SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Economic outlook for 2012–2014 Euro & talous (Bank...

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLANDErkki Liikanen 1

Economic outlook for 2012–2014

Euro & talous (Bank of Finland Bulletin) 3/2012

Governor

Erkki Liikanen

14.6.2012


Growth outlook subdued

14.6.2012


Finnish economy will grow slowly

14.6.2012

-10

-5

0

5

10

100

120

140

160

180

2000 2002 2004 2006 2008 2010 2012 2014

% change on previous year (right-hand scale)

At reference year (2000) prices (left-hand scale)

EUR billion %

Sources: Statistics Finland and Bank of Finland.


Growth dependent on domestic demand

14.6.2012

-10

-5

0

5

10

2006 2008 2010 2012 2014

Net exports Private consumption

Public sector demand Private investment

Inventory change andstatistical discrepancies

% change in GDP volume

The chart is merely indicative. The GDP growth contribution of each demanditem has been calculated on the basis of its volume growth and its value share in the previous year. The figures for 2012–2014 are forecasts.Sources: Statistics Finland and Bank of Finland.

% points


2011* 2010 2011 2012f 2013f 2014f

EUR billion Volume, % change on previous year

GDP 191,6 3,7 2,9 1,5 1,2 1,6

December forecast 2,8 0,4 1,8

Change 0,1 1,1 -0,6

Imports 75,9 7,7 0,1 1,8 5,3 5,2

Exports 74,9 7,8 -0,8 2,2 5,1 5,2

Private consumption 105,3 3,0 3,3 1,4 1,3 1,6

Public consumption 45,7 0,2 0,8 1,1 0,2 0,4

Private investment 31,9 4,1 5,0 1,5 3,3 3,5

Public investment 4,8 -6,7 2,4 0,2 0,6 0,6

Supply and demand

* At current prices, EUR billion.The data on 2011 are Statistics Finland’s advance data; more precise National Accounts data will be published on 12 July 2012.

14.6.2012


Employment growth comes to a halt

14.6.2012


No improvement in employment in immediate years ahead

14.6.2012

4

6

8

10

12

2200

2300

2400

2500

2600

2004 2006 2008 2010 2012 2014

Employed (left-hand scale)

Unemployment rate (right-hand scale)

1,000 persons %

Bank of Finland's seasonally adjusted figuresSources: Statistics Finland and Bank of Finland.


New jobs in service sectors

14.6.2012

-40 -20 0 20 40

2009 2010 2011

Source: Statistics Finland.

Change from previous year, 1,000 persons

Sectoral changes in employment

Manufacturing and other industrial activities

Construction

Trade, transportation and storage,accommodation and food service activities

Agriculture, forestry and fishing, mining and quarrying

Public administration, education, health care and social services

Other activities


Slower productivity growth

14.6.2012

-6

-4

-2

0

2

4

6

1995 2000 2005 2010

GDP/hour worked

GDP/person employed

% change on previous year



Labour costs increase substantially

14.6.2012

-6

-4

-2

0

2

4

6

8

10

2004 2006 2008 2010 2012 2014

Compensation per employee

Unit labour costs

Productivity per person employed




Household demand fading, exports gradually picking up

14.6.2012


Household savings falling

14.6.2012

-4

-2

0

2

4

6

2004 2006 2008 2010 2012 2014

%

Savings ratio

Real disposable household income**

Private consumption**

* Households and non-profit institutions serving households** % change on previous yearSources: Statistics Finland and Bank of Finland.


Investment growing slowly

14.6.2012

10

15

20

25

30

35

-20

-10

0

10

20

30

2006 2007 2008 2009 2010 2011 2012 2013 2014

Private investment (left-hand scale)Private investment excl. housing (left-hand scale)Housing (left-hand scale)Private investment, at reference year (2000) prices (right-hand scale)

% change on previous year EUR billion



World trade growth supports exports

14.6.2012

70

80

90

100

110

120

130

140

2007 2008 2009 2010 2011 2012 2013 2014

Exports of goods and services Finland's export markets

Index, 2007/I = 100

Sources: Statistics Finland, Eurosystem and Bank of Finland.


Market share of Finnish goods exports contracted sharply

14.6.2012

60

70

80

90

100

110

120

1999 2001 2003 2005 2007 2009

Finland Sweden Germany

Sources: Comtrade and calculations by the Bank of Finland.

Index, 1999 = 100

Market shares of Finland, Sweden and Germany


Services exports narrowly based

14.6.2012

0

2

4

6

8

10

12

14

2002 2004 2006 2008 2010

Manufacture of radios, TVs and data communications equipmentOther industryNon-industrial sectors

EUR billion


Other services exports by sector


Current account to remain in deficit

14.6.2012

-8

-4

0

4

8

12

1980 1985 1990 1995 2000 2005 2010

Current account Goods and services account*

* National Accounts.Sources: Statistics Finland and Bank of Finland.

% of GDP


Inflation to gradually slow

14.6.2012


Inflation driven by service and food prices

14.6.2012

-2

0

2

4

6

2006 2007 2008 2009 2010 2011 2012

Services Non-energy industrial goods

Processed food Unprocessed food

Energy Total index

HICP = Harmonised index of consumer pricesSource: Statistics Finland.

Contribution to HICP inflation, % points


Increases in indirect taxes push up the price level

14.6.2012

0

1

2

3

4

5

2006 2008 2010 2012 2014

HICP HICP at constant tax rates


HICP = Harmonised index of consumer pricesSources: Statistics Finland and Bank of Finland.


