Samu Kurri

1Unrestricted

Bank of Finland

Growth overshadowed by hard-to-quantify risks

Monetary policy and the global economy Bank of Finland Bulletin 4/2016

29.9.2016

Suomen Pankki – Finlands Bank – Bank of FinlandSamu Kurri 2Unrestricted

Themes of the presentation

Global growth forecast little changed– Growth will barely accelerate in the immediate years ahead– Effects of Brexit hard to assess at this point

Inflation remains very subdued– Oil price effect to subside in early 2017– Difference between markets’ and economists’ inflation expectations a

source of concern

Risks to growth mainly on the downside– Some risks relate to economic factors that can be estimated by economics

tools– Some risks are difficult to assess in economic terms

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Current situation and outlook for the real economy

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Suomen Pankki – Finlands Bank – Bank of FinlandSamu Kurri 4Unrestricted

Moderate global growth in early 2016

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-10

-5

0

5

10

15

2008 2010 2012 2014 2016

GDP, % change on previous year

Sources: National statistical authorities and Macrobond.32427

China

United States

Euro area

United Kingdom

Japan

Suomen Pankki – Finlands Bank – Bank of FinlandSamu Kurri 5Unrestricted

Stock exchanges do not signal any major improvement in growth …

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80

90

100

110

120

130

140

150

160

170

2015 2016

China Euro area United States

Japan Russia United Kingdom

Share price index, 100 = 1 Jan 2015

Source: Macrobond.32427

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… and neither do the soft statistics

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40

45

50

55

60

65

2015 2016

United States Euro area United KingdomChina Japan Russia

Index

Source: Macrobond.32427

PMI, composite

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Economists revised down 2017 growth forecasts, notably for the UK

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0

1

2

3

4

5

6

7

2016

GDP forecasts for 2017, % change on previous year

Consensus forecasts collected on the 7th–13th of each month.Sources: Consensus Economics (US, euro area and UK) and the IMF.23060

United Kingdom

Euro area

World

United States

China

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Estimates of the effects of Brexit surrounded by great uncertainty:notably for the UK economy …

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-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

3

01/16 02/16 03/16 04/16 05/16 06/16 07/16 08/16 09/16 10/16 11/16 12/16

Consensus: UK

Monthly GDP forecasts for 2017, annual growth

Source: Consensus Economics.23060@Chart10UK

United Kingdom

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Estimates of the effects of Brexit surrounded by major uncertainty:… but also for the euro area

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-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

3

01/16 02/16 03/16 04/16 05/16 06/16 07/16 08/16 09/16 10/16 11/16 12/16

Consensus: Euro area

Monthly GDP forecasts for 2017, annual growth

Source: Consensus Economics.

23060@Chart10EA

Euro area

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Inflation picture and underlying factors

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Inflation in main economic regions remains subdued

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-4

-2

0

2

4

6

8

10

2008 2010 2012 2014 2016

Consumer price index, % change on previous year

Sources: Eurostat, national statistical authorities, OECD and Macrobond.32427

China

United States

United Kingdom

Euro area

Japan

Suomen Pankki – Finlands Bank – Bank of FinlandSamu Kurri 12Unrestricted

Inflation, GDP and monetary policy

Key factors underlying inflation developments– Inflation expectations– Actual inflation– Output gap, or the difference between actual output and output

at full capacity– Price of crude oil

Monetary policy works through– Anchoring of inflation expectations– Real economic developments.

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Oil price an important one-off factor behind drop in inflation

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0

20

40

60

80

100

120

140

2014 2015 2016 2017 2018 2019 2020

USD/barrel

The Bank of Finland forecast assumption is the 10-day average of futures prices on 15 September 2016.Source: Macrobond.23060@FutuuritUusin

Oil price and futures prices forecast

Futures30 Jun 2014

Futures 15 Sep 2016

Futures 20 Jan 2016

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Sliding oil price not expected to influence longer-term inflation expectations

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0

0.4

0.8

1.2

1.6

2

2.4

0

0.4

0.8

1.2

1.6

2

2.4

2013 2014 2015 2016

Difference in expectations (right-hand scale)Long-term inflation expectations according to SPF surveyMarket expectations, 1 year 4 years ahead

