current account in balance Governor Erkki Liikanen

Governor Erkki Liikanen 21 Inflation slows

Inflation has slowed down despite tax increases Governor Erkki Liikanen

Weak demand keeps price pressures in check Governor Erkki Liikanen

Governor Erkki Liikanen 24 Subdued growth erodes public finances

Central and local government deficit remains sizable… Governor Erkki Liikanen

…also general government in substantial deficit Governor Erkki Liikanen

Public debt to exceed 60% already in Governor Erkki Liikanen

Governor Erkki Liikanen 28 Consolidation of public finances progressing – difficult decisions still ahead

Local government consolidation clearly slows down growth in public debt General government has accumulated an excessive structural deficit. The debt ratio will not be brought down to 60% without additional measures. Local government consolidation measures decided in the government’s structural program will balance the municipal finances and bring the general government structural deficit close to the target level. will reduce the risk of over-indebtedness, but the debt ratio will remain above 60% Governor Erkki Liikanen 29

Longer working careers and public sector productivity play a key role in the 2020s Governor Erkki Liikanen 30

Fiscal policy steering needs strengthening The framework of central government spending limits needs to be reformed. –If the slowdown of economic growth is structural, spending limits ought to be adjusted accordingly. The project to reform the system of financial steering for local government sector is important Governor Erkki Liikanen 31

Structural reforms essential to close the fiscal sustainability gap If all the planned structural policy measures will be applied in practice, they would be sufficient to close the sustainability gap. Determined progress is necessary to achieve the objectives of the government’s structural policy programme. –Pension reform is essential. Finland’s ability to make decisions is crucially important Governor Erkki Liikanen 32

Governor Erkki Liikanen Financial stability 33

Banking union going forward Comprehensive assessment of banks before the European Central Bank assumes responsibility for supervisory tasks Ensuring viability of banks before single supervision Banks to be recapitalised, if required by results of comprehensive assessment Governor Erkki Liikanen 34

Single resolution mechanism is the key Orderly winding-down of unviable banks requires a resolution mechanism Resolution mechanism is based on principle of bail-in Implementation of bail-in a prerequisite for effective resolution Governor Erkki Liikanen 35

Macroprudential tools to be introduced in Finland The need for national macroprudential tools is more compelling within monetary union –special challenge: country-specific housing market risks Systemic risks have to be addressed by several tools: –countercyclical capital buffer (excessive lending growth) –loan-to-value limit (housing market risks) –capital buffer for systemically important banks and systemic risk buffer (concentrated banking sector) Governor Erkki Liikanen 36

Governor Erkki Liikanen Domestic banking sector 37

Banking system’s risk-bearing capacity has remained good Governor Erkki Liikanen 38

Profitability of deposit banking under strain Governor Erkki Liikanen 39

Household indebtedness levelling off Governor Erkki Liikanen 40

Imputed average margins on new corporate loans in Finland Finnish non-financial corporations’ interest- bearing debt Imputed margins on new corporate loans granted by banks have widened Governor Erkki Liikanen 41

New corporate loan agreements of up to EUR 1 million in Finland Access to bank finance of Finnish SMEs No significant changes in access to finance for SMEs, but company-specific risk assessments tighter Governor Erkki Liikanen 42

Euro & talous (Bank of Finland bulletin) 5/2013 Feature articles: Rahoitusjärjestelmän vakaus (Financial stability in Finland) Talouden rakenneuudistukset ja julkisen talouden kestävyys (Structural reforms and sustainability of public finances) Helvi Kinnunen, Petri Mäki-Fränti and Jukka Railavo Governor Erkki Liikanen

Governor Erkki Liikanen 44 Thank you!