Situation and outlook for the global economy - presentation in the Bank of Finland Bulletin 4/2015 press conference by Samu Kurri, Head of Division on 24 September 2015

1. Julkinen
Suomen Pankki
Bank of Finland Bulletin
4/2015
Situation and outlook for the global economy
Press conference 24 September 2015
124.9.2015
Samu Kurri

2. Suomen Pankki – Finlands Bank – Bank of Finland Julkinen
Bank of Finland Bulletin 4/2015
Monetary policy and the global economy
 Main article
– Signs of life in the euro area economy
 Theme boxes providing background on the main
article
– Increased uncertainty in the global economy
– Structural reforms to provide boost during lean years in the
global economy
– China develops, growth slows
***
 Two theme articles
– ‘How can we simultaneously maintain both price stability and
financial stability in the euro area?’ Hanna Freystätter
– ‘Protracted period of low interest rates places further
demands on macroprudential supervision’ Katja Taipalus –
Jouni Timonen
24.9.2015 Samu Kurri 2

3. Suomen Pankki – Finlands Bank – Bank of Finland Julkinen
Themes of the presentation
 Seven lean years for the global economy
– Three stories of slowing growth
 Current situation and outlook for the global
economy
– Factors shaping the business cycle
– China and world trade changing more permanently
 Bank of Finland forecast for the global economy
– Forecast summary
– Risks
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4. Suomen Pankki – Finlands Bank – Bank of Finland Julkinen
Seven lean years for the global
economy
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80
90
100
110
120
130
140
150
160
170
180
190
90
95
100
105
110
115
120
125
130
135
140
145
2008 2010 2012 2014
Euro area United States Japan
Russia Finland China (right-hand scale)
Index, 2008 = 100 Index, 2008 = 100
Sources: National statistical authorities, Macrobond and calculations by the
Bank of Finland.
Effects of the recession on output

5. Suomen Pankki – Finlands Bank – Bank of Finland Julkinen
Three stories of slowing growth
 The Great Recession
– The financial crisis of 2008 led to a recession in the real economy.
– Despite stimulus measures, output remains below potential.
 Prolonged period of slow growth
– Expected slowing of potential output is already dragging down
investment (Secular Stagnation, Hansen 1938).
– Differences of emphasis:
 Larry Summers: low interest rates, prevention of path-
dependency
 Robert Gordon: emphasis on supply-side factors.
 Opposing views:
 Joel Mokyr: Technological tailwind is more like a tornado
 Matti Pohjola: ICT utilisation is currently in the same phase as
electricity utilisation in the 1930s.
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6. Suomen Pankki – Finlands Bank – Bank of Finland Julkinen
Distribution of potential output for
2014–2031 (2031–2060)
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Potential
output
Potential
output per
capita
Trend
productivity
excl. capital
Capital/
output
Potential
labour force
USA 2.4 (1.7) 1.6 (1.2) 1.7 (1.2) 0.2 (0) -0.3 (0.1)
Euro area 1.7 (1.5) 1.5 (1.5) 1.5 (1.7) 0 (-0.1) -0.1 (0)
China 5.0 (2.4) 4.7 (2.8) 4.4 (3.2) 0.7 (0) -0.4 (-0.5)
India 5.8 (4.3) 4.8 (3.9) 3.4 (3.8) 0.5 (0) 0.8 (0.1)
Source: OECD Economic Outlook (May 2014).

7. Suomen Pankki – Finlands Bank – Bank of Finland Julkinen
Current situation and outlook for the
global economy
 Near-term cyclical developments are shaped by:
– Decline in oil and other commodity prices
– Ample liquidity
– Exchange rate changes
– Deleveraging
 Longer-term changes
– China’s growth will continue to slow
– World trade growth has passed its peak
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8. Suomen Pankki – Finlands Bank – Bank of Finland Julkinen
0
10
20
30
40
50
60
1990 1995 2000 2005 2010
Private consumption Public consumption Fixed investment
% of GDP
Sources: CEIC and Macrobond.
Changes in the structure of Chinese Growth
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9. Suomen Pankki – Finlands Bank – Bank of Finland Julkinen
Slower growth in world trade
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0
0,5
1
1,5
2
2,5
3
3,5
2010 2011 2012 2013 2014 2015 2016 2017
Actual Average 1980-2014 (excl. 2009)
Average 1994-2007 Average 2011-2014
Forecast
Trade growth / GDP growth, four-quarter moving average
Sources: IMF, World Bank, OECD and Bank of Finland.

10. Suomen Pankki – Finlands Bank – Bank of Finland Julkinen
Structure of euro area and Finnish exports
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11. Suomen Pankki – Finlands Bank – Bank of Finland Julkinen
Summary of Bank of Finland forecast
for the global economy
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% change on the previous year (previous forecast below)
GDP 2014 2015f 2016f 2017f
United States 2,4 2,6 3,0 2,8
2,4 3,1 3,0 2,8
EU22 1,3 1,7 1,8 1,9
1,2 1,6 1,9 1,8
Japan -0,1 0,6 1,1 1,0
-0,1 0,6 1,4 1,0
China 7,4 7 6 6
7,4 7 6 6
Russia 0,6 -4 -2 1
0,6 -4,4 -1,8 0,5
World 3,1 3,0 3,2 3,5
3,1 3,3 3,5 3,7
World trade 3,4 1,8 3,7 4,5
3,5 4,2 5,0 5,4
f = forecast.
EU22 = euro area, Sweden, Denmark and United Kingdom.
Source: Bank of Finland.

12. Suomen Pankki – Finlands Bank – Bank of Finland Julkinen
Risks for the global economy
 External risks
– A sudden halt in Chinese growth is key external risk
– Increases in US interest rates may cause turbulence
– Situation in the Middle East and North Africa
 Internal risks
– Permanent, even deepening divergence in the euro area
– Country-specific consequences may be both sudden and long-
term
 Longer-term risks
– Long shadow of the financial crisis and ageing population
– Weak risk resilience of public finances
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