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Bank of Finland Bulletin 1-2014
Bank of Finland Bulletin 1-2014 Erkki Liikanen
24.3.20141
Themes
• From crisis prevention to strengthening the foundations of growth – Progress with consolidation, but financial crisis casts a long
shadow– Structural change weighs ability to adapt
• Bank of Finland forecast for the international economy– Growth will continue, albeit at a subdued pace; a period of low
inflation
• Bank of Finland 2013– Profit of EUR 239 million, of which EUR 180 million to the
State
• Three challenges for the Finnish economy
24.3.2014 Erkki Liikanen 2
From crisis prevention to strengthening the foundations of growth
24.3.2014 Erkki Liikanen 3
GDP growth in advanced economies picked up in the latter half of 2013
24.3.2014 Erkki Liikanen 4
-10
-5
0
5
10
15
2007 2009 2011 2013 2015
United States Japan China EU21 Finland
Year-on-year percentage change
EU21 = euro area, Sweden, Denmark and United Kingdom.Dash lines: Bank of Finland’s latest forecast.
Sources: BEA, ESRI, National Bureau of Statistics of China, Eurostat and Bank of Finland.
GDP still performing below potential output …
24.3.2014 Erkki Liikanen 5
-8
-6
-4
-2
0
2
4
6
8
2000 2005 2010
Euro area United States Japan Finland
% of GDP
Data for 2013–14 are WEO (World Economic Outlook) forecasts from October 2013.Source: IMF.
… as employment rates are low …
24.3.2014 Erkki Liikanen 6
62
64
66
68
70
72
74
2005 2007 2009 2011 2013
United States Euro area Japan United Kingdom Finland
%
Source: OECD.
Employment rate for 15–64-year olds
… and investment low
24.3.2014 Erkki Liikanen 7
12
14
16
18
20
22
2000 2005 2010
Euro area United States Japan Finland
% of GDP
Source: European Commission.
Fixed investment in productive capacity excl. housing investment
From crisis prevention to damage repair
• Adjustment has made headway– Deficits, indebtedness, competitiveness– Absorbing sizeable imbalances takes time
• Focus of economic policy on building the foundations of growth– Production resources need reallocated– Concerns both labour and capital
• Structural change requires ability to adapt– Places big demands on economic policy
24.3.2014 Erkki Liikanen 8
Financial intermediationComprehensive assessment of the
condition of banks
24.3.2014 Erkki Liikanen 9
Major cross-country differences remain in interest rates paid by households and businesses
24.3.2014 Erkki Liikanen 10
0
1
2
3
4
5
6
7
2003 2005 2007 2009 2011 2013
%
* Germany, France, Netherlands, Belgium, Austria and Finland.** Greece, Italy, Ireland, Portugal and Spain.New corporate and housing loan agreements, initial rate fixation period of up to 1 year.Sources: European Central Bank and calculations by the Bank of Finland.
Corporate loan stock: GIIPS countries**Housing loan stock: GIIPS countries**Housing loan stock: High-rated countries*Corporate loan stock: High-rated countries*3-month euribor
Divergence also in loan stock performance
24.3.2014 Erkki Liikanen 11
95
100
105
110
115
120
2008 2009 2010 2011 2012 2013 2014
High-rated countries* GIIPS countries** Euro area***
2007M12=100, index of notional stocks, loans adjusted for sales and securitisation
* Germany, France, Netherlands, Belgium, Austria and Finland.** Greece, Italy, Ireland, Portugal and Spain.*** excl. resale agreements with central counterparties.Sources: ECB and calculations by the Bank of Finland.
Debt ratio adjustment made only little progress
24.3.2014 Erkki Liikanen 12
0
40
80
120
160
200
2001 2003 2005 2007 2009 2011 2013
GIIPS countries** (private sector)High-rated countries* (private sector)GIIPS countries** (public sector)High-rated countries* (public sector)
% of GDP
* Germany, France, Netherlands, Belgium, Austria and Finland.** Greece, Ireland, Italy, Portugal and Spain.Source: European Central Bank.