Fiscal policy tightening will strengthen public finances

14.6.2012

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLANDErkki Liikanen

General government balance improves

2214.6.2012

-8

-6

-4

-2

0

2

4

6

8

2000 2002 2004 2006 2008 2010 2012 2014

% of GDP

Local government Central government

Social security funds General government



Central government debt ratio stabilizes

2314.6.2012

0

10

20

30

40

50

60

70

80

90

1990 1995 2000 2005 2010 2015

General government EDP debtCentral and local government debtCentral government debt

% of GDP

Sources: Statistics Finland, State Treasury and Bank of Finland.


Public expenditure share of GDP remains high

2414.6.2012

40

42

44

46

48

50

52

54

56

58

1995 2000 2005 2010

Primary expenditure, % of potential GDPPrimary expenditure, % of GDPTotal tax ratio, % of GDP

% of GDP

Sources: Statistics Finland and calculations by the Bank of Finland.


Restructuring of the economy and the long-term outlook for growth

14.6.2012


Labour productivity is vital to growth

14.6.2012

-10

-8

-6

-4

-2

0

2

4

6

8

1976 1980 1984 1988 1992 1996 2000 2004 2008

Capital intensity Labour input

Total factor productivity GDP, % change

Sources: Statistics Finland and calculations by the Bank of Finland.

% points


Population ageing and growth of service sectors will slow long-term growth

14.6.2012

0 0.5 1 1.5 2 2.5

Growth 2023–2032

Labour input

Production structure

Sectors’ productivity

Growth 2013–2022

Labour input

Production structure

Sectors’ productivity

Growth 2003–2012

0,2

1,5

-0,2

-0,4

1,9

-0,1

1,3

-0,1

0,0


How can we avoid the imbalances threatening the economy?

14.6.2012


Current account has weakened during the last decade

14.6.2012 29

-8

-6

-4

-2

0

2

4

6

8

10

1950 1960 1970 1980 1990 2000 2010

% of GDP

Sources: Bank of Finland and Statistics Finland.


Import prices up relative to export prices

14.6.2012 30

80

90

100

110

120

130

140

1995 1997 1999 2001 2003 2005 2007 2009 2011

Export prices Import prices Terms of trade

Index, 2005 = 100.



Key export sectors declined

14.6.2012 31

0

1

2

3

4

5

6

1975 1985 1995 2005

Paper industry Electronics industry

Share of GDP, %



Steep rise in Finnish unit labour costs in 2008-9

14.6.2012 32

90

100

110

120

130

140

1999 2001 2003 2005 2007 2009 2011

UK Netherlands Euro area GermanyFrance Finland Sweden

Unit labor costs, index, 1999 = 100

Seasonally adjusted. Source: European Central Bank.


Finnish households moved deeper into debt

14.6.2012 33

-20

-10

0

10

20

30

40

GDP, volume Private consumption, volume

Residential investment, volume

Household loans

Finland Euro area

Sources: Eurostat and EuropeanCentral Bank.

Change between years 2007 and 2011, %

26062


How the imbalances can be avoided

¨ Continued consolidation of public finances

¨ Lengthening working careers and other structural reforms to strengthen potential output

¨ Controlling the increase in household debt

¨ Ensuring cost-competitiveness

14.6.2012


Bank of Finland Bulletin Economic Outlook 3/2012 Articles:

¨ Assessing the Finnish house price development with various measures

-Jarkko Kivistö

¨ Market share of Finnish goods exports contracted sharply in the 2000s

-Seppo Orjasniemi and Terhi Ravaska

¨ The long-term growth forecast for the Finnish economy-Helvi Kinnunen, Petri Mäki-Fränti,

Elisa Newby, Seppo Orjasniemi andJukka Railavo

14.6.2012


Thank you!

14.6.2012


Alternative scenario: Households strengthen their financial position by

adjusting demand

14.6.2012


Savings ratio rises to long-run average level

14.6.2012

-4

-2

0

2

4

6

8

10

1975 1985 1995 2005

Forecast Alternative scenario Average 1975–2011

%

Households and non-profit institutions serving households.Sources: Statistics Finland and calculations by the Bank of Finland.

Household savings ratio 1975–2014


Also a decline in housing investment

14.6.2012

3

4

5

6

7

8

9

2000 2002 2004 2006 2008 2010 2012 2014

Savings ratio Investment ratio

Alternative scenario Alternative scenario

% of GDP

Households and non-profit institutions serving households.Sources: Statistics Finland and calculations by the Bank of Finland.

Households’ gross savings and investment ratios


Improved financial balance in household sector would weaken growth and public finances

2011 2012 2013 2014

GDP, % change 2.9 1.3 0.5 1.5

Difference -0.2 -0.7 -0.1

Private consumption, % change 3.3 1.0 -0.2 0.8


Household savings ratio, % of disposable income 1.7 1.5 1.6 2.0

Difference 0.2 1.3 2.1

Current account, % of GDP -0.7 -0.6 -0.3 0.1

Difference 0.1 0.6 1.0

Net lending by public sector, % of GDP -0.9 -1.0 -0.7 -0.8


14.6.2012


Household indebtedness and interest burden in Finland

14.6.2012

0

2

4

6

8

10

12

0

20

40

60

80

100

120

1987 1992 1997 2002 2007

Loan stock (left-hand scale)Share of housing corporations' loan stock (left-hand scale)Interest expenditure (right-hand scale)

% of disposable income % of disposable income

Sources: Statistics Finland and Bank of Finland calculations.

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