Economic outlook for Finland

Reijo HeiskanenOP Financial Group

February 2017

Economic growth has picked up and it is set to continue at reasonable

paceFinnish GDP

Annual rate, %

-3

-1

1

3

5

2010 2011 2012 2013 2014 2015 2016 2017 2018Source: Macrobond, OP

Consumer confidence pointing to healthy consumption growth

Retail Trade, rhsBa

lanc

e

-10

-5

0

5

10

15

20

25

%

-4

-2

0

2

4

6

2008 2010 2012 2014 2016Source: Macrobond, OP

Industrial cycle is gaining strength

Net

Bal

ance

-40

-30

-20

-10

0

10

20

30Index

90

95

100

105

110

115

120

125

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Lähde: Macrobond, OP

Diversified goods exports structure by country

5

Finnish economy

Finland’s largest goods exports countries Goods exports by country*2000-15 January–October 2016

Goods exports to EU member countries’ 59.8% and to Euro Area38.2% in January-July 2016

* Other countries: Norway (3,0%), Poland (2,8%), Italy (2,5%), Spain (1,9%), Japan (1,9%), Denmark (1,7%), Turkey (1,5%), Switzerland (1,6%), South Korea (1,3%), Latvia (1,0%), India (1,0%) and diversified other countries with a share of less than 1,0%.

Fall in value of exported goods seems to be bottomoning out

Finnish goods exports

Index 2011=100, 12-month moving average

Euro area

Russia

Other countries

50

60

70

80

90

100

110

120

2011 2012 2013 2014 2015 2016Source: Macrobond, OP

• The competitiveness pact will improve competitiveness by reducing private sector’s unit labour costs by 3.7%. In addition, wage freeze in 2017 will improve competitiveness by 0.5%. In total 4.2%.

• Measures will be phased in, therefore ULC will reduce by 3.3% and 3.8% in 2017-2018, respectively. From 2019 onwards, the impact of the measures will be 4.2%.

• According to Ministry of Finance’s calculations, decline in the ULC would boost GDP by 1.4% in the medium term and strengthen employment by 35 000.

• Eventually, the pact’s coverage reached over 90%, which means that the government will reduce taxation of wage-earners by 0,515 bn. euros in 2017. The tax cuts will outweigh the gradual increase in employees’ social security contributions in 2017.

• According to the OP’s economists the pact will start to impact exports positively late 2017, while the main effect will be seen in 2018-19.

How measures improving cost-competitiveness will impact economic growth?

Measures Impact on reducing unit labour costs, % (year 2021)

Increasing hours worked per year by 24 hours

1.5

Reduction in employer’s social security contribution

0.5

Transfer of the unemployment insurance contribution by 0.85 p.p. from employers to employees

0.7

Transfer of the earnings–related pension contribution by 1.2 p.p. from employers to employees

1.0

Wage freeze in 2017 0.5

Total 4.2%

Labour market picture is improvingFinland, Labour market

Unemployment rate, SA, rhsEmployment, SA, lhs

%

-5-4

-3

-2

-1

01

2

3

Percent

6,0

6,5

7,0

7,5

8,0

8,5

9,0

9,5

2006 2008 2010 2012 2014 2016Source: Macrobond, OP

Inflation – moderate pick-up in 2017Consumer prices in Finland

*HICP excluding energy and food

Annual change, %

-2-10123456

2008 2010 2012 2014 2016Source: Macrobond, OP

Deficit diminishing, increase in debt slowing

% of GDPDebt (right)

-4

-2

0

2

4

6

25

35

45

55

65

75

05 06 07 08 09 10 11 12 13 14 15 16 17 18 19Lähde: Macrobond, OP

Broad based growth aheadForecasts for the Finnish economyPublished on 24 January, 2017

Volume, % change on previous year 2015 2015 2016f 2017f 2018f EUR bn

GDP 209,1 0,2 1,7 1,8 2,0Imports 77,5 1,9 2,2 3,0 3,5Exports 76,6 -0,2 1,1 3,5 5,0Consumption 166,7 1,1 1,5 0,9 1,1 Private consumption 115,7 1,5 2,1 1,5 1,5 Public consumption 51,0 0,4 0,2 -0,5 0,2Fixed investment 42,7 0,7 3,0 4,1 3,0

Other key indicators 2015 2016 2017f 2018f

Consumer price index, % change y/y -0,2 0,4 1,4 1,6Unemployment rate, % 0,4 8,9 8,3 7,8Current account balance, % of GDP -0,4 -0,6 -0,6 -0,4General government debt, % of GDP -2,6 -2,3 -2,3 -1,8General government net lending, % of GDP 63,6 63,5 64,6 65,1

Sources: Statistics Finland and OP Financial Group

Stable growth in household loansFinland, MFIs loans, Change Y/Y

to Households, Housing Loans

to Non-

Perc

ent

-7,5

-2,5

2,5

7,5

12,5

17,5

2009 2010 2011 2012 2013 2014 2015 2016Source: Macrobond, OP

Moderate development in house prices

Finland, Real estate prices, Old dwellings

Greater Helsinki

Rest of Finland

Total

Inde

x, 2

010=

100

97,5

100,0

102,5

105,0

107,5

110,0

112,5

2010 2011 2012 2013 2014 2015 2016Source: Macrobond, OP

Average house prices and households’ debt

14

Latest values: Q3/2016 Latest values: 2015

Finnish economy

Balanced goods exports structure by commodity group

15

Finnish economy

Goods exports 70% of total exports and share of service exports gradually increasing

Goods exports by commodity group Goods exports by commodity group2000-15 January–October 2016

Finally upswing ahead• According to the latest information, the Finnish economy achieved moderate GDP growth in 2016. Consumer and business

surveys have improved and point to healthy growth ahead.

• OP’s economists expect Finnish GDP to rise 1.8% this year and 2.0% next year. This is the first time the 2018 growth forecast is issued. The 2017 growth forecast is 0.4 percentage points higher than in the adjusted prediction issued in November 2016.

• Economic growth in 2016 relied on consumer spending and construction. This year GDP growth will rest on a broader foundation. Exports and corporate investments will also recover. Prerequisites for stronger export growth in 2018 are in place. Construction growth, on the other hand, will slow down from the recent high level.

• Inflation should shift from the zero per cent level as the consumer price index rise will no longer be halted by oil price decreases. Pressure on costs is, however, only moderate and inflation is predicted to hover around 1.5%.

• Employment should increase relatively strongly both this and next year. The 2018 employment rate is expected to near the 70.3% level achieved in 2008 at the peak of the economic cycle. Labour supply is anticipated to start rising as job opportunities increase. The unemployment rate is expected fall roughly at the same pace as last year. It is forecast to decrease to 8.3 per cent this year and 7.8 per cent next year.

• The public deficit should continue decreasing again in 2018 after an intermission period, but the debt-to -GDP ratio will continue rising both in 2017 and 2018.

Thank you!

Macroeconomy