Banking union and comprehensive assessment of banks
• Lack of confidence in balance sheets still looms large– Households, non-financial corporations, banks – Building and reinforcing confidence
• Comprehensive assessment of banks helps meet challenge– Increases confidence in banks– Strengthens banks’ ability to finance lending
• Agreement on Single Resolution Mechanism on 20 March 2014– Solution very close to December ECOFIN Council outcome– Faster accumulation of resolution fund
24.3.2014 13Erkki Liikanen
Comprehensive assessment of banksCDS prices for European banks
24.3.2014 Erkki Liikanen 14
0
100
200
300
400
500
600
700
01/11 07/11 01/12 07/12 01/13 07/13 01/14
Unicredit
Santander
SocGen
RBS
ITRAXXSeniorFinancialsDeutscheBank
Nordea
bps
Source: Reuters5yr CDS prices
Bank of Finland forecast for global economy: key conclusions
24.3.2014 Erkki Liikanen 15
Bank of Finland forecastGrowth picking up but will remain moderate
24.3.2014 Erkki Liikanen 16
-10
-5
0
5
10
15
2007 2009 2011 2013 2015
United States Japan China EU21 Finland
Year-on-year percentage change
EU21 = euro area, Sweden, Denmark and United Kingdom.Dash lines: Bank of Finland’s latest forecast.
Sources: BEA, ESRI, National Bureau of Statistics of China, Eurostat and Bank of Finland.
Bank of Finland forecastSubdued outlook reflected in inflation
24.3.2014 Erkki Liikanen 17
-3
-2
-1
0
1
2
3
4
5
2010 2011 2012 2013 2014 2015 2016
EU21* United States Japan Finland
%
* Euro area, Sweden, Denmark and United Kingdom.Sources: National statistical authorities and calculations by the Bank of Finland.
Inflation in the euro areaPace of change in relative prices has slowed
24.3.2014 Erkki Liikanen 18
0
0,5
1
1,5
2
2,5
3
0 10 20 30 40 50 60 70 80 90
2012/12 2014/1
Sources: Eurostat and Bank of Finland.
%
Bank of Finland forecastGlobal forecast exposed to downside risks
• The period of low inflation may– be more protracted than previously forecast– impede economic adjustment more than estimated
• Impact of the crisis in Ukraine– Russia; EU (Finland); United States; global economy– Short-term outlook, longer-term impact
• Emerging economies: current state and outlook– Tightening financial conditions in some emerging
economies– Structural change in Chinese economy, sustainability of
financial sector
24.3.2014 Erkki Liikanen 19
Monetary policy in the euro area
24.3.2014 Erkki Liikanen 20
Euro area monetary policy stance to remain accommodative as long as necessary
24.3.2014 Erkki Liikanen 21
0
0,5
1
1,5
2
2,5
3
3,5
4
4,5
2008 2009 2010 2011 2012 2013 2014
United States Japan Eurosystem
%, central bank interest rates
Source: Bloomberg.
Asset purchase programmes led to an increase in Federal Reserve and Bank of
Japan balance sheets
24.3.2014 Erkki Liikanen 22
0
0,5
1
1,5
2
2,5
3
3,5
4
4,5
5
2008 2009 2010 2011 2012 2013 2014
United States Eurosystem Japan
Central bank balance sheets; Index, september 2008 = 1
Sources: Central banks.
Developments in long-term interest rates reflect differences in growth outlook and
monetary policy
24.3.2014 Erkki Liikanen 23
0
1
2
3
4
5
6
7
8
9
2010 2011 2012 2013 2014
United States Japan Germany Italy Spain Finland
%, 10-year government bond yields
Source: Reuters.
Euro area balance sheet shrunk as banks repay credit
24.3.2014 Erkki Liikanen 24
-200
0
200
400
600
800
1000
2010 2011 2012 2013 2014
Excess liquidity in euro area banking system*
30-day moving average
EUR billion
Source: Bank of Finland.* Reserve deposits – minimum reserve requirements + overnight deposits – use of marginal lending facility.
Monetary policy stance
• Current monetary policy stance is accommodative– Policy rates and expectations regarding their future
development have pushed shortest market rates down close to zero.
• Monetary policy stance to remain accommodative– Outlook for inflation is subdued extending into the medium
term.– There is ample unused capacity in the economy.– The credit stock has declined.
• Governing Council ready to adopt new measures, if necessary
24.3.2014 Erkki Liikanen 25
Bank of Finland’s financial result 2013
24.3.2014 Erkki Liikanen 26
Erkki Liikanen
Bank of Finland’s financial result 2013:Balance sheet contracted but still large
24.3.2014 27
• The volumes of monetary policy operations and extension of non-standard measures have significantly affected the financial result via net interest income.
• Financial result also weakened due to lower level of interest rates.
