Finnish economy, monetary policy and financial stability
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Transcript of Finnish economy, monetary policy and financial stability
Erkki Liikanen
1Unrestricted
Bank of Finland
Finnish economy, monetary policy and financial stability
10 December 2015
10.12.2015
Suomen Pankki – Finlands Bank – Bank of FinlandErkki Liikanen 2Unrestricted
Economy generating less income, spending increasingly financed by borrowing
Five important changes:
10.12.2015
Suomen Pankki – Finlands Bank – Bank of FinlandErkki Liikanen 3Unrestricted
90
92
94
96
98
100
102
2007 2009 2011 2013 2015 2017
GDP per capita GDP per person employedVolume index, 2007 = 100
Sources: Statistics Finland and Bank of Finland.32381
1. Decrease in income generation
10.12.2015
Suomen Pankki – Finlands Bank – Bank of FinlandErkki Liikanen 4Unrestricted
2. Economic dependency ratio weakened
-50 0 50 100 150 200 250
Other
Under-15-year-olds
Employed
Unemployed
Pensioners
Forecast change, 2007–2017, thousand persons
Sources: Finnish Centre for Pensions, Statistics Finland and Bank of Finland.32381
10.12.2015
Suomen Pankki – Finlands Bank – Bank of FinlandErkki Liikanen 5Unrestricted
70
75
80
85
90
95
100
105
110
2007 2009 2011 2013 2015 2017
Private and public consumption Exports Corporate fixed investmentVolume index, 2007 = 100
Sources: Statistics Finland and Bank of Finland.32381
3. Notable decline in exports and investment, increase in consumption
10.12.2015
Suomen Pankki – Finlands Bank – Bank of FinlandErkki Liikanen 6Unrestricted
-3
-2
-1
0
1
2
3
4
70
80
90
100
110
120
130
140
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Current account (right-hand scale)Aggregated household and public sector debt (left-hand scale)
% of GDP
Sources: Statistics Finland and Bank of Finland. 32381
% of GDP
4. Standard of living maintained by continued debt accumulation
10.12.2015
Suomen Pankki – Finlands Bank – Bank of FinlandErkki Liikanen 7Unrestricted
5. Pensions and unemployment benefits erode public services funding
59 %29 %
3 %9 %
55 %32 %
5 %
8 %
2007
2017
Publicly funded services
Pensions
Other currenttransfers
Unemployment-related expenditure
Sources: Statistics Finland and Bank of Finland.32381
10.12.2015
Suomen Pankki – Finlands Bank – Bank of FinlandErkki Liikanen 8Unrestricted
What corrective measures are needed?Will they restore confidence?
10.12.2015
Suomen Pankki – Finlands Bank – Bank of FinlandErkki Liikanen 9Unrestricted
We have to take determined, corrective economic policy measures
Restoration of cost-competitiveness Structural reforms Halt upward trend in public debt Economic recovery also supported by
monetary policy At the same time, macroprudential policy
must mitigate risks arising from protracted period of low interest rates
10.12.2015
Suomen Pankki – Finlands Bank – Bank of FinlandErkki Liikanen 10Unrestricted
1. Improvement in cost-competitiveness supports exports and employment
When cost-competitiveness improves, export businesses with production in Finland can
make profitable offers at a price that translate into contracts;
it pays to invest in production that takes place in Finland;
production and employment grow in export industries; income generation in the economy as a whole
increases, which supports demand and employment in a sustainable manner also in production for the domestic market.
