SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Growth rates high, but GDP not yet at its 2008 level 1Erkki Liikanen15.6.2011

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND

Growth rates high, but GDP not yet at its2008 level

1Erkki Liikanen15.6.2011


Finnish economy in the process of recovery


-10

-5

0

5

10

100

120

140

160

180

2000 2002 2004 2006 2008 2010 2012

% change on previous year (right-hand scale)

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

EUR billion %

Sources: Statistics Finland and Bank of Finland.


Consumption to account for a larger share of the economy


90

100

110

120

130

140

150

160

170

2000 2002 2004 2006 2008 2010 2012

GDP Private consumptionPublic consumption Exports of goods and servicesGross fixed investment

Index, 2000 = 100



Supply and demand

4Erkki Liikanen

2010* 2009 2010 2011f 2012f 2013f

% change in volume on the previous year

GDP 180,3 -8,2 3,1 3,8 2,6 2,4

Imports 65,2 -17,6 2,6 5,1 6,9 6,9

Exports 70,2 -20,1 5,1 8,0 7,0 7,2

Private consumption 97,3 -2,1 2,6 2,7 2,0 1,8

Public consumption 44,2 1,0 0,4 1,2 0,7 0,9

Private investment 28,5 -17,4 0,9 6,3 6,4 5,5

Public investment 4,9 6,2 0,1 0,8 0,2 0,1* At current prices, EUR billion.

15.6.2011


Labour markets to recover gradually



Unemployment to decline, albeit slowly


4

6

8

10

12

2200

2300

2400

2500

2600

2000 2002 2004 2006 2008 2010 2012

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.


Labour market mismatch problems have not worsened


1975

1980

1990

1995

2000

20052010

2011*

0.0

0.4

0.8

1.2

1.6

2.0

0 2 4 6 8 10 12 14 16 18 20

Unemployment rate, %* Q1 2011.Sources: Statistics Finland and Ministry of Employment and the Economy.

Vacancy rate, %


Labour supply to decline


-180

-160

-140

-120

-100

-80

-60

-40

-20

0

20

40

2010 2015 2020 2025 2030 2035 2040

Change in potential labour force Change in population

1,000 persons

*21–64-year-olds.Source: Statistics Finland.


Productivity growth to slow below 2%


-6

-4

-2

0

2

4

6

1995 2000 2005 2010

GDP/hour workedGDP/person employed

% change on previous year



Rise in labour costs to accelerate


-6

-4

-2

0

2

4

6

8

2004 2006 2008 2010 2012

Compensation per employee

Unit labour costs

Productivity per person employed

2011–2013 figures are forecasts.Sources: Statistics Finland and Bank of Finland.



Export demand strong, investments to recover gradually



Households to save more than before


-4

-2

0

2

4

6

2004 2006 2008 2010 2012

%

Savings ratioReal disposable household income**Private consumption**

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


Investments to recover gradually


0

5

10

15

20

2001 2003 2005 2007 2009 2011 2013

Total private investmentHousing Private investment excl. housingPublic investment

Investment ratios have been calculated on the basis of nominal figures.Sources: Statistics Finland and Bank of Finland.

% of GDP

I


World trade growth to increase Finnish exports


70

80

90

100

110

120

130

140

2007 2009 2011 2013

Finland's exports of goods and servicesFinland's export marketsWorld trade

Index, 2007 = 100

Sources: Statistics Finland, Eurosystem and Bank of Finland.


Current account to remain in surplus


0

2

4

6

8

10

12

2006 2008 2010 2012

EUR billion

Goods and services balance Current account

12-month moving totalSource: Bank of Finland.


Inflation in Finland faster than in the euro area



Energy and food prices have accelerated inflation


-2

0

2

4

6

2005 2006 2007 2008 2009 2010 2011

Energy Unprocessed foods

Processed foods Non-energy industrial goods

Services Total index

HICP = Harmonised index of consumer pricesSource: Statistics Finland.

Contribution to HICP inflation, % points


Forecast: Inflation to ease back to close to 2%


-2

0

2

4

6

2006 2008 2010 2012

Harmonised index of consumer prices, Finland

Harmonised index of consumer prices, euro area

Sources: Statistics Finland, Eurostat and Bank of Finland.



Food and services prices to rise faster in Finland

19Erkki Liikanen

HICP inflationApril 2011

Finland Euro area

Energy 1,2 1,3

Services 1,1 0,8

Food incl. alcohol and tobacco 0,9 0,4

Non-energy industrial goods 0,2 0,3

Total 3,4 2,8

15.6.2011


Public finances to face sizeable challenges



Long-term implications of the recession to be reflected in public finances


50

60

70

80

90

100

110

2000 2002 2004 2006 2008 2010 2012

Revenue Expenditure

EUR billion


Central and local government revenue and expenditure


Public debt accumulation to continue


0

10

20

30

40

50

60

2000 2002 2004 2006 2008 2010 2012

General government EMU-debt Central government debt

% of GDP

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


Central government indebtedness to remain on a sharp uptrend


0

20

40

60

80

0.1

0.2

0.3

0.4

0.5

1980 1990 2000 2010 2020 2030

Central government debt (right-hand scale)

Old-age dependency ratio (left-hand scale)

% of GDP

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


Fiscal consolidation

Predictable and credible fiscal policy is needed– A long-term plan for fiscal consolidation– Rules-based approaches, such as limits for appropriations in

budget policy, ensure a long-term perspective – Targets coordinated at EU level and internationally agreed

procedures are of key importance

Both structural reforms and reassessment of expenditure and revenue are necessary



Decisions are always made under uncertainty

Uncertainty argues for prompt decisions

If prompt action is taken Positive surprises → Public debt will decline, with

room for manoeuvre to react to future crises No positive surprises → Possible to avoid

emergency measures to restore public finances

Prompt action makes it possible to avoid the risk of emergency



Alternative scenario: Domestic wage and price pressures to strengthen



Wage/price spiral to dampen economic growth

27Erkki Liikanen

2011 2012 2013

Compensation per employee, % change3,4 4,1 4,3

Change relative to the forecast 0,4 0,9 1,1

Private consumption deflator, % change 3,4 2,9 2,5


Real GDP, % change 3,7 2,0 1,8

Change relative to the forecast -0,1 -0,6 -0,6

Unemployment rate, % 7,9 7,8 7,8


15.6.2011


Threatening spiral of wages and prices

The round of wage negotiations before the recession led to a clearly higher rise in wage costs than the euro area average– Unit labour costs rose in Finland by 5% relative to the euro area

average, from 2007 to 2010

Inflation in Finland has risen faster than in the euro area

A new spiral of rising wages and prices would increase the threat of a painful process of adjustment in the years ahead

Wage formation needs flexibility at corporate and workplace level and coordination at macro level

2815.6.2011 Erkki Liikanen


Thank you !


Documents

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Growth rates high, but GDP not yet at its 2008 level 1Erkki Liikanen15.6.2011