• Bank deposits (and correspondingly TARGET claims) down to one third.
EUR m
2009 2010 2011 2012 2013 2014-100,000
-50,000
0
50,000
100,000
150,000
Balance sheet total Intra-Eurosystem claims
Liabilities to euro area credit institutions
2012 2013
OPERATING PROFIT 754 411
TRANSFERS TO PROVISIONS
General provision –300 –50
Provision for real value loss –117 –122
PROFIT FOR THE FINANCIAL YEAR 337 239
OF WHICH DISTRIBUTED TO THE STATE 227 180
24.3.2014 Erkki Liikanen
Provision against additional Eurosystem risks EUR 100 m
(2012: EUR 200 m)
In 2012, EUR 100 m on unredeemed markka
banknotes was spread over forthcoming years’ profit
distribution. In 2013, EUR 50 million of this item was carried
over to the financial result.
EUR m
Bank of Finland’s financial result 2013:Result for the financial year and profit distribution
28
Bank of Finland’s financial result 2013:Summary
• Profit EUR 239 million, of which EUR 180 million to the State (in 2012: EUR 227 million)
• Provisions used for strengthening the balance sheet; central banks’ exposures and risks still high– Provisions in respect of unreturned markka banknotes
being reduced gradually
• Operating expenses held in check– Continued efforts to prioritise and increase the efficiency of
activities
24.3.2014 Erkki Liikanen 29
Challenges facing the Finnish economy
24.3.2014 Erkki Liikanen 30
Post-crisis economic developments in Finland worrying
24.3.2014 Erkki Liikanen 31
85
90
95
100
105
2008 2009 2010 2011 2012 2013
High-rated countries* GIIPS**Euro area GermanyFinland
2008/I = 100
* Germany, France, the Netherlands, Belgium, Finland and Austria.** Greece (2011–2013 arvio), Ireland, Italy, Portugal and Spain.Sources: National statistical authorities and Eurostat.
Three major challenges for the Finnish economy
• Structural change in Finnish industry
• Population ageing
• Global economic developments– Risks associated with the situation in Ukraine
“Finland has not recovered from the industrial collapse which began in 2008 and resulted in the loss of a significant part of Finland’s economic base.”
Bengt Holmström, Sixten Korkman and Matti Pohjola, 21 February 2014
32Erkki Liikanen24.3.2014
How to respond to the challenges
• Ambitious and frontloaded implementation of the Government’s structural policy programme
• Immediate fiscal consolidation also needed
• The Ukraine crisis may lead to an even bigger structural change and larger adjustment needs in the economy– Regeneration capacity: labour mobility across sectors and
regions, housing supply etc.
33Erkki Liikanen24.3.2014
Confidence is key
• Current economic shocks and turmoil are exceptionally strong. They can undermine confidence in the Finnish economy.
• Solutions improving long-term outlook – even if difficult in the short term – are crucial to bolstering confidence.
• Difficult decisions on structural reforms can improve corporate and household confidence in the future so that positive results can be seen immediately.
34Erkki Liikanen24.3.2014
The economic situation in Finland has changed fundamentally. Looking forward, it is vital that institutions
(government and social partners) are able to take corrective action.
35Erkki Liikanen24.3.2014
In conclusion
24.3.2014 Erkki Liikanen 36
Summary
• From crisis prevention to repairing the damage– Will weigh capacity of economies to adjust – Economic policy must support change
• Continued low inflation, monetary policy remains accommodative– Low inflation may impede adjustment– ECB Governing Council stands ready to act if
• deflationary developments pose a risk to the euro area or• monetary policy is not transmitted in the desired manner
• All economic policy segments needed– Monetary policy, banking sector consolidation, growth-
supportive structural reforms, fiscal consolidation
24.3.2014 37Erkki Liikanen
Bank of Finland Bulletin 1/2014Contents
• Monetary policy and the global economy– Boxes
• Inflation and relative prices in the euro area• Crimea crisis increases risks to the Russian economy• Uncertainties over quotations increased need for reference rate
updates– Niko Herrala and Seija Parviainen
• Japan’s inflation expectations as a measure of the success of Abenomics
– Tuomas Välimäki• Dual use of Eurosystem credit operations: steering interest rates
and preserving financial stability– Juhana Hukkinen
• Economic policy options in conditions of weak growth and low inflation
24.3.2014 Erkki Liikanen 38
Thank you!
24.3.2014 Erkki Liikanen 39