10.12.2015
Suomen Pankki – Finlands Bank – Bank of FinlandErkki Liikanen 11Unrestricted
20
30
40
50
60
70
80
90
100
110
120
1990 1995 2000 2005 2010
Manufacturing ServicesIndex, 2000 = 100
Non-financial corporations’ net operating surplus divided by net vaue addedSource: Statistics Finland. 31563
Profitability of production taking place in Finland has weakened, particularly in manufacturing
10.12.2015
Suomen Pankki – Finlands Bank – Bank of FinlandErkki Liikanen 12Unrestricted
2. Structural reforms
Structural reforms needed to improve growth potential and ensure fiscal sustainability– Pension reform is an important step, but further efforts are needed– New assessment of the long-term sustainability gap in public
finances is 3½%
Lengthening of working careers– From the beginning, middle and end
Conditions for supply of housing
Social and health care reform that improves productivity and curbs expenditure growth
10.12.2015
Suomen Pankki – Finlands Bank – Bank of FinlandErkki Liikanen 13Unrestricted
Structural reforms:Increased competition
Improves productivity and constrains the rise in prices– Advantages to consumers: lower prices, better products– Advantages to the economy: higher productivity, more innovation
Regulatory reforms are key
Removal of barriers to competition often resisted by groups enjoying special benefits– Changes therefore require determination and long-term
commitment from decision-makers.
10.12.2015
Suomen Pankki – Finlands Bank – Bank of FinlandErkki Liikanen 14Unrestricted
3. Fiscal stimulus cannot resolve problems in the export industry
Particularly weak dynamics in exports and export industry investments
Decline in the number of persons employed has affected mainly manufacturing• In the service sector, the number of persons employed has
increased since 2008.
Export production cannot be supported by stimulus measures that sustain domestic demand and fuel public debt• Nevertheless, selected public investments that support private
investment can be beneficial.
10.12.2015
Suomen Pankki – Finlands Bank – Bank of FinlandErkki Liikanen 15Unrestricted
-6 -3 0 3 6 9 12
GreeceRomania
LatviaEstonia
Czech RepublicHungary
LithuaniaItaly
SlovakiaMalta
SloveniaPortugal
SpainIrelandPolandFrance
GermanyAustria
United KingdomBelgium
NetherlandsBulgaria
LuxembourgSweden
DenmarkCyprusFinland
Source: European Commission. 27795
Exceptionally large support from fiscal policy to the general economy in FinlandStructural balance of public finances / GDP, change in 2008–2014, % points
Fiscal policyrelaxed ← │→ tightened
10.12.2015
Suomen Pankki – Finlands Bank – Bank of FinlandErkki Liikanen 16Unrestricted
Why does the public deficit need to be reduced now?
Accumulation of public debt would be a smaller problem if we could expect a prolonged period of strong economic growth.
Additional debt taken by Finland now must be serviced in future in a situation in which a smaller portion of the population is of working age– and in which a larger portion of the population needs social and
health care services.
Age structure weighs on the outlook for the public finances, aggravated by continued debt accumulation.
10.12.2015
Suomen Pankki – Finlands Bank – Bank of FinlandErkki Liikanen 17Unrestricted
What if public consolidation is postponed far into the future?
If consolidation measures are not fully implemented, the youth of today will have to not only– pay the majority of the pensions as well as
social and health care services for the baby-boomers, but also
– service the debt of the previous generation– and seek work in a situation in which the
problems in the economy are still unresolved.
10.12.2015
Suomen Pankki – Finlands Bank – Bank of FinlandErkki Liikanen 18Unrestricted
How does monetary policy support economic recovery?
10.12.2015
Suomen Pankki – Finlands Bank – Bank of FinlandErkki Liikanen 19Unrestricted
Euro area monetary policy very accomodative
The ECB’s monetary policy measures have already had significant positive effects on financial conditions, credit and the real economy.
Decisions of 3 December 2015 strengthen forward guidance and the asset purchase programme.– Full implementation of all monetary policy measures
secures a sustained adjustment in the path of inflation consistent with price stability
The ECB is willing and able to act, if warranted, by using all the instruments available within its mandate.
10.12.2015
Suomen Pankki – Finlands Bank – Bank of FinlandErkki Liikanen 20Unrestricted
Monetary policy measures and forward guidance
Monetary policy measures and the Governing Council’s commitment to introduce additional measures, if necessary, keep inflation expectations anchored.
Key decisions of 3 December 2015:
– The asset purchase programme was extended until March 2017, and it was announced that the principal payments on the securities purchased under the programme will be reinvested as they mature.
– The interest rate on the deposit facility was lowered to -0.3%.
– Fixed rate tender procedures with full allotment will be continued until at least the end of 2017.
