Bank of Finland Bulletin 1-2014 Erkki Liikanen 24.3.2014 1

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


GDP growth in advanced economies picked up in the latter half of 2013


-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 …


-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 …


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


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


Financial intermediationComprehensive assessment of the

condition of banks


Major cross-country differences remain in interest rates paid by households and businesses


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


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


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


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


Bank of Finland forecastGrowth picking up but will remain moderate


-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


-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


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


Monetary policy in the euro area


Euro area monetary policy stance to remain accommodative as long as necessary


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


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


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


-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


Bank of Finland’s financial result 2013


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


Challenges facing the Finnish economy


Post-crisis economic developments in Finland worrying


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.


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.


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.


In conclusion


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


Thank you!


Documents

Bank of Finland Bulletin 1-2014 Erkki Liikanen 24.3.2014 1