% % points

Sources: ECB, Macrobond and Bank of Finland.27227@Chart27(3)

Gulf between inflation expectations of markets and professional forecasters has grown

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Euro area core inflation subdued …

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-5

-4

-3

-2

-1

0

1

2

3

4

2008 2010 2012 2014 2016

Core inflation

Core inflation, %

Sources: Eurostat, European Commission, OECD, IMF and calculations by the Bank of Finland.23060

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… as the output gap remains significant

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-5

-4

-3

-2

-1

0

1

2

3

4

-5

-4

-3

-2

-1

0

1

2

3

4

2008 2010 2012 2014 2016

Core inflation Output gap

Core inflation, % Output gap, % points

The shaded area delineates the range between the minimum and maximum output gap assessment.Sources: Eurostat, European Commission, OECD, IMF and calculations by the Bank of Finland.23060@EA_CoreCPI_GAP

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Bank of Finland forecast for the global economy

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Forecast for the global economy little changed

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% change on previous year(previous forecast)

GDP 2015 2016f 2017f 2018fEU22 2.0 (1.7) 1.7 (1.6) 1.3 (1.8) 1.6 (1.8)

United States 2.6 (2.4) 1.6 (2.2) 2.3 (2.3) 2.2 (2.2)

Japan 0.6 (0.5) 0.4 (0.4) 0.9 (0.7) 1.0 (1.2)

China 6.9 (6.9) 6.5 (6) 6 (6) 5 (5)

Russia -3.7(-3.7) -1 (-3) 1 (0) 1.5 (1)

World 2.9 (2.8) 2.8 (2.8) 3.1 (3.2) 3.1 (3.2)

World trade 2.3 (1.4) 1.5 (2.7) 3.2 (3.8) 3.5 (4.0)f = forecastE22 = euro area, the UK, Sweden and Denmark.

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Oil price change broadly reflected in the inflation outlook

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% change on previous year(previous forecast)

Inflation 2015 2016f 2017f 2018fEU22 0.0 (0) 0.4 (0.2) 1.4 (1.4) 1.5 (1.6)

United States 0.1 (0.1) 1.1 (1.0) 2.1 (2.3) 2.2 (2.2)

Japan 0.8 (0.8) -0.1(0.2) 0.6 (1.5) 1.0 (1.4)

f = forecastE22 = euro area, the UK, Sweden and Denmark

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Forecast risks

Risks external to the euro area– Step-up in US productivity growth (+)– Protectionism, introversion (-)– Financial market disruption in China (-)

Risks internal to the euro area– Effects of Brexit (-)– Political uncertainty (in Italy), banking system in Italy (+/-)

29.9.2016

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Many unresolved issues remain in assessment of Brexit effects

What does Brexit mean? – Resignation likely to be triggered in early 2017– No information on negotiation objectives, negotiations likely to go on

beyond the end of 2018

Bank of Finland’s forecast mainly takes account of the trade effects of Brexit– UK growth forecasts surrounded by uncertainty– Assumptions of contagion effects marked by uncertainty

Bank of Finland forecast does not take account of the– Effects on the mobility of labour, on investment and productivity – Effects on the EU’s future internal dynamics

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Chinese debt surging in all sectors

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0

50

100

150

200

250

300

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Corporate debt Household debtPublic debt Total debt

% of GDP

Source: BIS.

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Protectionism and turning inwards

World trade already sluggish for many years– Partly due to the prolonged recession

Protectionism back in the headlines– International trade boosts size of cake– Cake nevertheless unevenly divided

Political processes hard to assess– Brexit, free-trade negotiations, …– Uncertainty surrounding both probabilities and impacts

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Globalisation and ICT boosted US productivity growth in 1995–2005

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-1

0

1

2

3

4

5

6

7

1987 1992 1997 2002 2007 2012

%, annual growth in labour productivity

Source: BLS.32428

1987-1994

1995-2004

2005-

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Thank you!

29.9.2016