10.12.2015
Suomen Pankki – Finlands Bank – Bank of FinlandErkki Liikanen 21Unrestricted
0
300
600
900
1200
1500
1800
0
300
600
900
1200
1500
1800
03/2015 09/2015 03/2016 09/2016 03/2017
omaisuusvakuudelliset arvopaperit katetut joukkolainat
julkisen sektorin velkapaperitmrd. EUR
Lähde: Bloomberg
mrd. EUR
Purchases under the expanded asset purchase programme
Asset-backed securities Covered bondsEUR bn
Public sector securities EUR bn
Source: Bloomberg.
10.12.2015
Suomen Pankki – Finlands Bank – Bank of FinlandErkki Liikanen 22Unrestricted
ECB monetary policy and Finland
Accommodative monetary policy also supports the Finnish economy.– The low level of interest rates has been transmitted to loan
interest rates paid by households and non-financial corporations.– Improved potential for exports to euro area
In the years to come, monetary policy will provide an effective stimulus to the economy, if1. measures are implemented to correct current
domestic economic trends2. and the stability of the banking system is safeguarded.
– In this event, accommodative monetary policy will boost investment.
10.12.2015
Suomen Pankki – Finlands Bank – Bank of FinlandErkki Liikanen 23Unrestricted
5. Can low interest rates pose a risk to financial stability?
10.12.2015
Suomen Pankki – Finlands Bank – Bank of FinlandErkki Liikanen 24Unrestricted
Finland must prepare in good time for risks to financial stability
Experiences in many other countries are a warning sign of the risks related to higher house prices and household debt.
Current macroprudential instruments available in Finland are limited.
Risk weights on housing loans should also cover systemic risks related to lending for house purchase.
10.12.2015
Suomen Pankki – Finlands Bank – Bank of FinlandErkki Liikanen 25Unrestricted
Finnish financial system stable, but vulnerabilities remain
Banks have maintained a good level of capital adequacy and profitability in an otherwise weak operating environment.
Finnish financial system and economy vulnerable to housing market shocks– Higher household debt– Low risk weights on housing loans– Importance of housing loans as collateral for covered bonds
The Finnish banking system is among the most concentrated in the euro area, with a significant level of cross-border interconnectedness.
10.12.2015
Suomen Pankki – Finlands Bank – Bank of FinlandErkki Liikanen 26Unrestricted
Short-term risks to financial stability have decreased in the euro area
An expected gradual recovery in the real economy supports financial institutions and markets.
Banking Union and other policy measures have decreased the negative feedback loop between banks and sovereigns.
Banks have strengthened their capital adequacy and profitability.
A high level of nonperforming loans and low level of interest rates burden banks’ balance sheets and profitability.
10.12.2015
Suomen Pankki – Finlands Bank – Bank of FinlandErkki Liikanen 27Unrestricted
Have financing conditions for SMEs tightened in Finland?
Low risk weights on housing loans steer bank lending towards housing loans instead of corporate loans.
In recent years some signs of a slight deterioration in access to finance by SMEs, but financing conditions are still less tight than in many other countries.
1.5
2
2.5
3
3.5
4
4.5
5
2011 2012 2013 2014 2015
Germany Spain Finland France Italy Euro areaNew small corporate loans*, average interest rate, %
*Loan size: EUR 250,000 – EUR 1 million.Source: ECB. patu32193@Chart27 (en)
10.12.2015
Suomen Pankki – Finlands Bank – Bank of FinlandErkki Liikanen 28Unrestricted
Single deposit guarantee scheme planned
Missing part of Banking Union– Already in place: single rulebook, supervision and crisis resolution
If implemented correctly, would increase resilience to crises
– Would weaken the negative feedback loop between banks and sovereigns
Would limit risks to public finances, particularly in countries with banking sector concentration similar to Finland
Essential to examine if Finland’s priorities can be achieved in context of gradual introduction of the scheme, as proposed by the Commission– If conditions imposed on countries are tight
enough and their compliance is monitored
10.12.2015
Suomen Pankki – Finlands Bank – Bank of FinlandErkki Liikanen 29Unrestricted
Thank you!
10.12.2015